New Gold inks Rainy River deal with Royal Gold

VANCOUVER — Canadian producer New Gold (TSX: NGD; NYSE-MKT: NGD) appears to have filled a funding gap at its Rainy River gold mine under construction 65 km northwest of Fort Frances, Ont., with a US$175-million streaming deal with Denver-based Royal Gold (TSX: RGL; NASDAQ: RGLD).

On July 20 the companies struck  a deal whereby Royal Gold will provide New Gold with cash for construction in exchange for a percentage of future gold and silver production. 

New Gold has spent US$119 million at Rainy River so far, which represents 14% of the estimated US$877-million development costs.

Royal Gold will make two advance payments under the agreement, consisting of US$100 million at closing and US$75 million once capital spending on Rainy River is 60% complete. In return New Gold’s payments will deliver 6.5% of gold produced at the project until 230,000 oz., and 3.3% thereafter; plus 60% of silver produced up to 3.1 million oz., and 30% thereafter.

Royal Gold will pay New Gold 25% of the spot price per ounce of gold or silver.

Based on a feasibility study released in early 2014, Rainy River will crank out 325,000 oz. gold and 480,000 oz. silver per year over its first nine years of operation. Total production over the project’s 14-year mine life is estimated at 3.4 million oz. gold and 6 million oz. silver.

New Gold plans to run a hybrid open-pit, underground operation that would process material at 21,000 tonnes per day. Rainy River’s open-pit reserves total 100 million proven and probable tonnes grading 0.96 gram gold per tonne and 2.49 grams silver per tonne, for 3.1 million contained oz. gold and 8 million contained oz. silver. Meanwhile, underground reserves include 4.2 million tonnes of 4.96 grams gold and 10.31 grams silver.

“This transaction provides our company with an attractive cost of capital,” New Gold executive chairman Randall Oliphant noted in a prepared statement. “In addition, we have structured the stream in a manner that maximizes our exposure to both the continued exploration potential of the Rainy River district and long-term gold and silver prices.”

Royal Gold figures it will receive annual deliveries of 17,000 oz. gold and 230,000 oz. silver over Rainy River’s current mine life. The company will also gain the upside of measured and indicated resources of 46 million tonnes grading 1.64 grams gold and 4.9 grams silver for 2.4 million contained oz. gold and 7.2 million contained oz. silver.

“Rainy River fits well into our high-quality portfolio and met all our criteria for new investments, with nearly 4 million oz. gold reserves, continued exploration upside and projected cash costs below US$600 per oz.,” Royal Gold president and CEO Tony Jensen added.

New Gold indicated that the total stream payment would bring its liquidity to US$738 million, which includes room on an undrawn credit facility and US$327 million in cash. The company said it would close the US$22-million funding gap through cash flow from operations.

New Gold received its permits for major earthworks construction in May, and expects mill infrastructure delivered by the fourth quarter. The company says it has outlined five prospective areas “within a 5 km radius of mine development area identified for future drill testing.”

New Gold shares have traded in a 52-week range of $2.80 to $7.15, and last closed at $2.91.

 The company has 509 million shares outstanding for a $1.4-billion market capitalization.

Meanwhile, Royal Gold is deploying its impressive balance sheet as precious metals markets stumble. The company reported cash and equivalents of US$715 million in March, and recently closed a US$525-million gold off-take agreement with major Teck Resources (TSX: TCK.B; NYSE: TCK) on the Carmen de Andacollo mine in Chile.

Royal Gold has traded within a 52-week range of $61.50 to $95.64, and closed at $66.55 at press time. 

The company has 65.2 million shares outstanding for a $4.4-billion market capitalization.