NGD:CC - New Gold: Raining Again At Rainy River

• On July 11, 2022, Canada-based New Gold Inc. released its second quarter 2022 operational results as of June 30, 2022.
• Operations at the Rainy River were adversely impacted by heavy rainfall and flooding.
• I recommend accumulating between $0.72 and $0.69 with potential lower support at around $0.65.

Introduction

on July 11, 2022, Canada-based New Gold Inc. ( NGD ) released its second quarter 2022 operational results as of June 30, 2022, and provided an update on its 2022 operational outlook for the Rainy River Mine, the New Afton Mine, and the consolidated operational outlook.

Note: This article is an update of my article published on May 31, 2022. I have been following New Gold on Seeking Alpha since 2019.

It was a dreadful quarter in terms of gold production, and the stock tumbled to its lowest point on a one-year basis on the news yesterday.

NGD closed at $0.71, illustrating the weakness in the company's business model based on few assets presenting definitive technical inadequacies.

I have always warned readers about the risk attached to New Gold which relies on two production assets and always recommended trading LIFO a large part of their NGD holding.

The stock disintegrated the past few days and reached a low of $0.71 today, down about 63% from April.

Renaud Adams, President & CEO, said in the press release:

Rainy River experienced challenges during the quarter as the Fort Frances area saw extreme rainfall and flooding, [...] I remain confident about the increased production profile as outlined in Rainy River's latest updated Technical Report announced earlier this year. At New Afton, the planned closure of the Lift 1 cave, including the recovery level, is now complete. While we've announced revisions to New Afton's copper guidance for the year, the priority remains on the B3 ramp-up and advancing C-Zone development, which remains on time for first ore in the second half of 2023.

2Q22 Gold production analysis

1 - The raw numbers

NGD announced on Monday, July 11, 2022, that it produced 70,514 GEOs during the second quarter. The production of gold equivalent ounces GEO includes gold, silver, and copper. Also, adding even more salt to the wood, the company said it sold 62,367 GEOs in 2Q22. The reason was an unfortunate timing in sales:

Concentrate sales in the quarter were impacted by timing of sales. As a result, approximately $12 million in sales will be deferred to the third quarter.

Below is shown the production for the past three quarters and per metal:

Gold production for the Rainy River mine was 42,516 Au ounces for the Rainy River and 9,916 Au ounces for the New Afton mine.

The gold production was 52,431 Au ounces, a multi-year low. Furthermore, because of the ore used in Rainy River, the grade per tonne was significantly lower this quarter. Unfortunately, it was also the case for the New Afton mine.

2 - What happened?

2.1 - Rainy River

The company indicated that the operations at the Rainy River were adversely impacted by heavy rainfall and flooding. The total tonnes mined from the open pit were lower because the company utilized the low-grade ore material during the quarter producing lower gold ounces. However,

The lower tonnes mined (ore and waste) year-to-date has caused a change to the mine plan for the remainder of 2022... This change requires the operation to continue to process low-grade ore material in the second half of 2022.

This operating change has forced the company to revise and lower the Rainy River's gold equivalent production for 2022. It is now expected to be between 230K to 250K GEOs from 265K to 295K GEOs.

Moreover, operating expenses per GEO are forecasted to be between $960 to $1,040 per GEO, from $730 to $810 per GEO. The increase is due to the lower gold production and current inflationary cost pressures.

Finally, all-in sustaining costs AISC are expected to be between $1,620 to $1,720 per GEO, from $1,270 to $1,370 per GEO.

2.2 - New Afton

The company focused on B3 and C-Zone development and closed the low-grade-higher cost recovery level zone earlier than planned, which is a positive. However,

As a result of the early shutdown, tonnes mined were lower than expected. To maintain mill feed, the operation utilized the low-grade stockpile during the quarter, resulting in lower grades and recoveries, and ultimately, lower production.

• Copper production guidance for 2022 is now expected to be between 25 to 35 million pounds (previously 35 to 45 million pounds).
• Gold production is expected to be at the low end of the annual production guidance range of 35,000 to 45,000 ounces.
• Due to the lower production, as well as, current inflationary cost pressures, operating expenses per gold eq. ounce are now expected to be between $1,485 to $1,565 per GEO (previously $1,100 to $1,180 per gold eq. ounce), and all-in sustaining costs are now expected to be between $2,210 to $2,310 per gold eq. ounce ³ (previously $1,695 to $1,795 per gold eq. ounce). Production ramp-up at the B3 zone continues to advance with development expected to be completed by September.

3.3 - New 2022 Guidance. Gold equivalent Production is down 19.2% (mid-point) from the previous guidance.

3 - Now what? Déja Vu.

It was very dreadful news for shareholders. The issue is that the Rainy River has been deeply impacted, affecting the production for the remaining 2022 and possibly even 2023. We are talking about 19.2% of the 2022 production gone.

It was not the first time the Rainy River mine inflicted pain on New Gold's shareholders.

On August 11, 2021, New Gold Inc. released its second quarter of 2021 results. The company had a piece of bad news about the Rainy River, as well, and NGD dropped to a 52-week low. You can read my article by clicking here.

New Gold tumbled to a 52-week low after announcing a 2Q21 loss of $15.8 million and warning about its full-year production guidance due to grade uncertainties at the Rainy River mine in Ontario.

The East Lobe zone at the Rainy River delivered below expectations gold grade in July. It is an important issue because production from the East Lobe represents 15% of the remaining open pit high and medium grade reserves. A possible modified mine plan is now considered.

The market sold off on the news, but the stock recovered later. However, the market may be less accommodative this time. Fool me once, shame on you, fool me twice, shame on me.

I do not recommend a long-term investment in NGD for apparent reasons. However, after this giant slide, I believe the stock is now attractive, and I suggest buying NGD and trading the stock, which will probably recover a little from this massive selloff.

Note: NGD trades in the NYSE American and can trade below $1 without the threat of delisting. However, in rare cases, the NYSE American exchange can force a company to reverse split to avoid being delisted.

Technical Analysis and commentary

NGD forms a descending channel pattern with resistance at $1.14 and support at $0.70. The RSI is now 25, which indicates an oversold situation hinting at a buy signal.

The strategy is to trade LIFO about 70%-80% of your position and keep a tiny core long-term for a more outstanding payday.

I recommend accumulating between $0.72 and $0.69 with potential lower support at around $0.65. NGD will remain weak and could test $0.65 if the FED hike is another 75-point pushing the US economy into a recession.

Also, It is important to take profits between $1.12 and $1.17 with a potentially much higher stock price if the company can solve the issues plaguing the Rainy River mine. A more prudent approach would be selling at $1, about 30%.

Note: The LIFO method is prohibited under International Financial Reporting Standards (IFRS), though it is permitted in the United States to generally accepted accounting principles (GAAP). Therefore, only US traders can apply this method. Those who cannot trade LIFO can use an alternative by setting two different accounts for the same stocks, one for the long term and one for short-term trading.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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