Can New Gold Expect Its Rainy River Project to Outperform?
New Gold’s underperformance
New Gold (NGD) stock has underperformed the VanEck Vectors Gold Miners ETF (GDX) by falling 9% in 1H17 compared to a rise of 5.5% in GDX. Investors should note that its performance has been better in 2Q17 than it was in 1Q17. Its stock price rose 6.7% in 2Q17 compared to a fall of 15% in 1Q17.
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Rainy River project
Rainy River 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. New Gold’s announcement regarding the cost overruns at its major project, Rainy River in Ontario, was the major reason behind its stock losses in 1Q17.
In a matter of five months, it announced cost overruns twice for its project, along with an expected delay in the completion of its project. 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.
On June 27, 2017, New Gold provided an update on the construction of Rainy River, noting that the project schedule and the capital cost estimate remained in line with its announcement in late January 2017.
Financing Rainy River
Apart from bought deal financing totaling $150 million in February and the sale of its El Morro gold stream to Goldcorp (GG) for $65 million, New Gold has entered a gold price option contract. This contract would cover 120,000 ounces of its second-half gold production. Through these initiatives, New Gold is trying to increase its cash flow during Rainy River’s development period.
New Gold is efficient with respect to its cost base. Its AISC (all-in sustaining costs) of $692 per ounce in 2016 was lower than many senior gold miners’ (GDX) AISCs. These miners include Newmont Mining (NEM), AngloGold Ashanti (AU), Eldorado Gold (EGO), and IamGold (IAG).
Next, let’s look at IamGold’s 2Q17 results expectations.