VANCOUVER — New Gold (TSX: NGD, NYSE-AM: NGD) had hoped 2018 would be the year it put development challenges to bed at its Rainy River gold mine in northwestern Ontario.
In 2017, New Gold found unexpected layers of peat and basal till that caused cost overruns and delayed pit development.
In its 2017 annual report, the company said it expected Rainy River would produce 310,000 to 350,000 oz. gold at all-in sustaining costs of US$990 to US$1,090 per oz. in 2018. That would have departed from the project’s 2014 feasibility study, which had projected production of 325,000 oz. gold at all-in sustaining costs of US$765 per oz. for 2018.
The first half of 2018 brought no respite for New Gold.
In the first quarter, the company experienced more operational difficulties at its mill, including plugged apron feeders, premature motor failure on the cyclone feed pump, and replacing liners in its semi-autogenous grinding mills.
In the second quarter, the gearbox in a cyanide destruction tank failed (preventing tailings deposition), leach-tank screens and a conveyor-feed belt needed replacing and the crusher was shut down for longer than expected.
As a result, the company produced only 84,000 oz. gold at all-in sustaining costs of US$1,790 per oz. in the first half. Gold recovery was 84%, as opposed to the 92% laid out in the feasibility study. Head grade came in at 1.18 grams gold per tonne — well beneath the expected 1.48 grams gold per tonne.
The company revised its 2018 guidance to 210,000 to 250,000 oz. gold production at all-in sustaining costs of US$1,600 to US$1,700 per ounce.
As a result of more capital expenses and revised guidance, New Gold took a US$282-million, post-tax writedown on Rainy River in the second quarter. New Gold says the current book value of Rainy River is US$995 million (using a 4.5% discount rate).
The company has US$167 million in cash and equivalents — a US$48-million decrease from the end of 2017 — and US$103 million in undrawn credit.
New Gold did not respond to a request for comment by The Northern Miner, but on its second-quarter conference call, CEO Ray Threlkeld said that “costs are up, but [Rainy River] is profitable and it makes money — 2018 and 2019 are not reflective of the life-of-mine, that’s for sure.”
The plant at New Gold’s Rainy River gold mine in Ontario. Credit: New Gold.
Threlkeld said that while management has been caught by operational surprises over the past year, they believe the challenges are typical start-up issues that will be overcome.
On Aug. 8, the company released an updated technical report that reveals details of its turnaround strategy.
The report shows sustaining capital expenses rising to US$1.2 billion — well above the US$350 million outlined in the project’s feasibility study. This most recent upward revision is mainly attributed to a construction-cost overrun on the tailings dam.
New Gold plans to boost daily mill throughput from the current 21,000 tonnes to 24,000 tonnes by 2019 and to 27,000 tonnes by 2021 — with ore coming from both open-pit and underground operations.
During the second-quarter conference call, when an analyst asked why New Gold is trying to increase throughput before sustainably producing at the original level, Threlkeld said positive results during July had given the company confidence to ramp up throughput to make up for the weak first-half performance.
The higher throughput should help New Gold increase underground mining rates from 1,500 tonnes per day to 2,300 tonnes per day, offsetting the decline in underground head grade from 5 grams gold per tonne to 3.6 grams gold per tonne. Taken together, that adds up to an increase in life-of-mine output from the underground part of the mine.
With respect to the lower-than-expected average grade in the first half and downward revision to expected grade, New Gold executive vice-president Cory Atiyeh said on the conference call: “We don’t have any concern about the amount of ounces there. The amount of ounces are there. The reserve is solid. We’re just going to have to work through our sampling and work through a cut-off strategy and draw shapes, and mine higher-grade ore.”
Pit operations at New Gold’s Rainy River gold mine northwestern Ontario. Credit: New Gold.
At a cut-off grade of 0.5 gram gold per tonne, Rainy River’s reserves total 120.4 million tonnes grading 1.1 gram gold per tonne and 3.2 grams silver per tonne for a contained 4.2 million oz. gold and 12.4 million oz. silver.
New Gold owns three other producing gold mines: New Afton in B.C., the Mesquite mine in California and Cerro San Pedro in Mexico. It also owns 100% of the Blackwater gold-development project in British Columbia.
The company’s stock is trading at $1.29 per share as of Aug. 17 — a 54% decline since it revised guidance for Rainy River on July 25, and an 82% decline over the past year.
It is surprising that the drillhole spacing used during the identification of resources and their location did not alert the company to the presence and extent of these peat and basal till layers.