Early Project Milestones At Rainy River And Afton Will Strengthen Future Operations

Key Takeaways

• Delivered key milestones ahead of schedule and increased stake at New Afton, enhancing asset value and future revenue share.
  
• Exploration success and higher production rates forecasted to boost revenue, increase margins, and enhance earnings.
  
• Operational risks and project uncertainties at Rainy River and New Afton may impact future production, financial planning, and revenue projections, requiring cautious optimism.

Catalysts

An intermediate gold mining company, develops and operates of mineral properties in Canada.

• New Gold has successfully delivered key project milestones ahead of schedule at New Afton and Rainy River, with mine life extensions and increased net asset value anticipated to improve future revenue and earnings.
  
• Exploration efforts have successfully replaced mining depletion of reserves, with plans to continue this in 2025, potentially boosting future revenue through reserve expansion.
  
• New Gold increased its stake at New Afton, reducing the free cash flow interest of Ontario Teachers, positioning the company to capture a larger share of future earnings.
  
• Higher gold grades and increased production rates forecasted for 2025 and beyond at both Rainy River and New Afton are expected to significantly boost revenue.
  
• Projected reductions in all-in sustaining costs over the next three years, coupled with increased production, are set to enhance net margins and free cash flow, substantially increasing earnings.

New Gold Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming New Gold's revenue will grow by 23.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.3% today to 31.1% in 3 years time.
• Analysts expect earnings to reach $500.8 million (and earnings per share of $0.64) by about February 2028, up from $20.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $738.8 million in earnings, and the most bearish expecting $301 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.6x on those 2028 earnings, down from 111.2x today. This future PE is lower than the current PE for the US Metals and Mining industry at 12.2x.
• 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 7.36%, as per the Simply Wall St company report.

New Gold Future Earnings Per Share Growth

Risks

• Unexpected mechanical downtime at Rainy River in December affected gold production, highlighting operational risks that could impact future revenues and operational efficiency.
  
• Additional pit pushbacks at Rainy River depend on confirming tailings storage capacity and prevailing gold prices, which introduces uncertainty that could affect long-term planning and revenue estimates.
  
• C-Zone ramp-up and transition from B3 cave at New Afton involve execution risks, potentially impacting the ability to meet future production targets and impacting revenue streams.
  
• The expectation of carrying over some capital from 2024 into 2025 to cover expenditures introduces uncertainty in capital allocation, affecting financial planning and potentially increasing future capital costs.
  
• The substantial increase in both gold and copper production over the next three years relies on successful project completions and market conditions, highlighting a risk of over-optimism that could affect future earnings if not realized.

Valuation

• The analysts have a consensus price target of CA$5.124 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$5.98, and the most bearish reporting a price target of just CA$3.59.
  
• 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 $500.8 million, and it would be trading on a PE ratio of 8.6x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of CA$4.02, the analyst price target of CA$5.12 is 21.6% 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.