High-Flying New Gold Asks:
Marc Davis, BNW Business News Wire
These are boom times for Vancouver-headquartered New Gold Inc. (TSX:
NGD (NYSE-AMEX: NGD). Indeed, this emerging mid-tier gold producer has gone from
strength to strength over the last couple of years. The company even posted
annual production of more than 301,000 gold ounces for 2009.
Remarkably, this has happened
against a backdrop of the worst financial crisis in over 70 years, as well as a
deep and protracted recession.
So what is New Gold’s secret to success amid the wreckage of
North America’s pronounced economic malaise? By committing the company to an
aggressive growth strategy, mostly by way of acquisitions, it has been able to
continuously ratchet up gold output in a rising tide environment for bullion
In hindsight, this strategy seems deceptively simple. But it has
required impeccable timing and the vision to understand that New Gold will only
truly shine when it reaches a certain critical mass. This involves reaching the
milestone of a minimum output of one million gold ounces in per annum, which New
Gold intends to reach by 2012. And the fastest way to get there so far has been
by way of buying out other small emerging gold producers.
This has been the company’s modus operandi since mid 2008, when
it acquired two other gold mining juniors
– Metallica Resources and Peak Gold –
in a friendly merger valued at $1.6 billion. In so doing, New Gold has since
then made the quantum leap from being an aspiring gold miner in 2007 with no
output to a formidable gold aggregator with three globally diversified mines in
operation just two years later.
They include the open pit, ‘heap leach’ (inexpensive to run)
Cerro San Pedro gold-silver mine in central Mexico, as well as the underground
Peaks Mine is in southern Australia, and the most-recently acquired Mesquite
open pit, heap leach mine in southern California. All of which are on-target to
produce up to 360,000 gold ounces in 2010.
Last summer’s $280 million merger with Western Goldfields – the
former owner of the Mesquite mine – should continue to add up to an additional
150,000 ounces to New Gold’s combined annual output. And this nearly doubling of
New Gold’s revenues will act as a big boost to the company’s bottom line,
according to the company’s hard-driving but soft-spoken CEO, Bob Gallagher. And
such exponential growth is resonating very favorably with the investment
“Our share price has doubled since our transaction with Western
Goldfields. So our financial ratios have gotten much, much stronger which means
that there are a much broader number of potential targets that we can acquire,”
Gallagher recently told BNWnews.ca
“Growth is good as bigger companies tend to receive better
valuations than smaller companies but the real growth comes when you can acquire
an undervalued asset. So your growth on a per share basis is accretive (it
acquires greater value per share). That’s what we’re targeting. And we
accomplished that in a huge way with Western Goldfields. But we’ll continue to
pursue other opportunities out there when we find the right assets.”
In recent headline-grabbing developments, New Gold stuck a
strategic joint venture deal in January involving its 30% stake in the sizeable
Chilean El Morro deposit, which hosts 6.7 million ounces of gold and 5.7 billion
pounds of copper. New Gold now has a new partner in the guise of world’s fifth
largest gold producer, Goldcorp (TSX: G) (NYSE: GG). The latter beat out the
dominant player in the gold mining business, Barrick Gold (TSX: ABX) (NYSE: ABX),
in a fight to snatch up El Morro’s rich gold assets.
This comes after a high stakes bidding war to buy-out the
project’s former majority owner, Xstrata Plc (LSE: XTA). In return for
supporting Goldcorp’s bid, the mining heavyweight has agreed to a $50 million
up-front cash payment to New Gold, as well as waiving New Gold’s estimated $225
million portion of the overall cost of building the mine.
Meanwhile, Gallagher concedes that his company still has a long
way to go before reaching the much-envied status of a well-established mid-tier
producer, which represents the Holy Grail for all emerging gold producers.
That’s because the mid-tier status offers major strategic and competitive
advantages, he says.
“There’s a space in the gold industry that we call an
intermediate space which are producers in the half million ounce to two million
ounce range. What’s special about that intermediate space is the big potential
for growth,” Gallagher says.
“By comparison, large gold companies seem to struggle to maintain
production and to maintain their reserve base. Also, smaller companies generally
are not of much interest to most investors due to a lack of liquidity. So, where
growth and value are best offered is in that intermediate space where you can
continue to grow.”
“That’s the space we entered in 2008. We did a three-way
consolidation of single mine producers last year,” he adds by alluding to New
Gold’s acquisition of Metallica Resources and Peak Mines. “Last year we added a
fourth company with Western Goldfields. So we’ve grown from a collection of less
than 100,000-ounce producers to approximately a 300,000-ounce producer.”
“We also have an asset that we’re building in Kamloops (the New
Afton project in southern British Columbia) that will add about another 100,000
ounces, which gets us nearly half way to that million ounce target. We think we
can get to a million ounces by 2012. We’ll do that by incremental growth in our
existing assets and continue our consolidation of producing mines. As an
intermediate, we will then continue to consolidate junior producers.”
In other words, Gallagher has no intention of taking his foot off
the accelerator any time soon. Especially since he envisions even more lustrous
times ahead for gold prices as the yellow metal continues to act as an inverse
proxy to the increasingly anemic US dollar.
“More and more people are investing in gold as a currency
and as protection against today’s financial issues. When you look at the
overhang in US dollars that countries like China have accumulated and the
ongoing deficits that the US is incurring, I think there is a strong case to be
made for countries and banks switching from US dollar reserves to commodities
like gold. We’re already starting to see it with China,” he says.
“So for a number of reasons gold is going to continue to
strengthen as we move forward. In fact, I think we’re in a very exciting sector
of the cycle. Whereas commodities like gold tend to have cycles in the 10-year
range, we’re probably only in about year six. So the fundamentals are very
favorable for continued growth in gold pricing.”
Investors who want to get the maximum leverage from rising gold
prices are better off buying gold mining stocks than gold bullion, according to
Gallagher. For instance, it’s easier at this stage to envision a modestly
priced, expansion-oriented emerging gold producer to double in price within the
next year than it is to imagine bullion’s spot price rising to over $2,000
during this time frame.
“Emerging mid tier gold producers by far represent the best
investment opportunities. Right now this space is more or less empty as previous
intermediate gold companies have moved on to become major mining companies. The
most recent examples would be Kinross and Agnico Gold Eagle. And Goldcorp and
Barrick Gold are great past examples.”
Gallagher believes that the relative absence of mid tier gold
producers – of which there are currently only a tiny handful – means that New
Gold will have meager competition from its peers in the quest to continue to
absorb other junior gold miners.
“Because we’ve got a great solid foundation of assets generating
cash flow and a great balance sheet and a strong proven board and management, I
believe we really are the ‘go to’ consolidator,” Gallagher adds.
Ultimately the absorption of gold mining juniors by larger
companies is beneficial for the industry and for investors, alike, Gallagher
“The issue is small companies with single producing assets are
not attractive investments. Over this last bull run for gold you’ve seen the
share prices of intermediates and the seniors appreciate significantly. The
juniors haven’t,” he says.
“That’s because the juniors primarily have a lack of liquidity
and limited market capitalization. Serious investors can’t move in and out of
them; so they shy away from them. Single asset producers also have good quarters
and bad quarters and don’t have the benefit of the portfolio effect that comes
with having a number of producing assets,” he adds.
“Furthermore, new emerging single asset producers struggle when
they come out of the exploration stage and into production. They generally have
tended to disappoint the (stock) market and don’t live up to expectations.”
Having recently received a solid endorsement from the financial
community by way of the completion of a Cdn. $115 million equity financing, New
Gold now has a more than adequate war chest to continue along a steep growth
curve. (The company already had $140 million in its treasury). That also
translates into more acquisitions without compromising the company’s commitment
to commercialize its in-development New Afton mine, which is scheduled to
produce 85 million gold ounces and 75 million pounds of copper per year,
starting in 2012.
“New Afton has all of our existing cash committed. So when we
wanted to grow by way of acquisitions we have been really limited to projects
that are already producing cash,” Gallagher says.
“With this $115 million in cash, it broadens the expanse of
opportunities that we have. For instance, we can now acquire near-production
projects which need a little more cash to get them over the hump. And you always
add more value when you take something from pre-production into production. So
with a stronger balance sheet, this further broadens our list of potential
All of this means that New Gold’s high-octane growth formula
promises to continue power’s ascendancy for the foreseeable future.
“In five years time I think we’ll be through a million ounces.
And I think you’ll see us with six or seven mines and a much stronger pipeline
of mine development projects. Also, you’ll see the actual quality of producing
assets going up-market,” Gallagher says.
“Again, it’s a historical reality that when companies build
themselves this way you start with reasonable assets and then as you strengthen
you are able to acquire better and better assets. And that translates into lower
Or in other words, New Gold’s ever-improving balance sheet is
sure to make investors ask the same question: What recession?
Disclaimer: Marc Davis does not
directly or indirectly have any stock positions in New Gold.