It’s been a busy couple of weeks for metals investors, with over thirty companies now having reported earnings. The average all-in sustaining costs for the last nine months for companies that have reported sits at $966/oz, and New Gold (NGD) was one of the most recent companies to report. Thus far, little has changed in 2019, with the company continuing to remain in the top 5% of highest-cost producers in the industry. New Gold’s all-in sustaining costs for the first nine months came in at $1,161 per gold-equivalent ounce, and the current guidance mid-point sits at $1,380/oz for FY-2019. The only two producers with worse costs are Harte Gold (OTCPK:HRTFF), and Guyana Goldfields (OTCPK:GUYFF). While things are improving from a production standpoint at New Gold’s flagship Rainy River Mine, costs remain exorbitantly high, with guidance of near $1,600/oz for FY-2019. Until the company can bring costs down at Rainy River through their planned optimizations, I continue to see the stock as an Avoid.
NEW GOLD CHART – MARCH 2019
NEW GOLD CHART – CURRENT
I wrote my most recent article on New Gold in March while the stock was at $0.90, and discussed why there were much better alternatives in the sector, and why it would be wise to sell rallies. The strong resistance at $1.32 highlighted in March ended up putting an end to the Q2 rally, and we still haven’t seen any real improvement on the fundamental side. While the Gold Miners Index (GDX) is up 23% from its March levels even after this recent correction, New Gold has seen a negative return over the same period. One look at the company’s Q3 results will explain why this is, with the company continuing to remain a serial laggard within the sector. Let’s dig into the Q3 results below:
While many analysts will dig in operationally and try to find a silver lining to justify owning New Gold, the company fails miserably on the most important metric I use to analyze any stock. New Gold remains one of the only gold miners not expected to post positive earnings per share [EPS] this year, and earnings estimates continue to be revised lower. While FY-2020 earnings estimates are projected at $0.03 based on $1,500/oz gold prices, this still leaves the company at a forward P/E ratio of 33 if it manages to hit these estimates. Meanwhile, Newmont Goldcorp (NEM) and Barrick Gold (GOLD) are trading at lower P/E ratios of 30 and 26, respectively, with better cost structures and much more attractive earnings trends. Therefore, from a valuation and purely “can this company earn money?” standpoint, New Gold is expensive and inferior compared to its peers.
Based on this, the arguments that New Gold is cheap or that $1.00 is too cheap for the stock are fluff and hold absolutely no weight. Many other producers in the sector are trading at lower valuations than New Gold, but they’re pulling gold out of the ground for $900/oz or less. Using year-to-date all-in sustaining costs, Barrick Gold is producing at $883/oz, Newmont Goldcorp at $974/oz, and New Gold at $1,161/oz. For this reason, the under-performance should not be surprising to investors when the company stacks up unfavorably against its peers. Let’s take a look at New Gold on a non-relative basis, and purely based on its operations and if it has any merit as an investment.
New Gold’s flagship mine is Rainy River in Thunder Bay, Ontario, and was purchased from Rainy River Resources for $310 million in 2013. As we sit here nearly seven years later, the company is still unable to turn a profit on this investment. While production has ramped up over the past few quarters and sits near highs on a quarterly and two-quarter average basis at 76,092 and 71,429 ounces, respectively, the all-in sustaining costs for the project remain exorbitantly high. All-in sustaining costs for the mine remain below guidance of $1,690/oz-$1,790/oz for FY-2019 at Rainy River and are currently sitting at $1,413/oz for the first nine months. While this is positive to be tracking nearly $300 under the guidance mid-point, the guidance was already insanely high and forecasting losses at Rainy River for the year. For this reason, I’m less impressed with the current production numbers as guidance was sand-bagged massively in the first place. When a company sets the bar at one foot off the ground and manages to step over it, there’s no reason to applaud.
Looking forward, the company expects costs to come down as the remaining construction is completed at the project. However, until the company can get all-in sustaining costs below $1,000/oz consistently at Rainy River, it’s hard to get behind the company. Given that Rainy River makes up the majority of the company’s production with a 60/40 split between Rainy River and New Afton, it’s no surprise that all-in sustaining costs on a consolidated basis remain so high.
As we can see from the above chart, all-in sustaining costs came in at $1,318/oz last quarter, and have trended up over the past two years. While the past three quarters had some separation between the gold price and all-in sustaining costs, the most recent quarter is seeing this margin decline with costs up 22% sequentially ($1,318/oz vs. $1,087/oz). On a company-wide basis, New Gold has produced 384,700 gold-equivalent ounces in the first nine months of 2019, and they remain on track to meet the mid-point of their initial FY-2019 guidance of 493,000 ounces. This is a positive once again on the production side of things, but the cost side is the problem with New Gold as an investment thesis.
The next milestone for the company is the finalized mine plan at Rainy River in Q1 2020. Investors are hoping this will be able to focus more on mid to high-grade ore, improving current open-pit production at Rainy River. There are some signs of improvement at Rainy River as gold recoveries have increased from 81% in Q1 2018 to 91% in the most recent quarter, and grades have also jumped from 1.08 grams per tonne gold to 1.14 grams per tonne gold in the same period. However, until the company can begin to bring costs more in line with the 2013 PEA assumptions (see above), I would expect funds to be less interested in the company from an investment standpoint.
For me to get interested in New Gold, I would prefer to see three consecutive quarters of consolidated all-in sustaining costs below $975/oz, and Rainy River all-in sustaining costs below $1,100/oz. If the company could manage to achieve this, this would de-risk its debt obligations as they’d be in a better position to generate cash flows. Also, it would move the company from a D-grade miner to a C grade miner, and make it a little more investable again. Until then, I see no reason to stick one’s neck out on the stock. While the share price would be much higher if these cost milestones are achieved, I would always rather pay a higher price, but be buying a sector performer vs. a sector laggard.
Let’s take a look at the technical picture below:
As we can see from the daily chart, New Gold saw a golden cross in Q3, which is represented by the 50-day moving average crossing up through the 200-day moving average. Unfortunately, the financing in August killed the stock’s momentum, and it’s now looking like we’re going to get a death cross at some point in December if momentum doesn’t improve. This would make New Gold one of the only gold producers with a death cross if this occurs and would make it much less attractive from a technical standpoint. While death crosses are not selling signals, they do represent signals to avoid a stock for my strategies. I much prefer to own stocks above a flat or rising 200-day moving average.
Taking a look at the below daily chart, we can see that New Gold is one of the few stocks that remains in an intermediate downtrend. In order to exit this downtrend, the stock will need a monthly close above $1.35 at a bare minimum. This would require a 40% rally from current levels that does not run into selling pressure like we’ve seen in the past. Pivotal support for New Gold sits at $0.70, and a weekly close below this level would be a bearish development. It is unlikely this level is going to be broken barring more negative news from Rainy River or an underwhelming mine plan. However, we’re sitting in the middle of this $0.70-$1.35 range which doesn’t offer exceptional reward to risk for investors.
To summarize, the Q3 results are tracking slightly above guidance for the year, but it’s important to note that guidance was sand-bagged and set at a very low bar. Despite being ahead of guidance, New Gold remains in the top 5% of the highest cost producers in the industry. The company’s cohort group is shared with Guyana Goldfields and Harte Gold, which are not great companies to be hanging out with on any metric. I continue to see New Gold as an Avoid and only a trading vehicle and do not believe the Q3 results have changed anything to make the stock more attractive from an investment standpoint. If I held the stock, I would be using rallies to the $1.28-$1.35 level to lighten up my position considerably.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.