It’s been a volatile start to the year for miners, but few names have fared as poorly as New Gold (NGD). The stock is down 44% year-to-date, lapping an underwhelming 13% decline last year, during a year when the price of gold (GLD) rose nearly 20%. Unfortunately, recent developments suggest that this trend is not likely to change, given that half of the company’s gold production is hedged at a ceiling below $1,400/oz, and Rainy River operations have been suspended temporarily for the safety of workers. Based on these negative developments, I continue to see the stock as an Avoid at $0.65, and I see much better opportunities elsewhere in the sector to go bottom-fishing.
Just over four months ago, I covered New Gold’s Q3 results and discussed the stock continued to be an Avoid despite trading more than 80% off of its highs at $0.93. The cheapest stocks during a bull market are often cheap for a reason, and they are the first names to crumple when we see any pressure put on a bull market. This is precisely what we’ve seen the past few months, as New Gold has tumbled another 30% since the article, while some analysts continue to try to find a bottom in the stock.
In a sector that is plagued with companies that over-promise and under-deliver, there are only ten to twelve names worth owning, and New Gold is certainly not one of them. The latest moves by the company and the underwhelming Q4 and FY-2019 report embolden the thesis that the stock continues to be a name to avoid, even at the current share price of $0.65. Let’s take a closer look at the recent developments and FY-2019 report below:
New Gold reported its FY-2019 results in late February, with the company producing 486,141 gold-equivalent ounces in FY-2019, roughly 2% below the company’s 2019 guidance mid-point of 492,500 ounces. All-in sustaining costs for the year came in at $1,310/oz, well below the guidance mid-point of $1,380/oz, but the bar was set quite low for the company to step over in terms of cost guidance. As we can see in the chart below, despite the 5% beat on cost guidance, this merely earned New Gold a seat as the 2nd highest-cost gold producer in the sector of the names that have reported their FY-2019 results. Therefore, I would hardly call the guidance beat an achievement, nor would I use the slight guidance beat as a justification for owning the stock.
The only stocks worth owning, in my opinion, are those with industry-leading cash costs, meaning those gold producers beating the industry average of $940/oz. Based on New Gold’s costs being 35% above the industry average at $1,310/oz, this is not even remotely attainable either in FY-2020 or FY-2021.
If we look ahead to FY-2020 guidance, there isn’t much to like here either, as the company has guided for similar costs of $1,300/oz, with inline production of 490,000 gold-equivalent ounces at the guidance mid-point. Unfortunately, this guidance has placed the company in a position that it will struggle to have positive earnings in FY-2019, given the recent developments. The first of these developments is the fact that the company has hedged off a significant portion of its gold production in FY-2020, with 72,000 ounces in the first half of the year having a ceiling of $1,355/oz. In addition, the company has hedged off 96,000 ounces in the back half of the year at $1,415/oz, for a total hedging program of 168,000 ounces, or more than half of its gold production guidance mid-point of 320,000 ounces. The weighted average ceiling price for these ounces is $1,389/oz, a price that gold has not traded at in over a year, and a price that’s barely above the company’s all-in sustaining costs. Therefore, it is hard to argue that New Gold is a play on the gold price at all when a good chunk of its production does not benefit from current gold prices.
The most recent development, which handicaps profitability from the company’s best-performing mine, is the deal to sell a 46% cash-flow interest at New Afton to the Ontario Teacher’s Pension Fund for $300 million. While this was a necessary move by the company to begin to pay down its massive debt load of over $700 million as of year-end, it also puts a considerable dent in cash-flow at the one mine that is actually producing at respectable levels. When it comes to Rainy River, which is forecast to produce 250,000 ounces at $1,510/oz for FY-2020, there is absolutely no profitability here at current gold prices. Therefore, it is as if the company has cut off one of its legs to pay its debt, and New Gold will have now have to hobble towards profitability at current gold prices. Fortunately, the company has the option to buy back this interest after four years, at fair market value at the time, and an agreed-upon internal rate of return to Ontario Teachers. However, for the next four years, New Gold has added to its struggle to return to positive earnings per share.
To make matters worse for the company, the Rainy River mine guidance is now looking ambitious after the company noted that it had suspended operations for two weeks, as announced Friday. This decision was made as the company has local workers that frequently go across the board to Minnesota, and it is best for the safety of workers that the majority go under self-isolation. Based on annual production guidance of 250,000 ounces at the mid-point and a two-week suspension plus a few days to return operations to normal, this will likely impact gold production at Rainy River by at least 15,000 ounces. Given the high fixed costs of mining, I believe the all-in sustaining costs at Rainy River of $1,510/oz may end up being too low unless the company can make up for this in the back half of the year. Let’s take a look at how this translates to the company’s earnings:
As we can see in the chart below, New Gold is one of the only companies with negative annual earnings per share [EPS], while many other gold companies are seeing earnings return to multi-year highs. We can compare the two earnings trends of Caledonia Mining (CMCL) and New Gold below to illustrate this point. As we can see, New Gold’s annual net loss per share of $0.08 in FY-2019 marked a multi-year low for earnings, while Caledonia Mining saw earnings rise to a new 7-year high at $1.52. Therefore, from a pure profitability standpoint, there are tons of companies in the sector that are making money due to the tailwind in the gold price, but New Gold is not one of them.
If we take a closer look at New Gold’s annual EPS above, we can see that FY-2020 earnings estimates are for a net loss of $0.05, with FY-2021 estimates forecasting a net loss of $0.03. Therefore, despite a gold price that is trading above its 2014 highs, New Gold’s earnings are sitting near all-time lows. Besides, the forward estimates suggest that there is no reason to expect this to change any time soon, and the gold hedging, the sale of cash-flow, and the recent suspension of operations don’t help matters in the slightest. The goal of owning gold producers is to benefit from strong balance sheets, positive earnings, and dividends in many cases. When it comes to New Gold, the company can’t even come near checking any of these boxes. Based on this, I see no reason to own New Gold even after the recent drop, and the technicals seem to be confirming this:
As we can see in the chart below, New Gold remains well below its 20-month moving average and has been unable to reclaim this level for several years now. Therefore, there has been no reason even to entertain buying the stock since 2017, and this would have saved investors a more than 90% loss since the $5.00 level. The lesson here to avoid disasters like this in the future is quite simple. Given that the market often knows best and smells trouble before the average investor, it’s generally wise to avoid companies continuously making new lows below their 20-month moving average. Some investors may believe that if a stock has fallen 80%, it can’t possibly fall another 80%, but this is absolutely not true. In fact, it’s those companies that fall 80% that typically do see further sharp declines as any stock dropping 80% has something fundamentally wrong with it. As long as New Gold is below its 20-month moving average, I don’t plan to waste time keeping it on my watch-lists.
If we take another look at New Gold, we can see a bearish development recently, which is the breakdown to new all-time lows for the stock. The fact that New Gold has managed to break to new all-time lows while the gold price is fighting to make new multi-year highs suggest that there is a negative correlation between the two. Therefore, it would be complete insanity to buy New Gold and hope to enjoy performance similar to the gold price. If New Gold is unable to reclaim the $0.70 level on a monthly close, this will mark the first monthly close at new all-time lows in over a decade, and will likely put a ceiling on the stock at the $1.05 level going forward.
In summary, I see absolutely no reason to own New Gold as several companies are generating positive earnings, increasing dividends, and enjoying margins of $500/oz or better. Meanwhile, New Gold has no earnings, no dividend, and almost no margins to speak of currently.
While bounces are possible as we often see the most violent bounces in bear markets, I would view any rallies towards the $1.00 level as selling opportunities. New Gold may be a gold producer, but there is nothing attractive about a gold producer that has negligible margins and high debt that’s selling off future cash-flow from assets to stay afloat. Based on this, I continue to see the stock as an Avoid.
Disclosure: I am/we are long GLD. 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: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.