New Gold Inc (TSX: NGD) is an intermediate gold mining company having a portfolio of two producing assets: Rainy River Mine and New Afton Mine in Canada. Also, it has interests in the Cerro San Pedro Mine in Mexico. The company derives revenue from the sale of Gold, Copper, and Silver.

Key highlights 

• Favourable economic outlook: Currency rate fluctuations, the relative strength of the US dollar, gold supply and demand scenario as well as macroeconomic factors like interest rates and inflation predictions, can have a substantial impact on the price of gold. Furthermore, we believe the long-term economic environment, should support precious metals and gold, which would make the company's prospects favourable. The continued recovery in the global economy would also increase demand for copper and provide support for copper prices.
  

• Revised production guidance:Recently, the Company provided an update to its 2021 operational outlook for the Rainy River mine and the consolidated operational outlook as a result of the variance experienced in the eastern area of the ODM zone. The consolidated gold equivalent production for 2021 is expected to be between 405,000 and 450,000 ounces.   

Source: Company Presentation 

• Increase in cash from operations: For the nine months ended September 30, 2021, cash generated from operations increased to USD 218.0 million compared to USD 196.3 million in the previous corresponding period. The higher cash from operations was primarily due to an increase in revenue, partially offset by negative working capital movements of USD 17.1 million driven by the timing of sales and trade payables.
  

• Strong liquidity position: At the end of Q3 2021, the company posted ample liquidity of USD 477 million, which includes USD 151 million of cash and cash equivalents along USD 326 million of undrawn credit facility. The current liquidity seems sufficient to support the company’s short-term working capital requirements. Furthermore, there is no debt repayment until 2025, which gives an extra cushion to the margins.

Source: Company Presentation 

Financial overview of Q3 2021

Source: Company Reports 

• In Q3 2021, the company posted higher revenue at 179.8 million, against USD 173.7 million in the previous corresponding period. The rise in revenue was mainly due to higher gold and copper prices, which was partially offset by lower sales.
• An income from operations increased to USD 35.8 million, against USD 30.2 million in the previous corresponding period. Although it registered higher exploration and business development expenses.
• The company posted net loss of USD 11.3 million in the reported period, against a profit of USD 15.7 million in the previous corresponding period. The change was primarily due to an unrealized loss on the revaluation of investments, partially offset by lower finance costs.
  

Risks associated with investment

The Company’s financial performance is mostly dependent on the price of gold and other metals, which directly affects their profitability and cash flow. Any drawdown in the prices would impact the group’s performance. Additionally, the natural calamities in British Columbia have disrupted the transportation routes to the Company's New Afton Mine, which could impact the company’s infrastructure and operations. 

Valuation Methodology (Illustrative): EV to Sales based 

Stock recommendation

The Company responded well to the challenges experienced in the third quarter, and positioned themselves to meet its updated guidance, and expect an improvement in fourth quarter production from Rainy River with lower contribution from the East Lobe, which is a key positive. Furthermore, we believe the long-term economic environment, should support precious metals and gold, which would make the company's prospects favorable. The continued growth in the global economy would also increase demand for copper and provide support for copper prices, hence beneficial for the group. Therefore, based on the above rationale and valuation done using the above methodology, we have given a “Buy” rating at the closing price of CAD 1.85 as on December 6, 2021. We have considered Dundee Precious Metals Inc, Eldorado Gold Corp, Golden Star Resources Ltd, etc., as the peer group for the comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary:

1-Year Price Chart (as on December 06, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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