New Gold (NGD) has recently reported its second-quarter results, missing analyst estimates on earnings and revenue. The company reported revenues of $128.5 million and GAAP earnings of -$0.07 per share. As I wrote in my previous article on New Gold, the company’s second-quarter production levels were lower than expected due to lower grades, while revenues remained under pressure due to unfortunate hedging programs.
The company produced 98,079 gold equivalent ounces (GEO) at all-in sustaining costs (AISC) of $1283 per ounce. The main driver for high AISC was the Rainy River mine, which had AISC of $1567 per ounce, as the mine continued to reposition itself for future production levels outlined in the recent life of mine plan.
This year, New Gold made a number of moves to strengthen its balance sheet, including a sale of 46.0% of cash flow interest in New Afton mine and a sale of the Blackwater Project. As I mentioned above, the company has also hedged its production at less than $1,415 per ounce. In short, New Gold’s management team has done everything to secure the survival of the company as it repositioned the Rainy River mine, but these measures have put pressure on New Gold shares at a time when gold is valued at more than $2000 per ounce.
In my opinion, New Gold’s management has done everything correctly, as they prioritized the survival of the company over potential stock price upside. The company finished the second quarter with $700 million of cash, up from $83 million at the beginning of the year, as it boosted its liquidity through various means.
There is no way that company management could have predicted a COVID-19 pandemic and the resulting money-printing from the world central banks which has led to a major gold price rally. However, the conservative moves that have been made by New Gold’s management team are putting pressure on the company’s shares despite the fact that they are up almost 90% year-to-date:
While the gold price has rallied above $2000 per ounce, New Gold’s near-term perspectives remain muted. Due to the unfortunate hedging program, the company cannot fully enjoy the higher gold prices. Investors and traders have plenty of gold mining stocks to choose from, so New Gold is not on their priority list.
In addition, the company’s production levels at New Afton are set to suffer due to lower grades until at least the end of this year, which does not bode well for the mine’s performance in the second half of 2020 despite the recent upside on the copper price front.
At this point, it looks like New Gold shares will show some sensitivity to gold price action, since some investors will buy them in anticipation of better results in 2021, but it’s hard to expect a major increase in demand for New Gold stock at times when many gold mining companies without restrictive hedges are available in the marketplace.
Source: Seeking Alpha Premium
Analysts expect that the company will report negative earnings, which is not surprising given the ill-timed hedging programs in place. The high gold price makes a real difference for higher-cost producers like New Gold, so its shares are positioned to be very sensitive to gold price movements when the current hedging program ends. Until then, the upside of New Gold stock will be limited, as traders can choose between many stocks that will be able to deliver immediate cash flow thanks to high gold prices.
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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.
Additional disclosure: I may trade any of the above-mentioned stocks.