New Gold updates Rainy River and New Afton mine plans

Looking to stem losses driven by high-cost operations, New Gold (TSX: NGD; NYSE-AM: NGD) recently tabled revamped life-of-mine plans for its Rainy River and New Afton mines focused on improving the bottom line and boosting profitability.

The mine plan update was released along with the company’s 2019 results that showed a US$74 million loss for the year or 12¢ per share. Although New Gold hit its guidance with annual consolidated production of 486,141 gold-equivalent oz. (322,557 oz. gold, 596,452 oz. silver and 79.4 million lb. copper,) its all-in-sustaining-costs (AISC) of US$1,310 per oz. gold-equivalent for the year and US$1,862 per oz. gold-equivalent in the fourth quarter flagged the need to trim costs.

New Gold says its new life-of-mine plan was roughly a year in the making and focused on mining method optimizations, evaluation of alternate mining scenarios and reigning in capital requirements to boost profitability and deliver free cash flow.

The company’s new vision for its Rainy River gold mine, located near Fort Frances in northwestern Ontario, sees a smaller pit shell for open-pit operations using a US$1,275 per oz. gold price and a boost in the mineral reserve cut-off grade to between 0.46 gram gold-equivalent per tonne to 0.49 gram gold-equivalent per tonne (up from the previous 0.30 gram gold-equivalent per tonne cut-off grade). The revised plan would mine open-pit ore at a lower strip ratio of 2.53:1 (waste: ore) over a four-year mine life through to 2024, with full depletion of the pit by early 2025. Lower grade open pit ore (0.30 gram gold-equivalent per tonne to 0.46 gram gold-equivalent per tonne) mined during the pit’s operational life would be stockpiled to supplement mill feed once the mine transitions to underground operations.

Over its new open-pit operational life, New Gold forecasts mining 67.5 million tonnes of ore at an average grade of 0.91 gram gold per tonne at Rainy River.

Pit operations at New Gold’s Rainy River gold mine northwestern Ontario. Credit: New Gold.

Underground operations at Rainy River are expected to come online in 2022 and would ramp-up to peak production from 2025 to 2027. The underground mine plan targets zones that can deliver optimal profitability at a gold price of US$1,275 per oz. and plans to use four in-pit portals and one portal outside the pit to exploit the ore blocks. Mining would cease in 2028 although the company says there are lower grade zones that could potentially support a mine life extension in a higher gold price environment. Over its planned underground mine life, an estimated 4.1 million tonnes of ore averaging 4.17 grams gold per tonne are to be extracted.

Average annual production from Rainy River under the new plan is forecast at 289,000 oz. gold equivalent at a new life-of-mine average head grade of 1.06 grams gold per tonne and an 89% recovery rate. AISC is forecast at US$967 per oz. gold-equivalent over the eight-year mine life. Total proven and probable reserves are tabled at 2.6 million contained oz. gold and 6.3 million contained oz. silver in 77.6 million tonnes grading 1.06 grams gold per tonne and 2.5 grams per tonne silver.

The company says it expects free cash flow generation at Rainy River beginning in the fourth quarter of this year and over its new forecast mine life it anticipates total free cash flow of about US$550 million at a gold price assumption of US$1,300 per gold oz., or more than US$1 billion at a spot gold price assumption of US$1,550 per gold ounce.

Raymond James mining analyst Farooq Hamed highlighted the new Rainy River life-of-mine plan as a “shorter life, lower-cost ounces” scenario, with four years trimmed from the mine life with less production, however that is offset by lower operating costs and significantly lower capital expenditures. In a research note, the analyst maintained his ‘market perform’ rating for the company and has a $1.25 target price on the stock.

Scotiabank analyst Trevor Turnbull viewed the revised plan negatively. “The new mine plan at Rainy River significantly reduced the mine life, and near-term capital costs (2020-2024) actually increased 16% to US$589 million,” he commented in a research note. He also expressed concern over reduced cash flow and debt servicing capacity with US$400 million of senior unsecured debt maturing in late 2022, but maintained his ‘Sector Perform’ rating on the stock and raised his one-year target price to US$1.00 from US75¢.

New Gold’s other operation, the New Afton underground gold-copper mine located on the outskirts of Kamloops in south-central British Colombia, also underwent a review over the past year looking to extend its life out to 2030.

An operator using Sandvik’s AutoMine system to drive an LH410 in the New Afton mine. Credit: Sandvik.

The New Afton mine was historically mined by Teck Resources (TSX: TECK.B; NYSE: TCK) as the Afton open pit from 1978 to 1997 when operations ceased due to economic constraints in deepening the pit to exploit the deeper mineralization. New Gold acquired the project in 2005 and developed an exploration ramp near the pit floor to extract a bulk sample and subsequently developed an underground mine plan utilizing block caving to extract the ore. The underground mine commenced operation in mid-2012. With an average production rate of about 16,000 tonnes per day, it is touted by the company as the largest daily tonnage underground hard rock mine in Canada.

The company’s plan looks to bring New Afton’s deeper and higher-grade C zone (situated roughly 800 metres to 1,200 metres below surface) into development using a similar block caving method as utilized in the upper levels. Under the plan, development would commence this year and continue through 2024, with production beginning in the third quarter of 2024 and ramping up to full production from 2025 to 2029.

In its news release announcing the mine plans revisions, Renaud Adams, New Gold’s president and CEO, said the company has “an integrated mine plan that optimizes the self-funded development of New Afton’s B3 and C zone that could deliver significant free cash flow of more than US$1 billion over the life of mine.”

New Gold forecasts total capital for the life-of-mine (US$175 million and US$460 million in sustaining and non-sustaining capital, respectively) is anticipated to remain high from 2020 to 2023, primarily due to the C zone, and decrease significantly from 2024 to 2026, with minimal capital over the balance of the mine life.

The New Afton updated mine plan will also incorporate enhanced tailings engineering to increase stability of the current and historical tailings, with in-pit thickened tailings deposition planned for the C zone ore portion.

Annual production from New Afton is forecast to average 260,000 oz. gold-equivalent over the next decade under the new plan at life-of-mine average head grades of 0.68 gram gold per tonne with an 86% recovery rate and 0.77% copper with an 89% recovery rate. AISCs are expected to come in at US$681 per oz. gold equivalent (based on US$1,300 per oz. gold, US$16 per oz. silver and US$3.00 per lb copper) over the 10-year mine life. Total proven and probable reserves are 1 million contained oz. gold, 2.8 million oz. silver and 802 million lb. copper in 77.6 million tonnes grading 0.66 gram gold per tonne, 1.9 grams silver per tonne and 0.77% copper.

Following the release of its annual financial results and the new life-of-mine plans, shares in New Gold dropped as much as 16% to the 98¢ level, an almost eight-month low. At press time the shares have recovered slightly to $1.07 giving the company a $723 million market capitalization based on its 676 million common shares outstanding.

As of year-end 2019, New Gold had a cash position of US$83 million.