Rainy River Disappoints Again, But The Patience May Be Rewarded

New Gold announced a loss of $0.05 per share in Q1 2018.

The company produced only 96,882 toz gold and the AISC climbed to $1,219/toz.

The main problem was the Rainy Rivermine that experienced several issues that led to a production of only 39,325 toz gold, at an AISC of $2,447/toz.

The management believes that the issues have been solved and the 2018 production and cost guidance will be met.

In the near future, it is possible to expect New Gold's share price to re-test the support at $2.3, maybe even at $2.

New Gold (NGD) announced its Q1 2018 financial results. The numbers are disappointing. The gold production amounted only 96,882 toz, the AISC climbed to $1,219/toz gold, the net loss equaled $29 million or $0.05 per share, and the cash position worsened from $210 million as of the end of December to $191 million as of the end of March. The main issue was the Rainy River mine that performed worse than expected.

With gold grades at 1.1 g/t (compared to the reserves grade of 1.24 g/t gold), recoveries at 81% (well below 91% projected by the feasibility study) and throughput rate approximately at 17,800 tpd (15% below the nameplate capacity), it is no surprise that the Rainy River mine was able to produce only 39,325 toz gold in Q1 2018. Given that the 2018 production guidance projects 310-350,000 toz gold, the average quarterly production should equal 77,500-87,500 toz gold. It means that in Q1, Rainy River's gold production lagged 50% behind the expectations. Due to the lower production volume, also the AISC was notably higher. According to the news release, it climbed up to $2,447/toz, which is really a scary number.

According to the management, the disappointing performance was caused by several events:

The process facility encountered operational and mechanical challenges during the quarter that impacted availability. No single issue accounted for a significant portion of the unplanned downtime. However, plugged apron feeders, premature motor failure on the cyclone feed pump, and additional time required for the initial replacement of SAG mill liners are examples of the issues encountered.

Recoveries in the quarter were lower than planned due to the previously described process interruptions as well as performance and increased wear of various screens, which have since been addressed. The focus in the second quarter is on increasing and stabilizing the process facility availability as well as recoveries.

What is positive, the management believes that the adopted measures have solved the issues and the 2018 production and cost guidance released back in January remains unchanged. According to the guidance, Rainy River should produce 310-350,000 toz gold at an AISC of $990-1,090. The confidence that the guidance will be met is based on the April performance of the mine:

Through the first twenty-three days of April, gold recovery has increased to over 87% resulting in month-to-date production of approximately 15.7 thousand ounces of gold as the operation is beginning to see the positive impact of addressing the above-noted challenges. Rainy River's 2018 production profile is expected to increase quarter-over-quarter, as both gold grade and gold recoveries continue to increase, while the team also continues to focus on further enhancing the mechanical availability of the process facility.

However, although the improved production volume is a positive news, the improvement is still not big enough. Producing 15,700 toz gold over 23 days means that the average daily production is 682 toz gold. Q2, Q3 and Q4 have 275 days which means that at the current pace, only 187,550 toz gold would be produced during these three quarters. Adding to it 39,325 toz gold produced in Q1 and we are at 226,875 toz gold, which is well below the lower limit of the 2018 production guidance. To reach the 2018 gold production of at least 310,000 toz, the Q2, Q3 and Q4 production must climb approximately to 984 toz gold per day, which is 44% above the average production level reached during the first 23 days of April.

Another interesting information is that a study investigating the opportunity to expand the nameplate capacity from 21,000 to 24,000 tpd is underway. It is expected that the expansion may be relatively inexpensive. Further information should be released together with the Q2 results, probably sometime in late July.

As there are no near-term catalysts, it is hard to expect New Gold's share price to go up in the short term. Quite the contrary, given today's disappointment, it is reasonable to expect the share price to decline in the coming days and weeks (barring any major gold bull run). The closest support level is located in the $2.3 area. If it doesn't hold, the road is free down to the $2 level. The $2 level is a strong support created back in the second half of 2015. Moreover, it is also a strong psychological barrier.

Conclusion

Although I'm still positive about the mid- to long-term prospects of New Gold, the short-term share price development probably won't be too positive given the disappointing Q1 results. Although various negative information has been already baked in the share price, it was generally expected that the Rainy River mine is back on track and also the analysts expected much better results. The low gold production, high AISC, and loss of almost $0.05 per share may push the share price back to the support level near $2.3. If this support doesn't hold, a strong support is situated in the $2 area. Right now, the best strategy seems to be to wait how the situation plays out and initiate a new position or add to the old one somewhere in the $2-2.3 area. If New Gold's management is right, the issues have been resolved and the production guidance will be met, these price levels will look like a real bargain by the end of this year.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in NGD over 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.