New Gold Inc. Winston updates New Gold Inc. by 24hgold

Mots clés associés : Canada | Copper | G Mexico | Ubs |

New Gold Inc. (NGD, TSX & AMEX) New Pick

My initial interest in New Gold was a result of a merger which took place earlier this year with one of our gold picks, Peak Gold. I�ve been watching for a good entry point for this stock since the merger was officially completed on May 12th. Both the technical and fundamental outlook of the stock makes this a good time to accumulate shares.

A recently completed $1.2 billion all stock merger with Peak Gold, New Gold and Metallica Resources has created this new up and coming intermediate gold producer. Retaining the �New Gold� name, this new entity has a global portfolio of plays in Alaska, British Columbia, Mexico, Chile, Brazil and Australia.

New Gold has three cash flow positive gold mines in operation: Cerro San Pedro, Amapari and the Peak Mine. The company also has a large resource and reserve base to draw on.

� Proven and probable gold reserves of 5.2 million ounces
� Measured and Indicated gold resources of an additional 3 million ounces
� Inferred gold resources of an additional 2.1 million ounces

� Proven and probable silver reserves of 65.3 million ounces
� Measured and indicated silver resources of an additional 15.5 million ounces
� Inferred silver resources of an additional 2.6 million ounces

� Proven and probable copper reserves of 2.7 billion pounds
� Measured and indicated copper resources of an additional 898 million pounds
� Inferred copper resources of an additional 333 million pounds

While the three existing producing mines are being streamlined to lower operating costs and improve production output, there are also two future producing mines in the pipeline. The New Afton mine is scheduled to start production in late 2009 while a decision to build a mine at the El Morro is being made.

Over Q2, the Amapari and Peak Mines experienced some technical challenges which resulted in lower production and higher cash costs. At Peak Mines where lower grades increased the cash costs of production, mining has now shifted to higher grade stopes which should positively impact Q3 results. At the Amapari Mine production was affected by the lack of fixed and mobile equipment which was partially to blame for rather exorbitant cash costs of $968. The new management is now conducting an in-depth study of their processing and operational systems which is aimed at lower costs and increasing production by year end.

These problems at Amapari and Peak are the reasons that make New Gold a good buying opportunity right now.

The company was targeting cash costs of production to be in the range of approximately US$340 per ounce of gold this year net of by-product credits however the new guidance is $520 per ounce.

Post merger, New Gold has an excellent management board. The new collective brain trust is working on a solution to turn Amapari around by year-end. If anyone can do it, this group is certainly more then qualified. As Robert Gallagher, the CEO of New Gold has stated, Amapari is a turn around opportunity.

The new company is well positioned financially for accretive growth and through acquisitions given their healthy treasury of $319 million in cash and short-term investments (including the potential cash proceeds from the exercise of in-the-money options and warrants), and operating cash flow. There is also significant leverage to the up trending gold prices as all the production is unhedged.

Cerro San Pedro Silver/Gold Mine, Mexico

The shining star for New Gold is their Cerro San Pedro mine in Mexico which achieved excellent results in Q2 with gold sales increasing 39% at 22,190 ounces compared to 15,922 in Q1 of 2008. Silver sales increased 47% at 300,728 ounces vrs 203,973 in Q1 of 2008. Total cash costs in Q2 net of by product sales was $375 per ounce.

100% owned Cerro San Pedro gold-silver mine is an open pit mine which is forecasted to produce a 10 year life of mine average of 125,000 ounces of gold equivalent (100,000 ounces of gold and 1.3 million ounces of silver annually) at a cash cost of US $282 oz net of the silver by product. Production began in April of 2007 with a total of 33,600 ounces of gold equivalent produced over 2007. Initial operating costs came in at US $407 per ounce.

This mine will be a nice cash cow for the company in the years ahead.

Amapari Gold Mine, Brazil

If you had to point the finger at one reason why New Gold is now a buying opportunity, then Amapari is it. The management reports that a comprehensive review of operations at Amapari is underway and is expected to return the project to normal operating levels by year end.

Amapari has had its challenges in dealing with adverse rain fall which impacted their ability to process to higher grade material. Also a lack of equipment reduced the amount of ore they could process. Unit costs were also impacted by $165 per ounce due to reconciliation of leach pad inventory. As a result the Q2 numbers showed gold production at 20,938 ounces with cash costs of an unacceptable $968.

With drier weather and the proper equipment in place, the coming quarters should see vast improvements in production output and costs.

Peak Gold Mine, Australia

The Q2 results at Peak Mines in Australia included production of 21,114 ounces of gold and 1.2 million pounds of copper with cash costs of $472. Again, the cash costs were higher then expected.

Production was hampered because of weather that slowed the development of a high grade stope. Production increases and lower cash costs are expected to improve this quarter now that mining is shifting from the secondary to primary stopes.

The Peak Mine is an underground operation that started in 1992. Over the last three years the annual production averaged 124,000 ounces of gold and 6.6 million pounds of copper. Cash costs averaged $230 an ounce net of copper credits.

New Afton Project, British Columbia

The key growth opportunity for New Gold over the next 18 months is the New Afton project in Kamloops, B.C. There�s great mining infrastructure up there with a long rich history.

New Afton has a 43-101 compliant Measured and Indicated Resource containing approximately 1.5 billion pounds of copper and 1.6 million ounces of gold. The project has a projected 13 year mine life which could annually produce on average 80,000 ounces of gold, 214,000 ounces of silver and 75.4 million pounds of copper.

By all accounts the underground development is on schedule with three mining crews working 20 hours per day, 7 days per week.

Construction of the processing plant stated earlier this year with the goal of completing the earthworks and associated foundation and mill building work by the end of 2008. The first concrete was poured for the New Afton processing facilities in June 2008, three weeks ahead of schedule.

The first ore is scheduled to be trucked to surface and along with stockpiled development ore which will enable commencement of milling operations in Q4 of 2009. Ramp up to four million tonnes per year capacity will continue throughout 2010 and into early 2011.

Robert Gallagher recently commented that �At today's gold and copper prices, the New Afton mine will be an enormous cash generator for the Company."

El Morro Copper/Gold Project, Chile

The 3,600 hectare El Morro project is a joint venture between Xstrata Copper (70%) and New Gold (30%). Under the terms of the agreement Xstrata has delivered a feasibility study in January �08 and is now in the process of making a production decision.

The feasibility study indicates that the capital requirements will be $2.5 billion. The joint venture agreement has Xstrata providing 91% of the project financing (70% and 21% at New Gold�s option) dependent on a positive production decision.

The study also projects a 14 year mine life, where El Morro could produce 380 million pounds of copper and 313,000 ounces of gold on average each year.

At this point there has been no confirmation how this project will proceed from here though on the surface it looks to be a sweet deal for New Gold.

Management and Directors

New Gold has retained key management from the merger which gives them a depth of experience in mine financing, development and operation of both open pit and underground mines.

Robert Gallagher, the past Chief Executive Officer of Peak Gold has assumed that role with New Gold Inc. He most recently spent seven years at Newmont Mining as VP of Asia Pacific Operations and prior to that he was with Placer Dome for 15 years.

Clifford Davis, the former Chairman and CEO of New Gold will stay on as a director given his 40 year international mining experience in both underground and open pit mining.
More recently, Jim Currie was appointed the V.P. of Operations. Jim was responsible for the development of Miramar�s 10 million ounce gold resource at Hope Bay. His 28 years of experience in engineering, construction and operations will be focused on Amapari.

Craig Nelson was the former Chairman and a Director of Metallica. He�s also the President, CEO, and a director of Avanti Mining. Nelson was also the Executive V.P. of exploration for Gold Fields, one of the world�s largest gold companies. He will be a director on the New Gold board.

Another director is Paul Sweeney who brings 30 years of experience in mining industry finance and is currently the V.P. of Corporate Development of Plutonic Power Corp.

On July 10th, James Estey was appointed as a director after having recently retired as Chairman of UBS Securities Canada Inc. Estey has more than 30 years of experience in the financial markets.

Pierre Lassonde is currently the Chairman of Franco Nevada Corporation and formerly served as President of Newmont, one of the world�s largest gold companies. He brings a depth of experience of the board as a director.

And last but certainly not least, one the original heavy weights behind the wildly successful Wheaton deal, Ian Telfer will be a director as well. Telfer is the current Chairman of Goldcorp.

Certainly the new board is an exponentially more powerful group who are more than capable of leading New Gold forward.

Conclusion

Metal production for 2008 is now forecast to be approximately 250,000 ounces of gold, 1.1 million ounces of silver and 9.4 million pounds of copper.

The key for the company for the balance of the year will be to lower the overall cash costs while ramping up production. Amapari is the major objective here.

Robert Gallagher mentioned recently in an interview with BNN that he would consider 2008 a success if he could see a smooth transition of the three merged companies and a new acquisition of another junior producing gold mine. So in addition to streamlining the three operating mines, watch for a possible acquisition of a junior gold producing company.

The potential for short term share price appreciation is good. The Q2 results were below expectations and the market acted accordingly. Given that New Gold gets their production back on track at the Peak Mine and at Amapari, the short term prospects of the company look good and it should trading back up toward the $8 by Q1 of �09. In 12 months time as production at the New Afton mine looks like a reality and production is ramped up this stock could be a double from today�s price.

New Gold certainly has a well seasoned management group in place to make this a reality. Also with over a half a billion in cash, the board of New Gold will be able to make some acquisitions when the right deal presents itself.

New Gold is a buy for growth.

www.jameswinston.com

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