Blackwater looks far-off for New Gold

VANCOUVER, BC: It looks as though New Gold will have to wait for more robust gold prices if it is to get its Blackwater project into production.

VANCOUVER, BC: It looks as though New Gold will have to wait for more robust gold prices if it is to get its Blackwater project into production.

The company released a feasibility study on the big tonnage project in south-central B.C. and despite the study substantiating early work done on the project, its high price tag and low grade mean the company will likely have to wait for gold prices to rebound before it puts shovels in the ground.

Using a US$1,300 gold price and a US$22 per oz. silver price along with a 5% discount rate, the new feasibility study expects a future mine to generate a net present value (NPV) of $991 million, while the internal rate of return (IRR) is expected to be 11.3%.

BMO Capital Markets Brian Quast labelled the results "neutral", noting that changes from the preliminary economic assessment (PEA) released last year were minor.

One slight change to the downside was life-of-mine silver recoveries, which went down to 49% from the previous estimate of 53%. Offsetting those lower recoveries, however, was a cut to operating costs. The anticipated reduction is a consequence of designing a smaller pit that would bring the strip ratio down to 1.88:1 from the previous 2.36:1.

The project has proven and probable reserves of 344.4 million tonnes grading 0.74 grams gold and 5.5 grams silver for 8.17 million oz. of gold and 60.8 million oz. of silver.

But lower costs on the operating side didn't transfer over into capex, as that estimate went up by roughly $110 million and is now forecasted at $2.5 billion. The bulk of the added building costs is connect to the new plan to expand the tailings dam.

BMO's Quast expects a future mine to ring in average annual production of 472,000 gold equivalent oz. with cash costs of $603 per oz. His previous estimate was for annual production of 468,000 oz at cash costs of $630 per oz.

And while that updated forecast does boost Quast's projected post-tax NPV for Blackwater by $26 million, he wrote in his research note that the amount is enough to push the needle on valuation.

"While [the new forecast] is an 80% increase in the NPV for the project, it does not impact valuation for the company as a whole given Blackwater accounts for only 1% of the company’s total NPV," he wrote.

Blackwater's negligible impact on the company's bottom line at this point combined with a continued fall in metal prices since Quast's last valuation resulted in the analyst cutting his target price to $7.00 per share from the previous $8.50. He did, however, maintain an 'outperform' rating on the stock.

Another analyst that largely agreed with Quast's assessment was CIBC's Alec Kodatsky. In his research note Kodatksy was also bearish on the prospect of a mine at Blackwater being built any time soon.

"Given the scale of the capex, the pre-tax return profile and NGD's desire to fund development largely from operating cash flow, we think Blackwater only goes ahead at higher gold prices. This places increased priority on Rainy River, which is expected to have more modest capital requirements," CIBC analyst Alec Kodatsky wrote in his report.

New Gold completed its acquisition of Rainy River Resources and its Rainy River project in northwestern Ontario earlier this year. The project is set to get the bulk of New Gold's attention as it drives towards getting an updated feasibility study finished early next year.

(Reprinted from The Northern Miner)

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