Diversification pays off: New Gold’s US mine is trouble-free

New Gold (NGD-T, NGD-X) may be tied up in Mexico’s courts over an environmental impact statement for its Cerro San Pedro gold-silver mine, and embroiled in a lawsuit with Barrick Gold (ABX-T, ABX-N) over the El Morro copper-gold project in Chile, but operations at the company’s Mesquite mine in California are ticking along quite nicely.

The intermediate gold mining company acquired Mesquite in June 2009 and as the mine transitions into its second year of production after restarting in January 2008, operations there have benefited from better gold recoveries from secondary leaching and more tonnes placed on the leach pad.

Looking ahead, New Gold aims is to enhance operational efficiencies, boost production and cut costs during the mine’s anticipated 13-year lifetime. In the meantime, the Vancouver-based company expects to repay the remaining portion of the US$27 million Mesquite project loan in the first half of 2010.

In the fourth quarter ended Sept. 31, the mine achieved its highest quarterly production since reopening in January 2008, with 61,245 oz. gold, 116% more than the 28,378 oz. churned out in the fourth quarter of 2008. Gold sales for the quarter reached 55,861 ounces compared to 30,625 ounces in the same period of 2008.

Total cash costs per oz. gold sold stood at US$551 compared to US$521 in the year-earlier period. The higher cost per oz. was primarily due to greater diesel consumption, the increased use of cyanide and lime to enhance gold recoveries, and various non-recurring maintenance costs.

For the full year, gold production at Mesquite rose 38% to 150,002 ounces from 108,325 ounces in 2008, with gold sales of 143,508 ounces, compared to 2008’s 110,880 ounces. Total cash costs per oz. gold sold for the full year came in at US$596 compared to US$508 in 2008.

New Gold forecasts that production at Mesquite will rise to 145,000 to 155,000 ounces of gold in 2010 at a total cash cost of between US$540 and US$560 per oz. sold.

Cash costs are forecast to drop because one-time costs last year, including tire replacement, contract mining and high repairs and maintenance, are not expected to re-occur. The lion’s share of the costs last year involved replacing the entire haulage fleet’s bias ply tires with radial tires, and paying a mining contractor to help advance waste stripping.

Proven and probable reserves have grown to 166.80 million tonnes grading 0.58 gram gold per tonne for 3.14 million oz. gold, up 19% from a previous estimate of 2.6 million ounces.

Measured and indicated resources tallied 296.94 million tonnes grading 0.51 gram gold, with inferred of 22.80 million tonnes grading 0.49 gram gold.

The Mesquite mine is in California’s Imperial County, about 230 km east of San Diego and roughly 70 km northwest of Yuma in Arizona.

The mine originally began operating in 1986 and over the last two decades has seen significant exploration with more than 6,000 reverse circulation drill holes punched into the ground. Recent exploration has targeted areas around the existing pits: Rainbow, Big Chief and Vista.

By the time New Gold acquired Mesquite through a business combination with Western Goldfields, the latter had completed a prefeasibility study in 2006. Western Goldfields acquired the mine from Newmont Mining (NMC-T, NEM-N).

But before Mesquite could be brought back into production, the leach pad was expanded and a new carbon in column plant installed to process run-of-mine ore.

At Dec. 31, 2009, New Gold had US$272 million in cash, including US$9 million in restricted cash.

Consolidated debt stood at US$238 million, including US$169 million of 10% senior secured notes; US$38 million of 5% convertible debentures; US$27 million of the Mesquite project term loan; and US$4 million in El Morro funding loans.

The senior secured notes are due in 2017, the convertible debentures are due in 2014 and have a $9.35 conversion price and In January 2010, the company sold an additional $83 million in face value asset-backed notes for proceeds of $50 million realizing an average of 60% of the face value.

At presstime in Toronto, New Gold was trading at $4.54 per share with a 52-week trading range of $1.85-$5.19 per share. The company has 388.8 million shares outstanding.