New Gold (NGD/NGD.TO) closed on Friday at $3 on the US market (I will be quoting the price in USD-you will have to multiply by 1.31 to equate the CDN exchange equivalent). The share price began to collapse on January 30th leaving a large gap on the chart at $3.96 (Jan 29th closing price). The even more significant flush came on January 31st, after analysts at the major brokerage houses downgraded the stock from a buy to hold, virtually across the board. That day, the price sank all the way to $2.39 intraday, just about sliced in half in 2 days! The news that caused this panic was an announcement that NGD would delay commercial production on their massive new Rainy River mine to November 2017 (this was previously scheduled to start “mid-year”).
The problem with Bay Street/Wall Street analysts is that they are, much more often than not, the sheep and not the shepherd. They are reactionary and behind the curve instead of in front of it and therein lies the opportunity here as the hatchet job on NGD was way overdone. The company also announced a $100MM funding gap due to cost overruns, which is not the end of the world. Guess what folks? New mines are very tough to build, mistakes are made, delays happen, and costs overrun. This is the mining business, not opening a new Chipotle. Obviously, some issues become perpetual and for smaller companies can be their demise. In the case of New Gold however, this is not the case. Last week on February 8th, they reduced that shortfall to $35MM as they sold a gold stream in their El Morro project for $65MM to Goldcorp, which is obviously non- dilutive.
Rainy River is NGD’s future and that future growth is not that far in the distance. I tripled my position size between $2.65-$2.85 and feel like this was a gift from the gold gods! I initiated a strong buy on NGD to all of our subscribers in the 2nd half of 2015 at just above $2 per share ($2.10 I believe was the official price USD). The share price tripled by mid-2016 and many of us wished we had bought more. Well, now is our chance as I love it again here in the high $2’s to low $3’s for primarily an investment but also for a pretty juicy trade too.
The daily chart shows two clear bullish signals via the clear gap in the chart (these tend to get “filled” much more often than not, even if just temporary) and a rising MACD, which acts like a pendulum swinging. I’ll take a step back and look at the bigger picture via the 10 year (monthly) chart below but first let’s look at the clear fundamental driver of the story….growing cash flow and earnings starting in 2018. Obviously a rising gold price is huge leverage to all of the gold producer’s earnings but we have a company specific driver in this case and it is Rainy River.
As you can see from the above slide in NGD’s corporate presentation, RR will virtually double the cash margin/flow of the entire company, which has 4 other producing mines. Average annual production per asset as it stands now is approximately 100,000 ounces. RR is projected to quadruple the average production of the other 4 mines and produce 400,000 ounces annually, starting in full during 2018.
You can see the huge impact RR will have on New Gold’s overall numbers above and it is significant. Do you want to invest in this company once RR is completely on track and producing 33,000 ounces per month in less than 12 months? No, you don’t. Not if you can buy it after a hiccup cheaply because Wall/Bay Street is focused on the short term and quarter to quarter realities. This is a perfect type of scenario to snatch value away from the sheep and buy into New Gold at a discount. Action and then patience will be rewarded.
None of this speaks to a rising gold price, which I expect going forward to north of $1,500 in 2018 (NGD uses $1,250 gold in their feasibility numbers/projections). However, per $100 an ounce rise in the gold price generates $300 million in value just at Rainy River. This is because $30MM in extra cash flow is generated and at 10X earnings it should reflect in $300MM in stock value added. That means when combined with the other 4 projects, just a $100 gold price increase in 2018 would add $600MM in value minimum, or 30% to the share price.
After a 5 year brutal bear cycle, most of the surviving mid-tier and blue chip gold producers are lean and mean because they had to be. The leverage going forward on rising gold prices will be significant and benefit stock prices fantastically if we see a real move in gold. NGD provides value at these prices, leverage to the gold price, as well as growth. Looking at EGO (Eldorado Gold) as a comparison, I would buy NGD every time. EGO has a $3B enterprise value versus NGD’s $2.1B yet their 2017 production profile will be very similar to NGD’s at between 365k-400k ounces. They also are not projecting anywhere near the explosion in production volumes that New Gold is after this year due to the Rainy River asset. The bottom line is that today’s problem will end up being tomorrow’s value driver and we actually don’t have to wait very long to see it.
I’ll circle back on this post in early-middle of 2018 once RR is hitting its stride and we’re seeing the same analysts that just downgraded, then upgrading, and driving the share price into the double digits again. As you can see on the monthly chart below, we are trading right on rising trend line support around $3. I ultimately expect the share price to retest the $14 area it hit in 2011 once the current gold cycle kicks into gear given some time. In the meantime, a closing of that gap could happen in as little as days or weeks. But even if it takes a year, 33% annual profits with a very low risk profile from these levels is better than a sharp stick in the eye!
I’m long NGD
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