Afton And Rainy River's Extended Mine Life Will Boost Future Production

Key Takeaways

• Achieving key milestones and mine life extensions positions New Gold for increased production, reduced costs, and long-term revenue growth.
  
• Improved operational efficiency and strategic financial adjustments are set to enhance net earnings and increase shareholder value.
  
• Operational challenges and deferred projects could impact production and profitability, with future exploration and gold prices further influencing financial stability.

Catalysts

An intermediate gold mining company, engages in the development and operation of mineral properties in Canada.

• New Gold achieved commercial production at the C-Zone and commissioned crusher and conveyor systems at New Afton, which positions the company for increased production and reduced costs, likely boosting future revenue.
  
• Mine life extensions at both New Afton and Rainy River assets are expected to increase the underlying net asset value and provide a foundation for long-term revenue growth.
  
• The reduction in Ontario Teachers' free cash flow interest from 46% to 19.9% increases New Gold's exposure to New Afton’s revenues, likely enhancing net earnings.
  
• The company anticipates a 30% increase in gold production and a 90% increase in copper production over the next three years along with a significant reduction in all-in sustaining costs, which should improve operating margins and overall profitability.
  
• Operational efficiency, including cost reductions and efficient capital management, is expected to contribute to an estimated free cash flow generation of over $1.7 billion over three years, significantly impacting net earnings and shareholder value.

New Gold Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming New Gold's revenue will grow by 18.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.1% today to 30.9% in 3 years time.
• Analysts expect earnings to reach $480.0 million (and earnings per share of $0.61) by about March 2028, up from $102.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.0x on those 2028 earnings, down from 23.2x today. This future PE is lower than the current PE for the US Metals and Mining industry at 11.7x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.34%, as per the Simply Wall St company report.

New Gold Future Earnings Per Share Growth

Risks

• The mechanical downtime at Rainy River in December impacted gold production, highlighting potential operational risks that could affect future revenue streams.
  
• Unexpected operational costs, such as those associated with mechanical issues or required maintenance, can increase all-in sustaining costs, impacting net margins.
  
• Capital expenditures that were deferred into 2025 signal delayed capital projects, which could slow down the predicted increase in production and consequently affect earnings.
  
• The reliance on future exploration to replace mining depletion might not guarantee sustained resource levels or translate into increased production, impacting long-term revenue.
  
• Expansion and development efforts are partially dependent on gold price levels and tailings storage capacity; fluctuations in these areas could disrupt future production plans and financial stability.

Valuation

• The analysts have a consensus price target of CA$5.169 for New Gold based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$5.99, and the most bearish reporting a price target of just CA$3.64.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.6 billion, earnings will come to $480.0 million, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of CA$4.33, the analyst price target of CA$5.17 is 16.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.