New Gold ordered to cease operations at Mexican mine

Vancouver – New Gold‘s (NGD-T) share price lost 15% in a day on news the company has been ordered to cease operations at its producing Cerro San Pedro mine in Mexico.

New Gold operates three mines and Cerro San Pedro, its only Mexican operation, poured its first gold in 2007. Now, following a ruling by the Federal Court of Fiscal and Administrative Justice, the Mexican government’s environmental protection agency has nullified the Cerro San Pedro environmental impact statement (EIS). Without a valid EIS a mine cannot operate, so as soon as the EIS was nullified the Mexican environmental enforcement agency issued an order requiring New Gold to suspend mining operations.

New Gold has appealed the decision and says it intends to pursue all legal avenues with respect to the actions of the environmental agencies. The company is seeking “immediate remedies.”

“This is a continuation of a decade of challenges from a group of individuals, largely from outside the area, who are opposed to the mining operations at Cerro San Pedro,” said New Gold CEO Robert Gallagher in a statement. “We are taking all possible steps to respond to challenges to our legal ability to operate the mine and believe that we will resume full operations.”

Gallagher recently referred to Cerro San Pedro as the company’s best mine. For the last two years the mine, which is about 20 km northeast of the state capital of San Luis Potosi, has been rated the safest mine of its size in the country by Mexico’s Chamber of Commerce.

On news of the cease-operations order New Gold’s share price fell 69¢ in a day to close at $3.85. The company has a 52-week trading range of 94¢ to $4.76 and has 390 million shares outstanding.

Two weeks earlier, New Gold announced solid third quarter results. The company produced 79,531 oz. gold over the three months of the third quarter at an average cash cost of US$470 per oz. In the third quarter of 2008 the company’s average cash cost to produce an ounce of gold was US$565; the decrease of late is attributable to a significant increase in silver revenues at Cerro San Pedro, an increase in copper revenues at the Peak mine in eastern Australia, and a favourable Australian-dollar exchange rate.

Earnings from mine operations were also up, totalling US$22.6 million and leading to net quarterly earnings of US$4.1 million. Cash flow from operations came in at US$6 million, helped along by increased gold production at Cerro San Pedro and the Mesquite mine in California, a 10% increase in the average realized gold price per oz., and increased by-product revenue.

In the first nine months of 2009 New Gold sold 185,932 oz. gold at an average price of US$935 per oz.

Cerro San Pedro contributed 68.857 oz. gold to that production, compared to 64,182 oz. produced in the first nine months of 2008. Silver production was also up from last year, totalling 1.2 million oz. compared to 800,000 oz. silver in the first nine months of 2008. The increased in silver production is due to higher silver head grades and the benefits of secondary leaching, which commenced in the first half of 2009. The boost in silver by-product credits helped keep the cash cost of gold production at Cerro San Pedro low, as US$416 per oz.

At Mesquite New Gold is having a more difficult time keeping cash costs down. The California mine produced 27,594 oz. gold in the third quarter, bringing its 2009 production to 87,647 oz. The cash cost produce each oz. is sitting at US$662, kept high by temporary factors such as the use of a mining contractor to catch up on waste stripping, lower grades than expected in the Rainbow pit, and costs stemming from abnormal maintenance needs, such as the one-time changeover from bias ply to radial tires for the entire haulage fleet.

And at the Peak mine in Australia New Gold has produced 22,858 oz. gold and 3.8 million lbs. copper in the third quarter. Copper production was up 119% compared to the same period in 2008 because mining shifted to zones of higher copper content. The increased copper levels pushed the cash costs to produce an ounce of gold down to US$302, compared to US$560 in the third quarter of 2008.

New Gold is also developing the New Afton gold mine, which is west of Kamloops in British Columbia. Once operational in late 2012 the underground mine is expected to produce 85,000 oz. gold, 75 million lbs. copper, and 214,000 oz. silver annually. So far this year New Gold has spent US$51.4 million on development at New Afton.

New Gold maintained its 2009 production guidance at 270,000 to 300,000 oz. gold, at an average cash cost of US$470 to US$490 per oz., net of by-product credits.

New Gold has a very healthy bank account. In September the company, with $140 million already in the treasury, raised $115 million in a bought deal offering at $3.75 per share. As of the end of September the company had US$242.6 million.