Blackwater PEA drives New Gold higher

A preliminary economic assessment of New Gold’s (NGD-T) Blackwater gold project in central B.C., 112 km southwest of Vanderhoof, suggests it should generate robust economic returns, even at a gold price that is US$500 per oz. below where it trades today, the company says.

Nearly 5 million shares of New Gold changed hands on the TSX after the PEA was released on Sept. 20, with the stock settling 20¢ higher at $12.34.

“The $1.8-billion project brings significant annual production potential of about 500,000 oz. that would more than double the gold output verus current levels,” Barry Cooper of CIBC writes in a note to clients. “Few peers can boast this level of growth.”

Andrew Kaip of BMO Capital Markets describes the PEA as a major milestone, and reiterates his “outperform” rating on the company, with a price target of $15 per share.

Construction is forecast to start in 2015, with first production in 2017. Over its initial 15 years of mine life Blackwater is estimated to produce an annual average of 507,000 oz. gold and 2.04 million oz. silver, at total cash costs, net of by-product sales, of US$536 per oz.

Life-of-mine gold and silver production, inclusive of a low-grade stockpile that adds 1.4 years of processing at the end of the pit life, would amount to 6.2 million oz. gold and 18.6 million oz. silver from the indicated category, and 1.8 million oz. gold and 13.5 million oz. silver from the inferred.

At gold and silver prices of US$1,275 per oz. and US$22.50 per oz., and a 5% discount rate, the PEA outlines a base-case after-tax net present value of US$1.1 billion, and an after-tax internal rate of return of 14%. At US$1,775 per oz. gold and US$34.50 per oz. silver, the after-tax NPV rises to US$2.8 billion and the IRR to 25.8%.

The scoping study envisions a conventional truck and shovel open-pit operation with a throughput of 60,000 tonnes per day, or 21.9 million tonnes a year. The processing plant would use conventional crushing, grinding, leaching and carbon-in-pulp to produce a gold-silver doré.

Payback is forecast in 4.8 years under a base-case scenario; development capital costs of US$1.8 billion include a 24%, or US$346-million contingency; sustaining capital is projected at US$537 million; and the life-of-mine stripping ratio is estimated at 2.36 to 1.

The intermediate gold producer noted that the PEA is based on drill results up to mid-May and was completed just 15 months after it acquired the property.

Additional drill results since then (an additional 377 drill holes, or 100,363 metres so far) will be folded into a feasibility study New Gold expects by the fourth quarter of next year.

At a base-case cut-off grade of 0.3 gram per tonne gold equivalent, the deposit contains 267 million tonnes grading 0.88 gram gold per tonne and 4.3 grams silver per tonne in the indicated category, and 121 million tonnes averaging 0.69 gram gold and 7.3 grams silver in the inferred.

Management also points out that it is continuing exploration around its Capoose gold-silver deposit, about 25 km from Blackwater.

Cooper of CIBC notes that the initial numbers “suggest that the unit costs to operate an open-pit mine at Blackwater would rank slightly better than average relative to existing North American gold producers,” adding that the PEA was “largely in line” with his expectations.

“Blackwater could add a meaningful 500,000 oz. production growth on the company’s current production base of 404,000 oz.,” he writes. “While the level of capital expenditure is significant, so too is the prize, as there are very few gold companies capable of more than doubling production over a five-year horizon.”

In terms of some of Blackwater’s advantages compared to other large-scale development projects, Cooper lists: its location in south-central B.C., and access to power, water and labour; its near-surface and lower elevation orebody; agreements in place with key First Nations stakeholders; and its straightforward process sheet. Other attributes include a compact mine site, he notes, nearby tailings containment and the company’s ability to “leverage the local knowledge and development expertise gained from New Afton.”

Cooper points out that on the exploration front, the deposit remains open to the north, and that many of the holes drilled to date were stopped at a depth of 400 metres and ended in mineralization, which “opens the prospect for the deposit to extend at depth.”

BMO’s Kaip expects New Gold would fully fund the development of Blackwater through current cash and forecast future cash flow. But he adds that, at long-term metal price assumptions of US$1,300 per oz., he expects a funding gap of US$75 million “just prior to production start-up.” This shortfall, however, can be met through debt facilities, he says, adding that he “does not foresee any material risk of equity dilution” for Blackwater.

New Gold has four operating mines in B.C. (New Afton), California (Mesquite), Mexico (Cerro San Pedro) and Australia (Peak), as well as development projects in B.C. (Blackwater) and Chile (El Morro).

At press time New Gold was trading at $12.30 per share within a 52-week range of $7.20 to $14.12. The company has 462 million shares outstanding, and counts Van Eck (8.3%) and Fidelity (7.3%) as its major shareholders.