New Gold Inc (TSX: NGD) is an intermediate gold mining company and has operations across the globe. The company has a portfolio of four producing assets, the New Afton Mine in Canada, the Mesquite Mine in the United States, and the Cerro San Pedro Mine in Mexico.

• Impressive Performance from the Rainy River mine: The company generates more than ~68% of its gold revenue from the Rainy River mine in Q1FY22. In the recent past, this mine has contributed healthily to the overall performance of the company. The management expects the momentum to continue and expects gold equivalent production to increase on y-o-y basis due to higher gold grade and gold recovery. Moreover, in Q1FY22, operating expense per gold eq. ounce from the Rainy River Mine has decreased from previous corresponding period primarily due to higher sales volume.

Source: Company Presentation 

• Bullish outlook of Gold: International Gold price has remained elevated since September 2021 due to rising bond yield and weak macros outlook. Moreover, being a defensive asset class, gold is gaining traction due to the overvalued equity market coupled with persisting tensions between Ukraine and Russia. Recently, we have seen a growing interest in the Gold ETF segment, which implies that investors are pouring their investments in the same. Continuation of the above trend would support the company’s sales volume in the coming days.
  

• Strong working capital management: The company reported its quick ratio and current ratio of 3.74x and 4.37x, respectively, as compared to the industry median of 1.58x and 2.61x, respectively. This indicates that the company has ample current assets to funds its short-term liabilities.

• Improved Cash-conversion period: In Q1FY22, the company reported its cash conversion period of 97.8 days, lowered from 121.9 days in Q4FY21. This indicates that the company takes lower time to convert its investments to cash flows, which remains a key concern for the group.

Risks associated with the investments:

The performance of the company is directly correlated with international gold and other metal prices. Thus, volatility in the commodity price would dampen the company’s income and would take a toll on the overall performance.

Q1FY22 Financial Highlights:

Q1FY22 Income Statement Highlights (Source: Company Report)

• NGD announced its first quarter FY22 result, wherein the company posted its revenues of USD 174.7 million, higher than USD 164.9 million in pcp. The growth was driven by higher a realized higher gold sales of 70,562 ounces v/s 63,539 ounces in pcp. Moreover, a higher realization price of USD 1,881/ounce v/s USD 1,769/ounce also contributed to the growth.
• The group reported a slightly higher operating expenses, higher exploration & business development costs. Hence, the company posted a slightly lower income from operations of USD 18.4 million in Q1FY22, versus USD 19.6 million in pcp.
• The company reported a net loss of USD 7.8 million in Q1FY22, as compared to a net profit of USD 15.1 million in pcp. This was due to lower income from operations and higher loss on foreign exchange, increase in loss on disposal of assets.

Valuation Methodology (Illustrative): Price to CF based

Analysis by Kalkine Group

Stock Recommendation:

The company has a strong liquidity of ~USD 432 million of cash and cash and cash equivalents along with an undrawn credit facility amounting USD 376 million, which is sufficient to fund its capital expenditures and working capital. Moreover, the company do not have any major debt repayment till 2025, which would support the retention of the company’s overall liquidity. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Calibre Mining Corp, B2Gold Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of NGD at the last closing price of CAD 1.77 on June 10, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on June 10, 2022). Source: REFINITIV, Analysis by Kalkine Group

The reference data has been partly sourced from REFINITV 

Technical Analysis Summary

Disclaimer

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