A reader asked what I thought about New Gold…
I’ll answer, but I have to say up front that I won’t be able to answer every question about every company I get. There are thousands of them, and only one of me.
That said, this question touches on a past pick of mine. I know that readers of my former work have been left without guidance on many of those. I’m addressing that need in the Independent Speculator, but I don’t mind sharing some quick case studies (as opposed to an in-depth review, analysis, and write-up) in this digest. All the more so if it can be instructive.
New Gold (NGD.TO, C$3.21, 578.7M shares, C$1.7B enterprise value)
Summary
New Gold is a mid-tier producer with four operating mines: New Afton and Rainy River in Canada, Mesquite in the US, and Cerro San Pedro, in Mexico. The latter is winding down, but the company also has the 8.2-million-ounce Blackwater gold project in British Columbia, which is in the permitting phase. New Gold is known for growing by mergers and acquisitions, rather than through its own exploration and discovery efforts.
Key Analytical points
• New Gold is losing money. It lost money in 2016. It lost more money in 2017. To be fair, the company reported adjusted net earnings for 2017. On the other hand, it reported both net and adjusted net losses for Q1 2018. The company is spending money on growth, so I’m not saying that’s all bad. But I’d rather bet on a company that’s making money and has growth.
• Growth is not assured. The Rainy River mine is still ramping up to full production, so there is near-term growth already on tap. However, Rainy River is already looking more expensive to mine than planned, and Cerro San Pedro is almost done. Absent another acquisition, the big growth story here may be Blackwater, but that seems stuck in permitting limbo. If this changes, it would make the company a lot more interesting.
Conclusion
NOTE: I had in the past recommended shares in Bayfield Ventures, which was bought by Rainy River Resources, which was bought by New Gold. As I recall, Bayfield doubled not long after I recommended it, so we were able to recover our initial investments and retain exposure to what came next, risk-free.
This history influences my current take: I’m not a buyer.
I’m trying not to be too negative here, because the company has value and strong cash flow. Last year’s loss was a “paper” loss. If management can start delivering to the bottom line regularly, the stock should do okay. This may be the year that happens. But I’d still rather speculate on a company that I’m more excited about.
Would I sell if I had bought Bayfield and now owned New Gold? Probably not.
I would have recovered my initial investment and would have a “can’t lose” position in New Gold now. The stock is down substantially since last September and could rebound sharply if the company starts delivering to the bottom line. Why not wait and see what happens?
What if that wasn’t my situation, and I had capital at risk in New Gold today? Well, I might look to re-deploy into something I was more certain would deliver.
Important Reminder: I am not making any recommendations in this service. I’m just saying what I would do. That may or may not be the best choice for others.
