New Gold Stock Craters After a Tepid 2019 Guidance

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New Gold’s (TSX: [stock_market_widget type=”inline” template=”generic” color=”default” assets=”NGD.TO” markup=”{symbol} {currency_symbol}{price} ({change_pct})” api=”yf”]) stock price was hammered big time despite a strong showing in the recently-reported fourth quarter as the stock market wasn’t pleased with its 2019 guidance. The intermediate gold producer tanked more than 26% in a single session after the earnings report came out, bringing an abrupt end to a three-month rally that had seen the stock pull up from its 52-week lows.

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Let’s take a closer look at New Gold’s quarterly performance and examine the reasons behind its massive drop.

New Gold Shows a Strong Q4 Performance

New Gold’s production is up nearly 68% from a year ago.

New Gold produced 97,428 ounces of gold from its continuing operations during the fourth quarter, up nearly 68% from the year-ago quarter’s output thanks to the ramp-up of operations at the Rainy River mine that began commercial production in October 2017. The company’s cash costs per ounce of gold stood at $540 an ounce as compared to $778 an ounce in the prior-year period.

All-in sustaining costs per ounce of gold went down from $945 in the prior-year period to $857 during the fourth quarter. Thanks to the higher production and lower costs, New Gold’s top line increased 27% annually while operating margin shot up to 81.5% as compared to 47.4% a year ago.

Read our guide to learn how New Gold’s gold production costs stack up again competitors.

The higher revenue and improved margins helped New Gold deliver adjusted net earnings of $22.7 million from its continuing operations, which is a massive improvement over the prior-year period’s loss of $10.6 million. On a per share basis, New Gold’s earnings arrived at $0.04 as compared to analysts’ expectations of break-even.

However, New Gold’s revenue fell slightly behind consensus estimates of around $165 million, and the lower-than-expected production guidance for 2019 further dented investor confidence.

Tepid 2019 Guidance Causes a Stock Route

New Gold expects to produce somewhere between 300,000 ounces and 335,000 ounces of gold in 2019. The mid-point of that guidance range is almost in line with the company’s 2018 production of 315,483 ounces. The company expects all-in sustaining costs of $1,370-$1,470 an ounce for the full year.

Profitability will take a hit this year thanks to an increase in costs.

However, analysts were expecting New Gold to deliver 336,000 ounces of production in 2019 at an all-in sustaining cost of $1,022 an ounce. The guidance suggests that New Gold will be missing those marks by a wide range, and its profitability will also take a hit this year thanks to an increase in costs. New Gold’s 2018 all-in sustaining costs from continuing operations stood at $1,051 an ounce. So, according to the mid-point of the company’s guidance, its all-in sustaining costs will rise by 35% in 2019.

The underperformance of the Rainy River mine is the biggest reason why the company’s cost profile will take a hit this year. The company estimates production of 245,000-270,000 ounces of gold at Rainy River in 2019 as compared to last year’s output of 227,284 ounces. But long-term focused investments at the mine to boost sustainable and profitable mining operations will inflate costs big time.

Rainy River expects all-in sustaining costs of $1,690-$1,790 an ounce this year, which is 16% higher than 2018’s all-in sustaining costs of $1,501 an ounce. As such, New Gold is unlikely to take advantage of the recent improvement in gold prices this year thanks to a flat production profile and spiking costs.

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The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan
Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.
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