New Gold on track to 1 million oz. production

New Gold’s (NDG-T) third quarter results are in and show the company to be executing on its plan to shape itself into the next significant mid-tier gold producer.

Increased gold sales from its three operating mines and higher realized gold prices helped to boost margins to over US$1,000 per oz. That increase led to a doubling of cash flows when compared to the same period last year, to $71 million.

But production wasn’t on the top of New Gold’s chairman Randall Oliphant’s mind. Instead he trumpeted the company’s three development projects as the keys to driving future market cap growth.

Oliphant pointed out that the location of the conference, Kamloops BC, was chosen for its proximity to two if its key development projects: Blackwater and New Afton.

The third key project is El Morro in Chile, which is held 30% by New Gold and 70% by Goldcorp (G-T).

Of the three, New Afton is the closest to contributing to the company’s bottom line, as the underground caving process has already gotten underway, with test ore being milled at the site. Oliphant said the mine will be generating cash flows in eight months time.

When it does achieve commercial production the mine is expected to turn out 85,000 oz. of gold per year over a 12-year mine life. Enough gold to increase its overall production profile, which currently stands at 400,000 oz. per year, by 20%.

After that, growth will come from El Morro and Blackwater, two mines that should be contributing enough gold ounces by late 2016 to bring total production up to 1 million oz. per year.

And while Goldcorp drives the development of El Morro, New Gold is firmly in the saddle at the recently acquired Blackwater.

The company acquired the project back in June through its acquisition of Richfield Ventures. Just three months later it released a resource update that increased resource by 50%. Indicated resources at the project now stand at 165 million tonnes grading 1.01 grams gold for 5.4 million oz. while inferred resources stand at 39 million tonnes grading 0.94 grams gold for 1.2 million oz.

Those robust results motivated the company to complete three more transactions on the property that will not only take its interest in the project up to 100% but will also increase its land position in the area.

Importantly, New Gold won’t be going to the market anytime soon to fund its ambitious development plans.

“All of this organic growth remains fully funded,” Oliphant said.

And while New Gold’s pipeline does look promising, it has had issues to contend with at its producing mines.

At Cerro San Pedro, shortages at the local cyanide supplier meant that New Gold was left with smaller than required cyanide shipments, and that hit production, especially on the silver side. Indeed New Gold was only able to produce 50% of its targeted silver production levels.

New Gold’s president and chief executive Bob Gallagher said the lost silver production would have generated enough credits to bring the mine’s gold production costs down to zero.

He did say, however, that since late September the mine has been getting its full cyanide allotment, and the silver that wasn’t recovered remains on leach pads to be extracted at a later date.

But more significant to the company’s bottom line was increased costs at its Peak Mines in New South Wales, Australia.

The appreciation of the Australian dollar added US$200 per oz. to costs, while inflation in Australia added an additional US$200 per oz.

Compounding the problem was the poor timing of copper concentrate sales, which missed the US$4.00 per lb. copper prices and instead had to settle for US$3.39 per lb.

If the company has been able to cash-in on the US$4.00 per lb. price that prevailed throughout the quarter it would have offset both the currency and inflation costs.

Gallagher says that while, overall, the company remains on track to reach its 400,000 oz. production target for the year, its costs are going to be above guidance.

Despite those increased costs, Oliphant stressed that New Gold remains one of the lowest cost gold producers and continues to deliver expanding margins.

That is a contention that the market has thus far, gone along with, as the company’s shares have climbed close to 60% sine January of this year, and were trading for $12.54 in Toronto on Nov. 4.