Can New Gold’s 1Q17 Help It Escape the Negative Rainy River Loop?
New Gold’s significant underperformance
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Rainy River cost overrun
New Gold’s announcement regarding its major project, Rainy River in Ontario, was the driving factor behind its stock losses in 1Q17. It announced that its capital expenditure (capex) for Rainy River would be $195 million higher than expected.
This was the second time in a period of just five months that the company had announced a cost overrun. In September 2016, New Gold made a statement that its capex for the project would be $105 million higher than its original projection. It also announced that the project would be completed in September 2017, three months later than originally expected. This announcement led to a fall of 35% for New Gold stock in just two trading days.
Rainy River, located in Canada, is currently the company’s most important project. At its full capacity, it’s expected to produce as much as all of New Gold’s other mines.
Financing Rainy River
New Gold announced its bought deal financing of 53.6 million shares at $2.8 per share for $150 million in February. It’s planning to use the proceeds of this transaction to finance the completion of the construction of Rainy River.
New Gold has also announced the sale of its El Morro gold stream to Goldcorp (GG) for $65 million. This sale will provide the company with additional liquidity to advance the construction of Rainy River.
New Gold is hugely competitive as far as its cost base is concerned. The company reported AISC (all-in sustaining costs) of $692 per ounce in 2016, lower than many senior gold miners’ (GDX) AISCs. Many of New Gold’s peers (RING) (GDX), including Newmont Mining (NEM), Eldorado Gold (EGO), AngloGold Ashanti (AU), and IAMGOLD (IAG), are developing projects that could lower their overall costs.
Next, let’s look at IAMGOLD’s 1Q17 results expectations.