New Gold sells Mesquite to Equinox

Renaud Adams hasn’t wasted any time settling into his new job at New Gold (TSX: NGD; NYSE-AM: NGD).

A week after taking the helm as president and CEO of the heavily indebted gold miner, Adams shook things up with the sale of its Mesquite gold mine in California to Equinox Gold (TSXV: EQX) for US$158 million in cash.

The sale allows New Gold to “immediately crystallize several years’ worth of future free cash flow as part of our strategy to prudently manage our balance sheet, providing the company with the financial flexibility to focus on our core assets,” Adams said in a news release.

Those assets include its Rainy River gold-silver mine and New Afton gold-silver mine in Canada. New Gold also owns the Cerro San Pedro mine in Mexico.

At the end of June, the face value of New Gold’s long-term debt stood at US$980 million (book value $959 million). Of that, US$500 million of 6.25% face-value, senior-unsecured notes is due in November 2022; US$300 million of 6.38% face value senior unsecured notes is due in May 2025; and US$180 million has been drawn from a revolving credit facility.

“The $158-million cash injection expected in the fourth quarter will alleviate balance sheet concerns, as the company continues to implement the new, high-cost life-of-mine plan at Rainy River,” Farooq Hamed, a mining analyst at Raymond James, said in a research note.

David Haughton, a mining analyst at CIBC, noted that while the Mesquite sale eases some debt pressure, “further de-stressing of the balance sheet rests on the ramp-up of Rainy River, where execution risk remains significant.”

“The sale of Mesquite allows the new CEO to focus on near-term execution of Rainy River and operation of New Afton,” Haughton continued. “The underperformance of Rainy River and the tight balance sheet have the potential to starve New Afton of the capital required.”

New Afton, west of Kamloops in B.C., is the company’s largest cash flow contributor.

While Rainy River is well into its start-up year, the mine has been plagued by variability in the process facility’s performance and lower gold grade and recoveries. Commercial production at the mine was declared in November 2017.

At the end of June, the company lowered its 2018 production guidance for Rainy River to between 210,000 and 250,000 oz. gold.

New Gold expects to produce between 415,000 and 480,000 oz. gold this year from all of its mines.

The appointment of Adams in early September reflects his track record as a turnaround expert.

While president and CEO of Richmont Mines, production at the company’s principal mine more than doubled, mineral reserves more than tripled, and costs were lowered, which makes the Island Gold gold mine one of the lowest-cost underground mines operating in the Americas.

Before his tenure at Richmont — which lasted from 2014 until the company was sold to Alamos Gold (TSX: AGI) in November 2017 — Adams was chief operating officer at Primero Mining (2011–2014) and general manager of Iamgold’s (TSX: IMG; NYSE: IAG) Rosebel mine in Suriname, and the company’s senior vice-president of Americas operations (2007–2011).

“We have yet to see the full strategy of the new CEO,” CIBC’s Haughton notes. “We are hopeful for plans that address the performance of Rainy River and cash management to realize the optimal development of New Afton. We remain cautious for now.”

New Gold’s shares at press time were trading at $1.50 apiece.

The company has 579 million shares outstanding for a $723-million market capitalization.