Lower than expected grades bite into Rainy River guidance for New Gold

New Gold (TSX: NGD) has cut production guidance at its Rainy River gold mine in Ontario by about 10% because of lower than expected grades. The gold miner now expects Rainy River to produce 240,000-255,000 gold-equivalent ounces this year, down from 275,000 to 295,000 oz. 

The company signaled last month that its guidance might be affected when it released second quarter results. The grade shortfall came from mining at the East Lobe deposit, which delivered 20,000 fewer ounces than expected in July and August. The zone will contribute about half of production from Rainy River in the second half of the year, and about 35% in the final quarter. 

The average grade to the mill in the second quarter was 0.82 gram gold per tonne. 

In order to improve its understanding of the mineralization and reconcile the modelled and mined grades, New Gold is conducting reverse-circulation within and outside of the East Lobe. 

The grade issues have also affected all-in sustaining costs (AISCs), which are now projected at US$1,365-US$1,440 per gold-equivalent oz., up about 14% from previous guidance of US$1,125-US$1,225 per ounce. 

New Gold’s guidance for its other producing mine, the New Afton operation in B.C., remains unchanged at 165,000-195,000 gold-equivalent ounces. 

“While the reduction in our near-term guidance at Rainy River is unfortunate, I remain confident the mine has reached an inflection point, as evidenced by the free cash flow generated in the second quarter and the mine is on track to deliver an improved second half of the year,” said Renaud Adams, president and CEO. “We continue to seek ways to further optimize our costs and capital profiles, and with the underground growth potential currently being evaluated, Rainy River is expected to be a meaningful contributor of free cash flow in our portfolio going forward.” 

Development of a decline to reach the underground Intrepid zone at Rainy River is ongoing, with first production expected in late 2022. The company is also working on an underground optimization study, to be released before the end of the year along with an update of reserves and resources.

Commercial production began in late 2017 at Rainy River, 65 km northwest of Fort Frances, Ontario. At the end of 2020, proven and probable reserves were 73.9 million tonnes grading 1.09 grams gold per tonne and 3 grams silver per tonne for 2.6 million oz. of gold and 7.2 million oz. of silver. 

Between Rainy River and New Afton, the company now expects gold-equivalent production of 405,000-450,000 oz. At AISCs of US$1,365-US$1440 per ounce. That compares with previous guidance of 440,000 –490,000 gold equivalent ounces at an AISC of US$1,230-US1,330 per ounce.  

New Gold also holds a gold stream on the Blackwater gold project in B.C., which it sold to Artemis Gold (TSXV: ARTG) last year.  

Brian Quast of BMO Capital Markets lowered his target price from $3.50 per share to $3.25 following news of the company’s negative grade reconciliation and revised guidance.

Dalton Baretto of Canaccord Genuity lowered his price target on the company to $2.00 per share from $2.75 per share but retained his buy rating on the stock.

“These grade reconciliation issues are unlikely to persist past this year — the East Lobe represents <15% of mill feed from 2022 onward and other areas of the pit appear to be reconciling well with the block model,” he commented in a  Sept. 13 research note. “We believe the longer term impact is likely to be on New Gold’s multiples; recall that New Gold has struggled with its operational credibility in the past, and while this perception has dramatically improved under current CEO Renaud Adams, we believe the operational issues at both Rainy River and New Afton could overhang the shares going forward.”