New Gold struggles with cost overruns at Rainy River

VANCOUVER  — Shares of Canadian gold miner New Gold (TSX: NGD; NYSE-MKT: NGD) were hit hard after revelations of more cost overruns and delays at its wholly owned Rainy River gold mine under construction 65 km north of Fort Frances, Ontario. The company’s struggles at Rainy River have led to management turnover and a liquidity shortfall that will likely force it to raise capital later this year.

New Gold revealed the additional capital requirements and a three-month production delay at Rainy River alongside its fourth-quarter operating results on Jan. 30. The company’s shares tumbled 29%, or $1.44 per share, over the next four trading days, before settling at $3.70 at press time.

Rainy River is now expected to cost $195 million more than planned, though the cost rise jumps to $245 million, once considering $50 million to $75 million in accounts payable post-commercial production.

Processing facilities under construction at New Gold’s Rainy River gold mine project in northwestern Ontario. Credit: New Gold.

The financial setback follows a similar report in September, wherein New Gold had to invest another $125 million — including contingencies — into a redesign of the project’s tailing facilities.

The company had estimated that the mine would require US$1.1 billion in preproduction capital, and invested US$777 million in development at press time. Rainy River is now expected to achieve production in September.

Due to the troubles, company founder Randall Oliphant has resigned as executive chairman, though he will remain a director.

Existing director Ian Pearce was appointed non-executive chairman while New Gold president Hannes Portmann added CEO to his title.

The executive shuffle follows the hiring of former president and CEO of Rainy River Resources, Ray Threlkeld, as interim chief operating officer (COO). The company also brought in general manager Greg Bowkett from its Peak Mines in Australia to take over Rainy River’s development. New Gold says the search for a permanent COO is underway.

“Based on the development challenges we had last year we have made several personnel changes at Rainy River to strengthen the team,” Portmann said during a conference call. “Over the last four weeks we’ve completed a thorough review of the project schedule and capital costs. The three-month production delay is based on a slower-than-anticipated ramp-up of mining rates this year.”

Mine construction at New Gold’s Rainy River project in northwestern Ontario. Credit: New Gold.

Threlkeld added that the layers of peat and basal till found during pit development have driven up costs. The clays in the overburden have caused problems for large equipment and slowed down mining rates. New Gold plans to spend more money on equipment and contractors to increase productivity.

“We actually have to engineer and build cells in which to dump the overburden. The cells are required because the large equipment gets stuck on the dump. We’ve bought in more equipment to decrease wait times, and once we have the cells built, our productivity will increase,” Threlkeld said.

New Gold has extracted 24 million tonnes of overburden and waste from Rainy River’s open pit through January, and mining rates have increased to 100,000 tonnes per day. The company’s September start-up date hinges on the mining rate rising to an average 120,000 tonnes per day over the next seven months, which includes both planned productivity gains and better weather in the spring.

Standing beside the pit at new Gold’s Rainy River gold mine in northwestern Ontario. Credit: New Gold.

New Gold’s remaining capital costs — up to a targeted November commercial production date — are estimated at US$515 million, including US$40 million in contingency.

The company anticipates a US$100-million funding gap due to the development issues.

“We intend to implement one, or more, financing alternatives to address the shortfall and provide ourselves with more financing flexibility depending on market conditions,” Portmann added. “This could include selling non-core assets, the sale of a stream on one of our operations or projects, or equity financing. We’re looking at everything right now.”

Rainy River could become New Gold’s largest operation, producing an average 325,000 oz. gold per year over a 14-year mine life, at cash costs of US$570 per oz. and all-in sustaining costs of US$670 per ounce.

The 21,000-tonne-per-day mine would an open pit for its first nine years before operations move underground.

New Gold expects Rainy River will produce between 50,000 and 60,000 oz. gold in 2017 at all-in sustaining costs ranging from US$1,200 to US$1,240 per ounce.

Meanwhile, the company is  awaiting regulatory approval for its new tailings facility at Rainy River.

Ontario’s Ministry of Natural Resources and Forestry signed off on the redesign in the fourth quarter, but federal review is not expected until later this year. New Gold needs the permits to ramp the operation up to full capacity. Threlkeld acknowledged that more regulatory delays could lead to the suspension of operations until the issue is resolved.

“Unfortunately it’s not a federal review process that has defined time lines,” Portmann said. “They have indicated it would be in the second half of 2017, and we’re working hard to provide any information they might need. Certainly we’ve expressed clearly what the social and economic impacts would be for the region if this review is delayed. So they are aware of the importance of this file, especially in light of the strong First Nation relationships we have, and the fact that these are not, by any means, large water bodies we’re dealing with here. It has been expressed to us as a ‘low risk’ government file.”

Scotiabank analyst Trevor Turnbull downgraded his recommendation on New Gold on the news to “sector underperform” after the latest bad news, and cut his one-year price target on the stock by $2 to $3 per share. BMO Capital Markets analyst Brian Quast kept his “market perform” rating on the company, but slashed his price target 75¢ to $4.50 per share. BMO notes that delays in tailing permits “pose a key risk to 2018 production levels.”

On Feb. 8, New Gold agreed to sell its gold stream on the El Morro gold project in Chile to Goldcorp (TSX: G: NYSE: GG) for US$65 million in cash. It says its total expenses on El Morro since the asset was first acquired has been less than US$7 million, and that it is “proud that, including the US$65 million payment for the stream, the company will have generated total proceeds of US$205 million through a series of transactions related to El Morro over the last seven years.”

On Feb. 22, New Gold entered into a bought deal for US$150 million, comprised of 53.6 million shares prices at US$2.80 per share. If an over-allotment option for another 8.04 million shares is fully exercised, gross proceeds will be US$172.6 million. New Gold commented that its available funds will be “sufficient to complete construction of the Rainy River project based on current cost estimates.”

New Gold has 513.2 million shares outstanding for a $2.1-billion press time market capitalization. The company reported US$186 million in cash and equivalents at year-end, plus US$178 million under an undrawn credit facility.

New Gold expects to produce between 380,000 and 430,000 oz. gold in 2017, at all-in sustaining costs ranging from US$825 to US$865 per ounce.