on July 11, 2022, the Canadian company New Gold Inc. (NYSE: NGD) published its operating results for the second quarter of 2022 as of June 30, 2022 and provided an update on its 2022 operating outlook for the Rainy River mine, the New Afton Mine, and consolidated operating outlook.
Note: This article is an update of my article published on May 31, 2022. I have been New Gold on Seeking Alpha since 2019.
It was a terrible quarter in terms of gold production, and the stock fell to its lowest point in a year on yesterday’s news.
NGD closed at $0.71, illustrating the weakness of the company’s business model based on a few assets with definitive technical deficiencies.
I have always warned readers of the risk in New Gold which relies on two producing assets and have always recommended trading LIFO a large portion of their NGD holdings.
The stock has been disintegrating in recent days and hit a low of $0.71 today, down about 63% from April.
Renaud Adams, President and CEO, said in the press release:
Rainy River struggled during the quarter as the Fort Frances area experienced extreme rainfall and flooding, […] I remain confident of the increased production profile as outlined in Rainy River’s latest updated technical report announced earlier this year. In New Afton, the planned closure of Elevator 1 Cave, including the recovery level, is now complete. Although we have announced revisions to New Afton’s copper guidance for the year, the priority remains the ramp-up of B3 and advancing the development of the C Zone, which remains in time for first ore in the second half. 2023.
2Q22 Gold Production Analysis
1 – The raw numbers
NGD announced on Monday, July 11, 2022 that it produced 70,514 GEO during the second quarter. Production of GEO gold equivalent ounces includes gold, silver and copper. Additionally, adding even more salt to the wood, the company said it sold 62,367 GEOs in 2Q22. The reason was unfortunate timing in sales:
Sales of concentrates during the quarter were affected by the timing of sales. As a result, sales of approximately $12 million will be deferred to the third quarter.
Below, the production of the last three quarters and by metal:
Gold production from the Rainy River mine was 42,516 ounces Au for Rainy River and 9,916 ounces Au for the New Afton mine.
Gold production was 52,431 ounces Au, a multi-year low. Also, due to the ore used at Rainy River, the grade per tonne was significantly lower this quarter. Unfortunately, this was also the case for the New Afton mine.
2 – What happened?
2.1 – Rainy River
The company said operations at Rainy River had been negatively affected by heavy rains and flooding. Total tonnes mined from the open pit was lower because the company used lower grade ore during the quarter, producing fewer ounces of gold. However,
The decline in tonnes mined (ore and waste) since the start of the year has resulted in a change to the mine plan for the remainder of 2022… This change requires the operation to continue to process low-grade ore at during the second half of 2022 .
This change in operations has forced the company to revise and reduce Rainy River’s gold equivalent production for 2022. It is now expected to be between 230,000 and 250,000 GEO from 265,000 to 295,000 GEO.
Additionally, OPEX per GEO is expected to be between $960-$1040 per GEO, $730-$810 per GEO. The increase is due to lower gold production and ongoing inflationary cost pressures.
Finally, AISC all-inclusive sustaining costs should be between $1,620 and $1,720 per GEO, $1,270 and $1,370 per GEO.
2.2 – New Afton
The company focused on the development of the B3 and C areas and closed the low-level cost recovery area ahead of schedule, which is positive. However,
Due to the early shutdown, the tonnes mined were lower than forecast. To maintain mill feed, the operation utilized the low-grade stockpile during the quarter, resulting in lower grades and recoveries and ultimately lower production .
- The copper production forecast for 2022 is now expected to be between 25-35 million pounds (previously 35-45 million pounds).
- Gold production is expected to be at the lower end of the 35,000 to 45,000 ounce annual production range.
- Due to lower production, as well as current inflationary cost pressures, operating expenses per eq. ounce of gold is now expected to be between $1,485 and $1,565 per GEO (previously $1,100 to $1,180 per ounce of gold eq.), and all-in sustaining costs are now expected to be between 2,210 $ and $2,310 per gold eq. ounce3 (previously $1,695 to $1,795 per gold eq. ounce). Production ramp-up in the B3 area continues to progress and development is expected to be completed by September.
3.3 – New direction 2022. Gold equivalent production is down 19.2% (midpoint) compared to the previous forecast.
3 – What now? Déjà vu.
This was very bad news for shareholders. The problem is that the Rainy River has been deeply impacted, affecting production for the rest of 2022 and possibly even 2023. We’re talking about 19.2% of 2022 production.
It was not the first time that the Rainy River mine had inflicted pain on New Gold shareholders.
On August 11, 2021, New Gold Inc. released its second quarter 2021 results. The company also had bad news about Rainy River, and NGD fell to a 52-week low. You can read my article by clicking here.
New Gold fell to a 52-week low after announcing a $15.8 million loss in 2Q21 and warning of its full-year production guidance due to grade uncertainties at the Rainy River mine in Ontario.
The East Lobe Zone at Rainy River returned gold grade below expectations in July. This is an important issue because production from the East Lobe represents 15% of the remaining high- and medium-grade open-pit reserves. A possible amended mine plan is now being considered.
The market sold off on the news, but the stock rallied later. However, the market might be less accommodating this time around. Fool me once, shame on you, fool me twice, shame on me.
I do not recommend a long term investment in NGD for apparent reasons. However, after this giant drop, I think the stock is now attractive, and I suggest buying NGD and trading the stock, which will likely recover a little from this massive sell-off.
Note: NGD trades on the US NYSE and can trade below $1 without delisting risk. However, in rare cases, the US stock exchange NYSE may force a company to reverse spin-off to avoid delisting.
Technical analysis and commentary
NGD Forms a down channel model with resistance at $1.14 and support at $0.70. The RSI is now at 25 indicating an oversold situation hinting at a buy signal.
The strategy is to trade LIFO around 70% to 80% of your position and hold a small long term core for a more exceptional payday.
I recommend accumulating between $0.72 and $0.69 with potential support below around $0.65. NGD will remain weak and could test $0.65 if the FED hike is another 75 points pushing the US economy into a recession.
In addition, it is important to take profits between $1.12 and $1.17 with a potentially much higher share price if the company can solve the problems plaguing the Rainy River mine. A more conservative approach would be to sell at $1, or around 30%.
To note: The LIFO method is prohibited by International Financial Reporting Standards (IFRS), although it is permitted in the United States under generally accepted accounting principles (GAAP). Therefore, only US traders can apply this method. Those who cannot trade LIFO can use an alternative by creating two different accounts for the same stocks, one for long term and one for short term trading.
Warning: The TA table must be updated frequently to be relevant. This is what I do in my stock tracker. The table above has a possible validity of approximately one week. Remember that the TA chart is a tool only to help you adopt the right strategy. This is no way to predict the future. Nobody and nothing can.
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