Image: Rainy River mine Courtesy: Royal Gold

Investment Thesis

The Canadian-based New Gold, Inc. (NYSEMKT:NGD) released its third-quarter results on November 5, 2020.

The investment thesis is now easier for New Gold. The stock is an excellent trading vehicle and will fluctuate depending on the gold price.

The basic idea is that the gold price is retracing from its high at $2,070 per ounce and may continue to retrace if the world economy can solve its virus problem, which is now only a question of time and logistics.

Therefore, we will experience lower lows until gold reaches strong support that I see between $1,750 and $1,580 and, eventually, resumes its uptrend.

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The idea is that gold is forming a cup and handle based on the 10-year chart (adjusted from inflation). I have indicated this basic strategy to my followers for many weeks now, and it seems what is happening.

NGD has outperformed the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) significantly.

ChartData by YCharts

Gold Production Details for the Third Quarter of 2020

New Gold released its gold production for the third quarter of 2020 on October 13, 2020. I have published an article on October 19, 2020, about it. It is basically what we can see here with a few updates not available initially.

Production was 115,536 Au Eq. Oz. for 3Q’20, down 10.4% compared to the same quarter a year ago and up 15.1% sequentially.

The gold price realized in 3Q’20 was $1,613 per Au Oz and $2.99 per Cu Lbs.

Important note: New Gold also has a gold stream obligation with Royal Gold (RGLD) on Rainy River, totaling over $160 million as of September 30, 2020. It is one reason why the gold price realized is much lower than the average gold price for the quarter, which is about $1,908 per ounce.

Details per metal comparing the 2Q and the 3Q:

New Gold is producing gold, silver, and copper.

Gold production was lower than the same quarter a year ago, especially for Rainy River, as shown in the chart below.

The quarterly gold production from both mines since 4Q’17 is indicated below. The company indicated that the Rainy River Mine produced 64,221 GEOs and sold 61,726 GEOs (63,004 ounces of gold and 102,814 ounces of silver) for the third quarter. The gold production was better than the three preceding quarters but still lagging compared to the same quarter a year ago.

The New Afton mine produced 51,315 GEOs and sold 49,179 GEOs (15,955 ounces of gold and 18.2 million pounds of copper) for the quarter. The silver production has not been indicated.

The grade is improving a little, but it is far from what was realized in 2018-2019.

The AISC per gold equivalent was $1,013 per GEO in Q3’20, up 2.3% sequentially.

New Gold Inc. – Balance Sheet In 3Q 2020 – The Raw Numbers

New Gold NGD 3Q’19 4Q’19 1Q’20 2Q’20 3Q’20
Total Revenues in $ million 168.4 139.2 142.3 128.5 173.7
Net Income in $ million -24.7 0.30 -28.3 -45.6 15.7
EBITDA $ million 51.6 70.1 40.8 0.2 81.5
EPS diluted in $/share -0.04 0.01 -0.04 -0.07 0.02
Cash from Operating Activities in $ million 91.1 47.9 51.3 52.8 92.2
Capital Expenditure in $ million 62.6 102.3 65.3 50.2 59.4
Free Cash Flow in $ million 28.5 -54.4

-14.0

2.6

32.8

Total cash $ million 178.8 83.4 400.4 700.2 416.4
Total Long-Term Debt in $ million 728 715 750 1,079 681
Shares outstanding (diluted) In millions 610.7 675.0 676.0 676.0 677.9

Data Sources: Company release

Note: More historical data are available for subscribers only.

Analysis: Balance Sheet Discussion

1 – Revenues of $173.7 million in 3Q’20

New Gold posted revenue of $173.7 million for Q3’20, up 3.1% from the same quarter a year ago and up 35.2% sequentially.

After adjusting for certain charges, adjusted net earnings for the quarter was $12.4 million or $0.02 per share. Finally, the operating expense for the quarter was $778 per GEO.

The company indicated in the press release:

During the quarter, the Company completed the divestment of the Blackwater Project to Artemis Gold Inc. (“Artemis”) for total cash consideration of C$190 million. The initial cash payment of C$140 million was received during the quarter with the remaining C$50 million cash payment due on August 24, 2021. Under the terms of the agreement with Artemis, the Company retained an 8% gold stream and a 6% equity stake in Artemis. (Refer to the Company’s June 9, 2020 and August 24, 2020 news releases for further information.)

Renaud Adams, the CEO, noted in the conference call:

We are extremely pleased with the significant turnaround that took place at New Gold in the first nine months of 2020, and in particular with our overall performance and significant milestones achieved in the third quarter. With the restructured balance sheet and significant cash and liquidity on hand and performing assets, we are now well positioned to enter our next phase of value creation.

2 – Free cash flow was a profit of $32.8 million in 3Q’20

Note: The generic Free Cash Flow is the cash from operating activities minus CapEx.

The free cash flow for 3Q’20 was a profit again of $32.8 million. The yearly free cash flow is still a loss of $33.0 million due to significant CapEx at the Rainy River and New Afton mines.

3 – Net debt is now about $265 million as of September.

New Gold is showing a net debt of $265 million, down $114 million sequentially.

Source: Presentation Q3

2020 New Revised Guidance

Gold production is now expected between 284K Oz and 304K Oz, with copper production unchanged at 65-75 Mlbs.

Gold Equivalent production is expected in the range of 415K – 455K GEOs with AISC between $1,410 and $1,490 per ounce.

Source: Presentation

Discussion and Technical Analysis

The technical analysis is using the basic idea that I have developed in my investment thesis.

NGD corrected significantly from its high in October. The new pattern now is a descending channel with line resistance around $1.80 – $1.90 and line support between $1.55 and $1.60.

The short-term trading strategy is to sell 30-40% of your position at or above $1.85 and wait for a retracement below $1.60 to accumulate again. NGD may eventually retest the 50 MA at $1.95. It is a basic blueprint and should be constantly updated based on the price of gold.

If gold continues to weaken, it is possible to see NGD breaking down to $1.40 – $1.30 (200 MA). This is a non-negligible possibility. However, if the gold price soon finds support and resumes its uptrend, NGD may break out and retest its October top at $2.30.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I trade short term NGD occasionally.