Analyst Report: New Gold Inc. (TSX:NGD / NYSE:NGD)

7/31/2019 Analyst Report: New Gold Inc. (TSX:NGD / NYSE:NGD)

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May 24, 2012

New Gold Inc.Overview

With three producing gold mines and threedevelopment-stage projects, New Gold Inc.(TSX:NGD / NYSE:NGD) is a growing mid-tier gold producer. The company’s currentlyproducing assets, located in the United States,Mexico and Australia, together with its NewAfton mine, located in British Columbia,

Canada, are expected to produce more than400,000 ounces of gold in 2012. The NewAfton mine will begin production in mid-2012and in 2013 the company expects to producebetween 450,000 and 500,000 ounces of gold.

As of the first quarter of 2012, the company’s

average cash cost per ounce of gold producedwas $543, yielding an average cash margin of $1,032 per ounce. Net of byproduct credits,the company expects its cash costs to fall to

between $150 and $200 per ounce of goldproduced in 2013, assuming a $30 per ounceprice for silver and a $3.50 per pound price forcopper.

The company’s 100% owned, developmentstage Blackwater project, located in BritishColumbia, is estimated to contain 7.8 millionounces of gold and 37 million ounces of silverin all categories. Additionally, the companyholds a 30% stake in the El Morro project

located in Chile, while Goldcorp Inc. holds a70% interest. New Gold’s 30% represents 4.7million ounces of gold and 3.9 billion poundsof copper in all categories.

Management

The company’s Executive Chairman and

Director, Randall Oliphant, was President andChief Executive Officer of Barrick Gold

Company Type MiningResources Gold / Silver / CopperCompany Stage Mid-tier ProducerSymbol TSX:NGD / NYSE:NGDShare Price (CAD) $8.8552-week High/Low $14.12 / $7.20

Market Cap. $4,086,303,110Shares Out. 461,729,165Fully Diluted 530,793,357Insider Ownership 2.83%Major Shareholders Fidelity Mgmt, 6.01%; Van Eck

Assoc, 5.79%; RS InvestmentMgmt, 4.78%; BlackRockInvestment Mgmt, 4.42%;Harris Investment Mgmt,

4.08%; Market Vectors GoldMiners, 3.78%; FidelityContrafund, 3.74%

HeadquartersAddress

3110-666 Burrard St.Vancouver, BC V6C 2X8Canada1 (604) 696-4100 phone1 (604) 696-4110 [email protected]

Board of Directors Randall Oliphant, RobertGallagher, James Estey,Vahan Kololian, Martyn Konig,Pierre Lassonde, CraigNelsen, Raymond Threlkeld

CEO Robert GallagherOperating Region(s) United States, Mexico,

Australia, Canada, ChileWorking Capital $238,000,000 (12/31/2011)Burn Rate N/ADebt $375,000,000Revenues $166,755,000 (Q1 2012)Profit/Loss $33,531,000 (Q1 2012)Net Assets $3,292,964,000 (3/31/2012

total assets)

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New Gold Inc. ©2012 Hera Research, LLC

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Corporation from 2006 to 2009 and Chairman of Western Goldfields Inc., which was acquiredby New Gold in 2009. The company’s President and Chief Executive Officer, Robert Gallagher,previously served in senior roles at Placer Dome Inc. and Newmont Mining Corporation. Beforethe business combination of Peak Gold Ltd., Metallica Resources Inc. and New Gold in 2008,Mr. Gallagher was the President and Chief Executive Officer of Peak Gold. The company’s

Chief Financial Officer, Brian Penny, served as CFO of Kinross Gold Corporation, Western

Goldfields and Silver Bear Resources Inc. Mr. Penny was a Director of and chaired the AuditCommittee of Equinox Minerals Limited until its acquisition by Barrick in 2011.

The development and operation of the company’s New Afton mine is managed by Ron Allum,Vice President of Operations for Canada. Mr. Allum has more than 33 years of undergroundmining operational experience, including 28 years in block cave mining operations at the SanManuel mine in Arizona and at the Questa mine in New Mexico. The company’s Latin

American operations are managed by Armando Ortega, Vice President for Latin America. Mr.Ortega also serves as Managing Director of Minera San Xavier S.A. de C.V. Previously, Mr.Ortega served as Vice President, Legal and General Counsel at Southern Copper (a subsidiary of Grupo Mexico) and as General Counsel of Grupo Mexico, S.A.B. de C.V. Mr. Ortega also held

positions in the Mexican federal government where he participated in trade negotiations with theUnited States and Canada (the North American Free Trade Agreement) and the European Union.

The company’s exploration teams are led by Mark Petersen, Vice President of Exploration, whois an economic geologist with over 28 years of mining industry experience in the Americas. Mr.Petersen previously served as Vice President of Exploration for Metallica Resources, where hewas responsible for exploration and development at the Cerro San Pedro project in Mexico andexploration projects in Chile, Brazil and Alaska. Mr. Petersen was also the company’s technical

liaison for the El Morro joint venture project in Chile. Prior to Metallica Resources, Mr.Petersen held positions as an exploration geologist with Lac Minerals Inc. and predecessorcompanies Bond Gold Inc. and St. Joe Gold Inc.

Operating Mines

The company’s three producing mines are the Mesquite mine located in the United States, theCerro San Pedro mine located in Mexico and the Peak mines located in Australia. Thecompany’s New Afton mine is on schedule to begin production in 2012. The company estimatesthat it will produce between 405,000 and 445,000 ounces of gold in 2012 and between 450,000and 500,000 ounces of gold in 2013.

Cerro San Pedro Mine – The Cerro San Pedro mine, located in Cerro San Pedro,Mexico, is an open pit gold and silver (with zinc and lead) heap leach operation. Themineral rights consist of 53 mineral concessions (consolidated to 17) covering an area of

7,969 hectares. The open pit mine life is estimated to be 6 years, after which anunderground operation might be implemented (exploration is currently under way).Metal recoveries are 60% for gold and 30% for silver. The mine is expected to produce140,000 to 150,000 ounces of gold and 2 million ounces of silver in 2012 at a total cashcost of approximately $260 per ounce of gold produced.

Mesquite Mine – The Mesquite mine, located in Imperial County, California, UnitedStates, is an open pit gold mine and heap leach operation with an estimated 13-year minelife. The mineral rights cover a total area of approximately 1,890 hectares (4,670 acres).




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75% of produced gold is recovered from oxide ores and gravels and 35% from non-oxideores. Metal recoveries for gold are approximately 92% (75% over the life of the mine).The mine is expected to produce 140,000 to 150,000 ounces of gold in 2012 at a totalcash cost of approximately $720 per ounce of gold produced.

Peak Mines – The Peak mines, located in the Cobar Gold Field of Central West New

South Wales, Australia, is an underground gold, silver and copper mining operation. ThePeak gold mines comprise five producing mines and a copper-gold processing plant. Themineral rights consist of approximately 86,110 hectares of mining leases and explorationlicenses. The primary Peak mine has an estimated 9-year mine life, but the mine has a20-year history, thus it is likely that further exploration will extend the mine life. Metalrecoveries are approximately 90% for gold and 87% for copper. The five mines feed acentral mill that operates at approximately 2,200 tonnes per day (tpd). The mines areexpected to produce 90,000 to 100,000 ounces of gold and 13 million pounds of copperin 2012 at a total cash cost of approximately $650 per ounce of gold produced.

New Afton Mine – The New Afton mine, located in British Columbia, Canada, is a block

cave mining operation with an estimated 12-year mine life. The mineral rights consist of 61 mineral claims covering an area of 12,450 hectares. The project is on track forcommencement of commercial production by August 2012. Metal recoveries areexpected to be 88% for copper, 87% for gold and 75% for silver. Once fully operational,the New Afton mine is expected to produce an annual average of 85,000 ounces of goldand 75 million pounds of copper. Initially, the mine will operate at 6,600 tpd (60% of nameplate capacity) and will then ramp up to 11,000 tpd in early 2013. In 2012, the mineis expected to produce between 35,000 and 45,000 ounces of gold at a total cash cost of approximately $640 per ounce of gold produced, not including byproduct credits. On abyproduct basis, the total cash cost is expected to be -$1,250 per ounce of gold producedin 2012.

Reserves and Resources

At its operating mines, including New Afton, the company’s NI 43-101 compliant Measured andIndicated resources total 10 million ounces of gold, 62.9 million ounces of silver, 1.7 billionpounds of copper, 753 million pounds of zinc and 106 million pounds of lead, with the majorityof the resources in the Proven and Probable (reserves) category. Adding in the developmentstage El Morro and Blackwater projects (including the Capoose deposit) raises the company’s

total Measured and Indicated gold, silver and copper resources to 18.8 million ounces of gold,115 million ounces of silver and 3.9 billion pounds of copper.

Mine / Project Gold (oz) Silver (oz) Copper (lbs) Zinc (lbs) Lead (lbs)

Blackwater/Capoose 5,851,000 52,388,000 - - -Cerro San Pedro 1,812,000 55,860,000 - 753,000,000 106,000,000

El Morro * 2,954,000 - 2,193,000,000 - -

Mesquite 5,534,000 - - - -

New Afton 1,742,000 5,470,000 1,586,000,000 - -

Peak 948,000 1,570,000 167,000,000 - -

Total 18,841,000 115,288,000 3,946,000,000 753,000,000 106,000,000* Total for New Gold’s 30% ownership.




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Including all properties, in the Inferred category, the company has an additional 6.7 millionounces of gold, 78.7 million ounces of silver, 2.2 billion pounds of copper, 598 million poundsof zinc and 18 million pounds of lead.

Property Gold (oz) Silver (oz) Copper (lbs) Zinc (lbs) Lead (lbs)

Blackwater/Capoose 2,725,000 40,705,000 - - -

Cerro San Pedro 956,000 36,024,000 - 698,000,000 18,000,000El Morro * 1,810,000 - 1,705,000,000 - -

Mesquite 512,000 - - - -

New Afton 483,000 1,478,000 390,000,000 - -

Peak 259,000 486,000 107,000,000 - -

Total 6,745,000 78,693,000 2,202,000,000 698,000,000 18,000,000* Total for New Gold’s 30% ownership.

The El Morro project, of which New Gold owns 30%, contains NI 43-101 compliant Proven andProbable reserves of 8.4 million ounces of gold and 6.1 billion pounds of copper. The site,which is located in the Región de Atacama of Northern Chile (District III), covers 417 squarekilometers and is one of the largest known copper and gold deposits in Latin America. Copper

and gold will be recovered via flotation with average metal recovery rates of 85.1% for copperand 67.2% for gold. Initial production is expected in 2017 with full production in 2018 at a rateof 90,000 tpd. New Gold’s 30% share of annual production is projected to be over 100,000ounces of gold and 95 million pounds of copper. Over the mine’s estimated 17-year mine life,cash costs are expected to be approximately $550 per ounce of gold net of byproduct credits.

Exploration Plans

Exploration is ongoing at the Peak mines, focusing on near mine satellite targets, and at theCerro San Pedro mine, focusing on a potential underground resource. In 2012, an undergroundexploration program at the New Afton mine will focus on a near mine extension of themineralization. At the El Morro project, drilling will focus on identifying further mineralizationat the La Fortuna deposit and on further testing of the geologically similar El Morro deposit. Atthe Blackwater project, the company is engaged in a substantial exploration program that, in2012, comprises 210,000 meters over 500 holes.

Growth Strategy

New Gold is the product of a series of business combinations and acquisitions beginning in 2008when New Gold, Metallica Resources and Peak Gold joined forces. In 2009, New Gold acquiredWestern Goldfields, which owned the producing Mesquite mine, and, in 2011, New Goldobtained the Blackwater project through its acquisition of Richfield Ventures Corp. The strategyincreased liquidity and generated a portfolio effect. As a larger entity, New Gold was able to

lower production costs and increase production.

The company’s strategy is to continue its growth trajectory through acquisitions, exploration and

mine development in mining friendly jurisdictions. CEO Robert Gallagher explains that “The

company’s original strategy was to acquire single-asset companies with producing mines.

Buying producing assets has become more expensive. We’re looking at late stage exploration

assets, like Blackwater, that are pre-development. We’re moving up the value chain and

competing with larger companies for higher quality assets.” The company is focused on




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projects that will have a minimum 12-year mine life and produce 100,000 ounces of gold peryear.

Currently, the company has cash and cash equivalents of $326 million as well as an undrawncredit facility of $150 million. As of March 2012, the company had $382 million in debt,consisting primarily of $300 million in unsecured notes at 7% issued in April 2012. The

company reported Q1 2012 financial results showing net earnings of $33.5 million with revenuesof $168.7 million.

Near-term Catalysts

The company’s New Afton mine, which is scheduled to begin production in June 2012, will addbetween $200 million and $250 million in gross annual revenues to the company’s top line.

The company is working towards a Preliminary Economic Assessment (PEA) of its Blackwaterproject, which will be completed in the third quarter of 2012, and additional drill results from theproject are expected in 2012.

Investment ThesisNew Gold has shown consistent execution and growth in resources and production, has a strongbalance sheet and growing cash flow. The company is in a strong position to make additionalstrategic acquisitions. High volatility in the gold price and in the stock market recently led to anindiscriminate sell off in gold mining shares. The company’s share price recently fell to a new

52-week low. Insiders are buying shares in the open market.

New Gold’s share price has been affected by a lawsuit and by a permitting delay at the El Morroproject in Chile. The issues are of a temporary nature and if the El Morro project weresubtracted entirely, New Gold would remain undervalued.

Major Risks

A judgment in the litigation between Barrick Gold and Goldcorp over the acquisition of XstrataCopper Chile’s 70% stake in the El Morro project by Goldcorp is imminent. In 2009, New Goldexercised its right of first refusal by purchasing Xstrata’s 70% stake in the project, which Barrick was prepared to acquire. New Gold then sold 70% of the project to Goldcorp. Barrick sued,alleging that New Gold had unlawfully sold its right of first refusal. Although it is questionableif Barrick can prove its case, litigation is unpredictable. In any case, the outcome has no impacton New Gold’s 30% ownership of the project.

Goldcorp’s 70% owned subsidiary Sociedad Contractual Minera El Morro suspended

construction at the El Morro project in April 2012. Engineering, design and architectural work have continued. A Chilean court ruling on April 27 suspended approval of an environmentalpermit issued on March 14 by the Chilean Servicio de Evaluación Ambiental (SEA). The SEA isexpected to require Goldcorp to meet with the Comunidad Agricola Los Huasco Altinos, whichrequested the permit review in order to discuss environmental impacts and mitigation measures.Sociedad Contractual Minera El Morro had met with local farmers individually but had not metwith the Comunidad Agricola Los Huasco Altinos organization. Since Chile is a mining friendly jurisdiction, it is likely that the permit will be approved once all of the requirements have beenmet. However, the timeline and additional mitigation measures, if any, are unknown.




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Outside of the El Morro project, the primary risks to New Gold’s share price have to do withgeneral stock market conditions and the price of gold. Mining companies are subject to normalexecution and operating risks, as well as to risks associated with exogenous events.

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About This Report

Hera Research is a subscriber-funded research service that does not receive compensation fromresource companies. Hera Research focuses on value investing in companies that producenatural resources and seeks to identify resource companies whose share prices could gain 100%or more in 18 to 24 months.

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authoritative sources and is assumed to be true and accurate.

Hera Research does not issue buy, sell or hold recommendations or set short-term, e.g., 90-day,price targets. Hera Research provides research and does not offer investment or financial adviceof any kind.

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Analyst Report: New Gold Inc. (TSX:NGD / NYSE:NGD)