Rainy River dampens New Gold guidance

The company (TSX: NGD) previously struggled with operational credibility and operational issues could overhang the shares going forward, Canaccord Genuity warned.

New Gold had issued a guidance warning in August, with the below-par East Lobe area set to represent about 35% of the mine’s planned production this quarter.

The company reduced Rainy River’s gold-equivalent production from 275,000-295,000 ounces to 240,000-255,000oz.

All-in sustaining cost guidance increased from US$1,125-$1,225 to $1,365-$1,440oz Au-eq.

Growth capex was increased from $10-$15 million to $15-$20 million due to the accelerated development of the Intrepid zone. The company said it planned to deliver an underground optimisation study for Rainy River by year-end.

Guidance remains unchanged for New Afton in British Columbia but the Rainy River adjustment reduced consolidated guidance, from 440,000-490,000oz to 405,000-450,000oz Au-eq, and increased AISC from $1,230-$1,330 to $1,415-$1,495/oz Au-eq.

“While the reduction in our near-term guidance at Rainy River is unfortunate, I remain confident the mine has reached an inflection point, as evidenced by the free cash flow generated in the second quarter and the mine is on track to deliver an improved second half of the year,” president and CEO Renaud Adams said.

Rainy River’s initial underperformance and high cost had threatened the company’s viability but Adams had said a year ago he would “call Rainy fixed“. 

“We believe the longer-term impact is likely to be on NGD’s multiples; recall that NGD has struggled with its operational credibility in the past, and while this perception has dramatically improved under current CEO Renaud Adams, we believe the operational issues at both Rainy River and New Afton could overhang the shares going forward,” Canaccord Genuity analyst Dalton Baretto said yesterday.

He said the size of the production cut and increase in cost guidance were larger than anticipated, although he did not believe the grade reconciliation issues would persist past this year.

Canaccord reduced New Gold’s target price from C$2.75 to $2 a share but reiterated a buy rating.

New Gold shares are trading at the lower end of a one-year range of $1.30-$3.05. They closed up 3.3% yesterday to $1.56, valuing it at $1 billion (US$0.8 billion).

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