New Gold Inc (TSX: NGD) is an intermediate gold mining company and has operations across the globe. The company has a portfolio of four producing assets, the New Afton Mine in Canada, the Mesquite Mine in the United States, and the Cerro San Pedro Mine in Mexico.

Key Investment Rationale:

• Reported higher mineral reserve: During FY21, the company reported an increase in consolidated gold Mineral Reserves by ~126,000 gold ounces over the previous year (FY20). The increase was primarily due to an economic study at the Mineral Reserve gold price of USD 1,400 /ounce, which supports the conversion of approximately 569,000 gold ounces of underground Mineral Resources to Mineral Reserves at the Rainy River Mine. A higher mineral reserve is expected to support the company’s upcoming operations.

• Impressive FY22 outlook: The company expects its FY22 production in between 380,000 - 440,000 gold eq. ounces, as compared to 418,933 gold eq. ounces in FY21. Operating expenses are expected to be USD 840 to USD 920 per gold eq. ounce, lower than the prior year as management is anticipating lower operating expenses per ounce form the Rainy River Mine

Source: Company Reports

• Strong Performance from the Rainy River mine: The company generates more than ~83% of its gold revenue from the Rainy River mine. In the recent past, this mine has contributed healthily to the overall performance of the company. The management expects the momentum to continue in the FY22 and is expected to generate 265,000 to 295,000 gold eq. ounces of gold in FY22 (v/s 242,961 gold eq. ounce in FY21), due to an improvement in gold grade, tonnes mined.

• Robust profitability margins: The company reported improved profitability margins as compared to the industry median, which indicates better operational efficiencies. Notably, in FY21, the company reported its EBITDA margin and operating margin of 46.1% and 38.2%, respectively, higher than the industry median of 40.9% and 19.5%, respectively. Moreover, the company reported its net margin of 18.9% in FY21, higher than the industry median of 13%.

• Positive outlook of Gold: International Gold price has remained elevated since September 2021 and is trading close to 52-weeks high due to rising bond yield and weak macros outlook. Moreover, being a defensive asset class, gold is gaining traction due to the overvalued equity market coupled with persisting tensions between Ukraine and Russia. Recently, we have seen a growing interest in the Gold ETF segment, which implies that investors are pouring their investments in the same. Continuation of the above trend would support the company’s sales volume in the coming days.
  

• Investments in several exploration companies: The group has equity investments in other public mining companies, which are not controlled by NGD, such as Artemis Gold (~4.8% stake), Talisker Resources Ltd. (~14.9%), Harte Gold (~14.9%), Northern Superior Resources Inc. (~9.9%), Angus Gold Inc. (~9.9%) and Burin Gold Corp (~9.9%). These are mostly early-stage exploration, development and greenfield properties, which might turn into tremendous value-creation in the coming years. Moreover, this would also enhance the company’s exploration platform also and is a key positive.
  

• Ample Liquidity: As of Q4FY21, the company reported its liquidity of USD 775 million, which includes cash equivalents of USD 151 million, an undrawn credit facility of USD 326 million, along USD 300 million of funds received from the sale of the Blackwater Project. Notably, cash from operations was reported at USD 323.7 million in FY21, as compared to USD 294.8 million in FY20. This is sufficient to fund the company’s long-term and working capital needs.              

Current Liquidity Position (Source: Company Presentation)

Risks associated with the investments:

The performance of the company is directly correlated with international gold and other metal prices. Thus, volatility in the commodity price would dampen the company’s income and would take a toll on the overall performance.

FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• Higher Revenues: NGD announced its full-year result, wherein the company posted its revenues of USD 745.5 million, higher than USD 643.4 million in FY20. The growth was driven by higher a realized gold price of USD 1,798/ounce in FY21, higher than USD 1,559/ounce in FY20.
• Increase in income from operations: The group reported higher operating expenses, due to an increase in corporate administration expense, higher exploration & business development costs, partially offset by lower share-based payment expenses. Despite the higher input costs, the company posted higher income from operations of USD 137.3 million in FY21, versus USD 81.4 million in FY20, supported by higher income.

• Net earnings v/s net loss: The company reported its net profit of USD 140.6 million in FY21, as compared to a net loss of USD 79.3 million in FY20. This was due to higher income from operations, partially offset by higher income tax expenses.
  

Top-10 Shareholders:  Top ten shareholders of the company together hold approximately 34.79% stake, Van Eck Associates Corporation and Judico Capital Pte. Ltd. are the major shareholders in the company with an outstanding position of 9.53% and 7.62%, respectively.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales base

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

NGD has delivered strong FY21 performance and reported higher cash flows and elevated earnings, which is encouraging. The company is looking for several exploration activities and would prioritize underground exploration and infill drilling on the mineralized zone across the New Afton footprint, follow-up surface drilling within the Cherry Creek trend, and inspect exploration drilling opportunities from the regional targets that were defined in 2021. These are expected to be a meaningful addition to the group’s upcoming operations. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like OceanaGold Corp Eldorado Gold Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of NGD at the last closing price of CAD 2.33 on March 23, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 23, 2022). Source: REFINITIV, Analysis by Kalkine Group

*Recommendation is valid on March 24, 2022, price as well 

Technical Analysis Summary

Disclaimer

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