New Gold closes US$300M partnership with Ontario Teacher’s Pension Plan

New Gold (TSX: NGD; NYSE-AM: NGD) has closed a strategic partnership with the Ontario Teachers’ Pension Plan (OTPP) to acquire a 46% free cash flow interest in the company’s New Afton mine for an upfront cash payment of US$300 million. The proceeds are to be used to reduce the company’s debt and increase its financial flexibility.

“The partnership agreement is a great deal and a great outcome and followed a considerable amount of work and diligence on our part,” Renaud Adams, New Gold’s president and CEO, said in a telephone interview. “We were looking for a partner with an upfront cash payment and who was willing to be patient over the next four years, and the free cash payment approach from Ontario’s Teachers Pension Plan represented the right structure for us to focus on the bottom line, with both parties recognizing what a great opportunity the partnership represented.”

New Gold is a Canadian-based intermediate gold mine company. Its portfolio includes two producing mines in Canada: Rainy River, a gold-silver mine 65 km northwest of Fort Frances in Ontario and New Afton, a gold-copper mine 350 km northeast of Vancouver in British Columbia.

In addition, the company owns 100% of the Blackwater gold-silver development project located 160 km southwest of Prince George, B.C., and operates the Cerro San Pedro mine 20 km northeast of San Luis Potosí in Mexico, which transitioned to residual leaching in 2016.

OTPP is one of the world’s leading pension funds with net assets worth over $207 billion. The fund focusses on finding investment opportunities and establishing investment partnerships that add to OTPP’s broad and diversified assets group, which encompass several target sectors, including infrastructure and natural resources.

Under the terms of the transaction, New Gold retains full operational control over the New Afton mine, with a buyback option to re-purchase a 100% interest in New Afton’s cash flow and cancel the partnership during the agreed period at the greater of an agreed-upon internal rate of return to OTTP or fair market value for the free cash flow at the time. The company also retains 100% of the exploration claims that lie outside of the mine’s permit area and has granted OTPP an option to purchase a proportionate share of any claims after conversion into the joint venture interest.

“The transaction allows us to restructure our balance sheet and lower our level of net indebtedness focused on free cash flow,” Adams said. “It also provides New Gold with an attractive cost of capital, further strengthening our finances and allowing us to carry out further exploration on the New Afton land package, as well as the opportunity to re-acquire 100% of New Afton in the future.”

Pit operations at New Gold’s Rainy River gold mine northwestern Ontario. Credit: New Gold.

The agreement provides OTPP with 46% interest effective from the closing date of the transaction over a four-year term. After four years, OTPP has the option to convert the interest into a 46% joint venture with New Gold, with the company holding the remaining 54% interest in the limited partnership formed at the time of conversion.

Should OTPP decide to enter into the joint-venture agreement, the option is exercisable over 60 days following the fourth anniversary of the date of signing of the agreement. If OTPP decides not to take up the option, then it retains a free cash flow interest in New Afton but at a reduced rate of 42.5%.

“With the signing of the agreement, we now have $390 million in cash and $590 million in liquidity,” Adams said. “We now understand what is required at both our Rainy River and New Afton mine assets to make them profitable and self-funding. Even with the unpredictable situation at the moment, we are now very well positioned to face the challenges that lay ahead.”

The closure of the agreement comes shortly after New Gold announced updated life of mine plans for both the Rainy River and New Afton mines.

The new mine plan for Rainy River aims to extend the life of the underground mine beyond 2028, and is contingent on gold prices that support the extension.

Rainy River produced 257,000 oz. gold last year, and New Gold forecasts 2020 production of between 240,000 to 260,000 ounces.

The mine has for 2020 measured and indicated resources of 23.13 million tonnes grading 2.57 grams gold per tonne and 6.9 grams silver per tonne for 1.91 million contained oz. gold and 5.12 million oz. silver.

At the New Afton mine, New Gold has been developing the C-zone for the past 12 months, which could extend the mine life to 2030. The company has been focussed on de-risking development of the zone, including finalizing the mine design, the tailings disposal plan, subsidence and stabilization, as well as advancing permitting work.

“Our integrated mine plan optimizes the self-funded development of New Afton’s C-Zone, which could deliver free cash flow of more than 1 billion dollars over the life of mine,” Adams said. “And we now have a clear path forward for the further development of the mine.”

Last year, New Afton produced 69,000 oz. gold and 79 million lb. copper, and the company forecasts production this year of 73,000 to 83,000 oz. gold and 75 million to 85 million lb. copper.

New Afton has measured and indicated resources of 57.01 million tonnes grading 0.61 gram gold per tonne, 2.1 grams silver per tonne and 0.74% copper for 1.12 million contained oz. gold, 3.75 million oz. silver and 933 million lb. copper.

BMO Capital Markets analyst Brian Quast resumed coverage of the company, upgraded his rating to ‘outperform’ and increased his target price on the stock to $1.50 per share following news of the transaction with the OTPP.

“The transaction alleviates the concerns surrounding New Gold’s liquidity and upcoming debt maturities,” the mining analyst commented in a March 31 research note to clients. “Prior to the announcement of the transaction, New Gold was not in a position to generate sufficient free cash flows to repay the ~$400 million of unsecured notes coming due in FY2022. With this no longer being an immediate concern, the company is able to focus on the execution of its new life of mine plans for the New Afton and Rainy River mines.”

At press time in Toronto, New Gold was trading at 79¢ per share within a 52-week trading range of 56¢ and $2.03. The company has 676 million common shares outstanding for a $534-million market capitalization.