New Gold Is in a Tough Spot Thanks to Copper Price Trends

Shares of New Gold [stock_market_widget type="inline" template="generic" color="default" assets="NGD.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] have witnessed a roller-coaster ride this year. The stock started the year on slippery ground, but started making impressive progress once gold prices started ticking up. Though there has been a slight decline in shares of New Gold, the stock is still sitting on gains of around 30% this year.

But given the volatility of New Gold stock, should investors continue holding it? Or will it be a good idea to book profits? Let’s find out.

The Valuation Is Attractive

New Gold stock currently trades at a price-to-earnings ratio of 21.6. This multiple is substantially lower than the company’s five-year average price-to-earnings ratio of 111. This means that New Gold is currently trading at a cheaper valuation than where it has been in the past.

However, investors should note that the company’s forward price-to-earnings ratio is higher than the trailing multiple as its earnings are expected to tumble this year. A compilation of Yahoo! Finance analyst estimates indicate that New Gold will deliver a bigger loss of $0.04 per share in 2019 as compared to the year-ago period’s loss of $0.02 per share.

But next year New Gold is expected to make a strong recovery going forward and deliver earnings of $0.04 per share. The company’s top-line growth is also expected to gain momentum. New Gold’s revenue is expected to increase 11% in the next fiscal year as compared to 7.9% in the current one, though the top-line acceleration and a turnaround in earnings next year will depend a lot on copper prices.

Two Things to Note

Trade war-related headwinds could push copper prices lower in the future and continue to create trouble for New Gold.

As the name suggests, New Gold is a gold miner. But at the same time, it has interests in copper as well. The company’s recent quarterly results were dented by a weak copper pricing scenario even though its gold segment performed well.

New Gold’s gold output was up in the second quarter to the tune of around 4%, and the company recorded an average realized price of $1,304 an ounce. Now that gold is trading at a much higher level and carries the potential to move higher, New Gold’s gold revenue should improve in the future.

However, the copper pricing scenario remains mixed. Trade war-related headwinds could push copper prices lower in the future and continue to create trouble for New Gold. Last quarter, New Gold’s average realized copper price was down around 14% year over year to $2.74 per pound, offsetting the slight increase in the company’s copper output.

The bad news is that copper spot prices have moved lower than before, and that’s probably the reason why analysts expect the company to post a bigger loss this year. But if gold keeps rising and offsets the negative impact of copper prices on New Gold’s finance, then it would be a good idea for investors to go long the stock given its current valuation.

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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