New Gold Stock: A Slow Start in Rainy River (NYSE: NGD)
The Canadian company New Gold Inc. (NYSE: NGD) released its first quarter 2021 production results on April 12, 2022. The initial reaction was a surprise after reviewing the production results. It was a multi-year low and unlike the previous quarter.
CEO Renaud Adams said in the Press release:
“In the first quarter, our two operations produced total gold equivalent production of 87,696 ounces as we begin a year focused on operational excellence and the optimization of both assets”
1.1 – Investment thesis
Despite a bullish gold price, production numbers were insufficient to classify NGD as attractive over the long term. First quarter production is far from encouraging, and the investment thesis is improving but remains uncertain.
I recommend trading LIFO around 60% of your position and keeping a small long-term core.
A crucial element that can help a long-term investment thesis is the cash position of $541m in 4Q21 and is expected to remain above $520m despite lower production in 1Q22. On December 13, 2021, New Gold has sold the existing gold stream held on the Blackwater project to Wheaton Precious Metals (WPM) for $300 million in cash and other consideration.
- New Gold will receive an initial cash consideration of US$300 million from Wheaton upon closing of the transaction;
- The gold stream entitles Wheaton to 8% of the gold produced at Blackwater, reducing gold production to 4% once approximately 280,000 ounces of gold have been delivered to Wheaton. Gold delivered as part of the stream is subject to a continuous spot price equal to 35% of the spot price of gold, payable to Artemis.
The company is now net debt free.
1.2 – Stock market performance
NGD significantly underperformed the VanEck Vectors Gold Miners ETF (GDX), especially after news related to Rainy River. However, NGD is recovering quickly and is now up 15% YoY.
2 – Details of gold production for the first quarter of 2022
Quarterly gold equivalent production was surprisingly weak this quarter.
- Total gold equivalent production was 87,696 Eq. Oz for 1Q22, down 8.7% from the same quarter a year ago and down 21.4% sequentially.
- New Gold produced 68,101 Au Oz, 109,511 Ag Oz and 8.2 Mlbs of copper.
To note: New Gold has a gold flow obligation with Royal Gold (RGLD) on Rainy River, which reduces the quarterly realized price of gold.
The increase in COVID-19 cases has impacted Rainy River’s production at the site, which has created technical issues. In addition, the cold weather affected drilling productivity. At the New Afton mine, the drop in production was due to a transition to the B3 ramp-up and the C zone.
CEO Renaud Adams said in the press release:
At Rainy River, we achieved quarter-over-quarter production growth despite lower tonnes mined due to an increase in COVID-19 cases at the site during the first part of the quarter, which impacted equipment utilization, and the cold weather affected drilling productivity. Grinding rate was also impacted during the quarter due to mechanical maintenance of the SAG mill and crusher, and weather conditions impacting inventory movement.
At New Afton, the scheduled closure of Elevator 1 Cave was completed except for the salvage level, commissioning of the thickened and modified tailings facility was completed, and we continued to advance the ramp-up of B3 and development of zone C.
- Details by metal comparing 3Q21, 4Q21 and 1Q22: Production was weak for gold, silver and copper.
- The Company said the Rainy River mine produced 59,895 GEO (58,834 ounces of gold and 79,621 ounces of silver) in 1Q22.
- The New Afton mine produced 27,800 GEO (9,267 ounces of gold and 8.2 million pounds of copper, and 29,890 Ag Oz) in 1Q22.
3 – A positive point: the recent technical report of Rainy River
On March 31, 2022, New Gold published new mineral reserves for the Rainy River mine. LOM is ten years old and the average annual gold production from 2022 to 2027 is expected to be 302K Au Oz (309K Au Eq. Oz). The AISC per GEO is estimated at $1,047.
Technical analysis (short term)
NGD forms an ascending triangle with resistance at $1.91 and support at $1.75. The trading strategy is to trade LIFO around 60% of your total position and hold a long-term base position for higher returns.
I suggest selling between $1.91 and $1.95 or more, 30% of your position, and waiting for a possible breakout to sell 30% from $2 to $2.10.
However, if gold turns bearish again due to hawkish Fed action, the NGD will likely fall below $1.80 (50MA) – $1.75 and retest $1.55 – 1.50 again. $ in the worst case, assuming no catastrophic news. I suggest accumulating below $1.75 with a potential low set at $1.50.
Watch the price of gold like a hawk.
Warning: The TA table must be updated frequently to be relevant. This is what I do in my stock tracker. The table above has a possible validity of approximately one week. Remember that the TA chart is a tool only to help you adopt the right strategy. This is no way to predict the future. Nobody and nothing can.
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