The fourth quarter earnings season is finally underway for the Gold Miners Index (GDX), and one of the first companies to report was New Gold (NGD). The company had a lackluster year operationally with one miss to its median target, but it was a tough year with lower grades at East Lobe, a tragic incident at New Afton and delayed B3 permits. Fortunately, Rainy River ended the year strong and the sale of Blackwater Creek improved NGD’s balance sheet, ending the year with approximately $480 million in cash. At a stock price of $1.88, I don’t see enough of a safety margin to justify entering new positions, but NGD is a name worth watching for a pullback.

New Gold released its fourth quarter and full year 2021 results last month, reporting quarterly production of approximately 111,600 gold equivalent ounces. [GEOs], a decrease of 7% compared to the period of the previous year. This was due to much lower production from New Afton, where the company experienced lower grades and recoveries on a sequential basis. New Afton’s lower production led to missing the midpoint of the company’s guidance of ~427,000 GEO, with fiscal 2021 only reaching ~418,900 GEO, down 4% year over year ‘other. Let’s take a closer look at the results below:

As the graph above shows, it was a very difficult year for New Gold operationally, with production falling off a cliff in the first quarter at ~96,000 GEO, but steadily improving throughout the year. year. Unfortunately, the strong fourth quarter performance at Rainy River was masked by a much weaker year at New Afton, where GEO production was down 14% year over year due to lower throughput and lower grades. Unsurprisingly, this translated into a sharp increase in costs at the BC mine, with all-in sustaining costs hitting $1,385/oz from $1,064/oz in fiscal 2020.

While New Afton had a difficult year with the late receipt of B3 permits and the tragic mud rush incident at the start of the year, Rainy River had a better year (headwinds taken into account) and the outlook for fiscal 2022 is also strong. Evidenced by Q4 production reaching a very impressive number of approximately 70,500 GEO, up more than 3% year-over-year. On a full year basis, the asset faced relatively easy compounds due to a two-week COVID-19 related shutdown, but this was offset by much lower grades at East Lobe, which had an impact on production.

Despite the setback, the operation recorded a 4% increase in production to approximately 243,000 GEO, with all-in sustaining costs rising to $1,415/oz (FY 2020: $1,562/oz). This cost improvement occurred despite a strengthening Canadian dollar which was a minor headwind, offset by lower sustaining capital during the period. This improvement in costs resulted in higher margins year over year when combined with the expiration of gold hedges. As shown, Q4 all-in sustaining cost [AISC] margins were $443/oz, compared to $297/oz a year ago.

Looking to fiscal 2022, some investors may be disappointed with the outlook, given that production is expected to be relatively flat year-over-year at much higher costs. This is based on the current forecast midpoint of approximately 420,000 GEO at all-in sustaining costs of $1,520/oz (FY 2021: $1,463/oz). However, it’s important to note that this is primarily due to much higher sustaining capital and sustaining leases, which are expected to increase to approximately $203 million at the midpoint from $157 million last year. This increase is related to the completion of the B3 development at New Afton, tailings management and waste immobilization.

The good news is that costs will decline in the second half of the year, with production weighted 45%/55% between H1 and H2 and sustaining capital falling in H2. The other good news is that investors can expect the start of mining at Intrepid Underground at the Rainy River mine in the second half. This will contribute to a much better year at Rainy River, with forecasts of around 280,000 GEO at $1,320/oz versus around 243,000 GEO at $1,415/oz in fiscal 2021. Looking ahead to fiscal 2023, production will improve even further, with costs expected to come down significantly, assuming there are no more setbacks with East Lobe.

The other good news, of course, is that the price of gold appears to be on a significant tailwind this year, a welcome development from a massive headwind in fiscal 2021. That’s a big deal. for a high-cost producer like New Gold, where the company will see an outsized impact on its margins if the price of gold can stay above $1,950/oz. So, while the AISC is expected to increase by $60/oz in fiscal 2022, it looks like New Gold could see an improvement of more than $125/oz against the price of gold, more than offsetting the increase in costs. Let’s take a look at New Gold’s valuation below after the recent share price rally:

Evaluation and technical image

Looking at New Gold’s valuation below, we can see that the stock has historically traded at around 3.6x operating cash flow (5-year average), which is well below its peer group. This much lower multiple can be attributed to New Gold’s much higher costs, limited free cash flow generation compared to its peer group and a weaker balance sheet. At the current share price of $1.88, New Gold is trading at around 4.5x trailing 12-month cash flow, well above its 5-year average.

However, New Gold’s balance sheet is much stronger following Blackwater’s transaction with Wheaton Precious Metals (WPM), and its free cash flow is expected to improve significantly in fiscal 2023, although costs are expected to remain high in fiscal 2022 ($1,520/oz). If we combine this with gold prices near all-time highs, I’d say New Gold could warrant a cash flow multiple of 4.0, which would be a 10% premium to its all-time average.

Based on cash flow estimates for fiscal year 2023 of $0.53, this would translate to a fair value of $2.12. This indicates an increase of about 15% from current levels. However, I generally prefer to buy at least a 30% discount to fair value for higher cost producers, which means the stock would have to drop below $1.48 for me to start trading. interested in a new position. Therefore, while New Gold appears to have a medium-term upside (assuming gold prices stay above $1,950/oz), I don’t see this as a low-risk buying opportunity. .

Moving on to the technical picture, we can see that NGD has rallied strongly from its lows, but it is now trading at the upper end of its expected trading range. This is based on the stock price at $1.88 against support at $1.35 and resistance at $2.35. Based on the current price action, this translates to a reward/risk ratio of 0.89 to 1.0, given that there is $0.47 of upside potential at resistance and 0, $53 downside potential at support. The current reward/risk ratio supports my view that this is not a low risk buy point for investors. For the reward/risk ratio to become compelling from a trading perspective, NGD would need to drop below $1.50 per share.

Obviously, if gold prices remain high and continue to hold above the $2,000/oz level, New Gold is unlikely to pull back to support at $1.35. However, I would never pay for a lagging sector just because commodity prices are rising. Instead, I prefer to wait for a safety margin or look for alternative names where there is a significant safety margin. Therefore, I continue to see more attractive bets elsewhere in the industry. One name that offers a significant margin of safety is Nomad Royalty (NSR), which trades at a P/NAV multiple typically reserved for producers despite margins above 80%.

New Gold has made solid progress under the leadership of CEO Renaud Adams, and while costs will remain high in fiscal 2022 and well above the industry average (~$1,100/oz), the future looks much brighter after 2022. Indeed, we should see a significant increase in production at Rainy River, with costs expected to drop below $1,000/oz. Therefore, for investors looking for turnaround stories with improved cash flow profiles, NGD is one of the best stories. That said, I prefer to buy dips, not chase rallies, so I would need to see the stock dip below US$1.48 to be interested from a trade perspective.