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

• Golden outlook: On the London Bullion Market Association, the spot price for gold climbed by 4% in Q4 2021 compared to the previous quarter, completing the quarter at USD 1,806 per ounce. The likelihood of earlier and quicker interest rate hikes than previously predicted was offset by higher inflation in the fourth quarter, which boosted the price of gold. As geopolitical and economic worries boosted demand for the safe-haven commodity, gold recently extended its rise to an 18-month high within striking distance of USD 2,000 an ounce on March 7, 2022. Furthermore, a rising number of experts are warning of the potential of stagflation, which occurs when high inflation meets decreasing GDP, a scenario that has generally favoured gold.

• Elevated Free cash flow: In FY2021, the business reported higher average realized prices for gold at USD 1,798 vs. USD 1,559 in pcp and copper at USD 4.24 vs. USD 2.86, respectively. The firm generated substantial free cash flow of USD 61.9 million, compared to USD 0.1 million in pcp, thanks to higher commodity prices and decreased expenditure.

• Healthy Guidance for FY 2022: The company recently announced that it has exceeded its FY2021 production forecast and provided solid output projection for FY 2022, which is a significant positive. Its gold equivalent output for FY 2022 is estimated to be between 380,000 and 440,000 ounces, with copper production from its New Afton Mine expected to be between 35 and 45 million pounds (Mlbs). Production is predicted to increase in the second half of the year, accounting for around 55 percent of total yearly output.

Source: Company Presentation

• Industry beating margins: The company maintained its pace and witnessed spirited performance across its margin matrix. In addition, the management’s solid determination helped them leap the industry median margins on many fronts in FY 2021, which exhibits the competitive advantage of the company within the industry. The chart below gives a glimpse of this. 

 Source: REFINITIV, Analysis by Kalkine Group 

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.

Financial overview of FY 2021

Source: Company Filing 

• For FY 2021, the company posted higher revenues at USD 745.5 million against USD 643.4 million in pcp. An increase in revenue relative to the prior-year period was due to higher gold and copper prices, partially offset by lower sales volume.
• The company reported elevated income from operations in FY 2021, at USD 137.3 million compared to USD 81.4 million in pcp, partially offset by higher operating expenses mainly due to the strengthening of the Canadian dollar relative to the U.S. dollar.
• On the back of lower finance cost and other gains in the reported period, the company transformed its losses into net income of USD 140.6 million compared to a loss of USD 79.3 million in pcp, partially offset by higher income tax expense.
  

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group 

Stock recommendation 

The Company handled the challenges it faced in the fourth quarter successfully, delivering the best production quarter of the year, allowing it to surpass its revised FY 2021 projection. It was also the company's most cost-effective quarter, resulting in the best free cash flow quarter of the year. Furthermore, with the sale of the Blackwater gold stream, it ended the year on a high note. Looking ahead to FY 2022, the company's strategy at both properties will continue focused on operational excellence and efficiency. It also provided solid production estimates for FY 2022, which is a big plus.

Above all, a rising number of experts are warning of the potential of stagflation, which occurs when high inflation meets decreasing GDP, an environment historically favorable to gold. Therefore, based on the above rationale and valuation done using the above methodology, we have given a “Buy” rating at the current market price of CAD 2.24 at 9:45 AM, Toronto time on March 7, 2022.

 One-Year Technical Price Chart (as on March 7, 2022). Source: REFINITIV, Analysis by Kalkine Group 

  Technical Analysis Summary

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