New Gold Inc (TSX: NGD) is an intermediate gold mining having portfolio of two producing assets: Rainy River Mine and New Afton Mine in Canada. Further the company fetch revenue from the sale of Gold, Copper, and Silver.

Why Should Investors Book Profit?

• Increasing uncertainties: The resurgence of various new Covid variant cases has raised a lot of questions, and it might have an influence on the company's operations and cash flows as the government may tighten some mandatory lockdowns to combat the spread.
• Lower margin profile v/s Industry: In Q3 2022, the company failed on maintaining its pace and witnessed lower performance across operating margin and net margin, which exhibits the pressure on company.
• Smaller cash generation from operations: In the reported period the company’s cash from operations fell 41% to USD54.3 million against USD 92.2 million in the previous corresponding period. We believe the lower cash generation was mainly due to lower gold production and lower amount of gold sold, partially supported by elevated average realization prices.
• Long cash cycle days: The company’s Cash Cycle (Days) has increased compared to the previous sequential quarters, implying the company is taking more days to convert its inventory to cash. In Q3 2021, its Cash Cycle stood at 167.0 days against 119.8 days in Q2 2021. Also compared to industry median its very high, which is at 56.4 days only.
• Over leveraged against an industry: The company’s debt to equity ratio at the end of September 30, 2021, stood at 0.62x, which is too high against the industry median of 0.22x. Additionally, its net debt to EBITDA stood at 3.69x against the industry median of 1.40x. These factors imply higher balance sheet risks.
  

Valuation Methodology (Illustrative) EV to Sales Based

Analysis by Kalkine group

Stock recommendation

In the reported period the company posted considerable numbers despite lower gold production and less amount of gold sold, which was partially supported by higher average realization cost of the precious metal. However, it reported unrealized loss on the revaluation of investments, which dented its bottom line and posted a net loss of USD 11.3 million against a net income of USD 15.7 million in pcp. Furthermore, new Covid variant cases has raised a lot of questions, and it might have an influence on the company's operations and cash flows. Moreover, the operating margins are exhibiting the pressure on the company, as well as compared to the industry median its cash cycle days are on the longer side, indicating a weak liquidity profile. Therefore, based on the above rationales and valuation, we recommend a “Sell” rating on the stock at the current market price of CAD 1.87 at 9:40 am Toronto Time on January 07, 2022.

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

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

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