VANCOUVER — New Gold (TSX: NGD; NYSE-MKT: NGD) executive chairman Randall Oliphant recently reiterated the fact that its Rainy River gold asset — located 65 km northwest of Fort Frances, Ont. — is a “priority development project,” and on Nov. 10 the company boosted its regional presence via a friendly, $17-million bid for junior Bayfield Ventures (TSXV: BYV; US-OTC: BYVVF).
Bayfield’s assets include a 100% interest in three properties, totaling 10 sq. km, next to Rainy River. Burns Block — one of the three projects — lies between the eastern edge of New Gold’s planned open pit and the underground Intrepid zone.
New Gold has offered 0.0477 of a share for every Bayfield share held, which equates to 21¢ per share, or a 47% premium based on the companies’ 20-day, volume-weighted average trading prices.
The deal would see 3.8 million shares of New Gold issued, with Bayfield’s directors and officers — who hold 3.3% of the company’s outstanding shares — entering into voting and support agreements.
In January Bayfield released a maiden resource at Burns Block, which hosts 1.3 million indicated tonnes grading 1.4 grams gold per tonne and 16 grams silver per tonne for 60,000 contained oz. gold and 686,000 contained oz. silver.
The project also holds 3 million inferred tonnes of 1.6 grams gold and 16.3 grams silver for 151,000 contained oz. gold and 1.6 million contained oz. silver. All resource calculations assume cut-off grades of 0.35 gram gold for open-pit ounces and 2.5 grams gold for underground ounces.
The gold-silver zones at the Burns Block are contained within a south-dipping, strongly foliated, sheared and locally folded dacite volcanic and intrusive unit. Pervasive sericite-silica alteration occurs within the foliated Main zone.
Drilling at the project confirmed widespread gold distribution and silver in high-grade shoots within surrounding mineralized envelopes. The shoots are concentrated in both the western part of the property on strike with New Gold’s ODM17 gold-silver deposit, and in the east of the property down-plunge of Intrepid.
New Gold expects to receive its environmental permits at Rainy River by early 2015, and is targeting around 300,000 oz. in annual gold production from the mine starting in 2017. The company aims to have equipment on-site early next year, which will trigger “multiple development initiatives.”
“Rainy River provides the company with an asset that combines location close to infrastructure and skilled labour, manageable capital requirements that we expect to fund internally, a current resource base underpinned by solid grades and significant continued exploration potential,” Oliphant said during a conference call on Oct. 30. He added that New Gold drilled “almost 200 new holes” at the project in September to identify resources that would enhance project economics.
Vice-president of corporate development Hannes Portmann said the Bayfield acquisition “simplifies the development process, increases gold and silver resources, and adds to the prospective land package.”
New Gold picked up Rainy River in a friendly, $310-million takeover of explorer Rainy River Resources in June 2013, paying a 42% premium. The project eclipsed the company’s Blackwater asset in B.C. as a near-term producer due to its lower development cost.
Early this year New Gold released an updated feasibility study at Rainy River that models a US$885-million build, which would feature a US$314-million after-tax net present value and 11.3% internal rate of return assuming a US$1,300 per oz. gold price and US$22 per oz. silver price.
Gold and silver production over a 14-year mine life are estimated at 3.4 million and 6 million oz., with total cash costs of US$663 per oz. and all-in sustaining costs of US$765 per oz.
The hybrid mine plan was based on proven and probable reserves of 104 million tonnes grading 1.13 grams gold and 2.81 grams silver for 3.8 million contained oz. gold and 9.4 million contained oz. silver. An underground component would be accessed via a 4 km decline from a portal east of the proposed open pit.
“The expanded revolver we announced in August was basically put in place to provide us with flexibility in case we hit a softer metal-price period,” New Gold president and CEO Robert Gallagher noted when asked about project financing. The company recently entered into a $300-million credit facility with a syndicate of banks led by the Bank of Nova Scotia and RBC Capital Markets.
“Our projections still show Rainy River fully funded with the cash-on-hand and cash flow. The credit facility is our insurance policy,” he said.
New Gold reported US$416 million in cash and equivalents at the end of the third quarter after producing 93.4 million oz. gold and 25.6 million oz. copper. The company boosted its quarterly net cash from operations by 61% year-on-year to US$58 million, and generated adjusted net earnings of US$5 million, or 1¢ per share.
New Gold has a portfolio of four producing assets, including: the New Afton copper-gold mine in B.C., Mesquite gold mine in Arizona, Peak gold-copper operations in Australia and the Cerro San Pedro gold-silver mine in Mexico. The company’s full-year gold production is expected to fall between 380,000 and 420,000 oz. gold.
BMO Capital Markets analyst Brian Quast — who has a stock “outperform” rating on New Gold, along with a $6.75-per-share price target — noted that the Bayfield acquisition was a “small transaction with minimal costs” that would help the company simplify development at Rainy River.
“Acquiring the land between the Intrepid underground and the proposed open pit makes sense in BMO Research’s view, given that [Intrepid] is considered the most prospective area of the project,” Quast wrote on Nov. 10.
New Gold has traded within a 52-week window of $3.85 to $7.28 per share, and closed down 7% after the Bayfield announcement at $4.11 per share at press time.
New Gold has 504 million shares outstanding for a $2.1-billion market capitalization.
New Gold’s Bayfield acquisition is amongst a growing number of deals where producers are picking up exploration-stage companies at a market-driven discount. Bayfield shares were down 61% since January and sat near a 52-week low of 12¢ per share at the time of New Gold’s offer. The junior had traded at a 41¢-per-share high to start the year.
I don’t think New Gold produced 93.4 M oz. gold, and their Mesquite Mine is in California, not Arizona, as stated in the article.