Exhibit 99.2
OPERATING AND FINANCIAL
HIGHLIGHTS
OPERATING
HIGHLIGHTS
All dollar figures
are in United States dollars and tabular dollar amounts are in millions, unless otherwise noted.
New Gold Inc. (“New
Gold” or the “Company”) is an intermediate gold producer with operating mines in Canada, the United States, Australia
and Mexico, development projects in Canada and a stream on gold production from a development property in Chile. For the first
quarter of 2016, the New Afton Mine in Canada (“New Afton”), the Mesquite Mine in the United States (“Mesquite”),
the Peak Mines in Australia (“Peak Mines”) and the Cerro San Pedro Mine in Mexico (“Cerro San Pedro”) combined
to produce 90,811 gold ounces, 25.4 million pounds of copper and 0.4 million silver ounces, providing the Company with a solid
start to the year.
New Gold’s
production costs remained competitive compared to the broader gold mining space as New Gold had total cash costs(1)
of $354 per gold ounce sold and all-in sustaining costs(1) of $758 per gold ounce sold in the first quarter of 2016.
We believe New Gold continues to further establish itself as one of the lowest cost producers in the industry.
| 2 |  |
FINANCIAL
HIGHLIGHTS
New Gold maintains a strong liquidity position with total available liquidity of $551 million, comprised of $298 million in cash and cash equivalents and $178 million available for drawdown under the Company’s $300 million revolving credit facility, each as at March 31, 2016, and $75 million representing the second instalment of the deposit to be paid in connection with the Company’s stream agreement relating to the Rainy River project.
| |
 |
| 1. | The Company uses certain non-GAAP financial performance measures throughout this Management’s
Discussion & Analysis (“MD&A”). For a detailed description of each of the non-GAAP measures used in the MD&A
and a detailed reconciliation, please refer to the “Non-GAAP Financial Performance Measures” section of the MD&A. |
| 2. | Payment of the $75 million second instalment of the stream deposit is expected to be received in
mid-2016, subject to certain conditions. |
| 3. | Of the $300 million credit facility, $121.7 million is utilized for letters of credit as at March
31, 2016. |
| |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016 |
2015 |
| Operating information |
|
|
| Gold production (ounces) |
90,811 |
94,977 |
| Gold sales (ounces) |
86,031 |
92,398 |
| Average realized price ($/ounce)(1) |
1,206 |
1,229 |
| Total cash costs per gold ounce sold ($/ounce)(1) |
354 |
486 |
| All-in sustaining costs per gold ounce sold ($/ounce)(1) |
758 |
1,014 |
| Financial Information |
|
|
| Revenue |
154.5 |
168.9 |
| Net earnings (loss) |
26.8 |
(43.8) |
| Adjusted net loss(1) |
(0.3) |
(4.9) |
| Cash generated from operations |
61.5 |
69.8 |
| Cash generated from operations before changes in non-cash operating working capital(1) |
62.1 |
67.4 |
| Cash and cash equivalents |
298.3 |
365.8 |
| Capital expenditures (sustaining capital) (1) |
22.4 |
37.8 |
| Capital expenditures (growth capital) (1) |
85.0 |
31.4 |
| Share Data |
|
|
| Earnings (loss) per basic share ($) |
0.05 |
(0.09) |
| Adjusted net loss per basic share(1) ($) |
$nil |
(0.01) |
| 3 | |
Contents
| OPERATING HIGHLIGHTS |
2 |
| FINANCIAL HIGHLIGHTS |
3 |
| OUR BUSINESS |
5 |
| OPERATING, DEVELOPMENT AND FINANCIAL HIGHLIGHTS |
5 |
| CORPORATE DEVELOPMENTS |
10 |
| CORPORATE SOCIAL RESPONSIBILITY |
10 |
| OUTLOOK FOR 2016 |
12 |
| KEY PERFORMANCE DRIVERS |
12 |
| FINANCIAL RESULTS |
16 |
| REVIEW OF OPERATING MINES |
20 |
| DEVELOPMENT AND EXPLORATION REVIEW |
29 |
| FINANCIAL CONDITION REVIEW |
33 |
| NON-GAAP FINANCIAL PERFORMANCE MEASURES |
40 |
| ENTERPRISE
RISK MANAGEMENT AND RISK FACTORS |
50 |
| CRITICAL JUDGMENTS AND ESTIMATION UNCERTAINTIES |
52 |
| CONTROLS AND PROCEDURES |
53 |
| CAUTIONARY NOTES |
54 |
| 4 | |
MANAGEMENT’S
DISCUSSION AND ANALYSIS
For the three months ended March
31, 2016
The following Management’s Discussion
and Analysis (“MD&A”) provides information that management believes is relevant to an assessment and understanding
of the consolidated financial condition and results of operations of New Gold Inc. and its subsidiaries (“New Gold”
or the “Company”). This MD&A should be read in conjunction with New Gold’s unaudited condensed consolidated
financial statements for the three months ended March 31, 2016 and 2015 and New Gold’s audited consolidated financial statements
for the years ended December 31, 2015 and 2014 which were prepared in accordance with International Financial Reporting Standards
(“IFRS”) as issued by the International Accounting Standards Board (“IASB”). This MD&A contains forward-looking
statements that are subject to risks and uncertainties, as discussed in the cautionary note contained in this MD&A. The reader
is cautioned not to place undue reliance on forward-looking statements. All dollar figures are in United States dollars
and tabular dollar amounts are in millions, unless otherwise noted. This MD&A has been prepared as at April 27, 2016. Additional
information relating to the Company, including the Company’s Annual Information Form, is available on SEDAR at www.sedar.com.
OUR
BUSINESS
New Gold is an intermediate gold producer
with operating mines in Canada, the United States, Australia and Mexico and development projects in Canada. The Company’s
principal operating assets consist of the New Afton gold-copper Mine in Canada (“New Afton”), the Mesquite gold Mine
in the United States (“Mesquite”), the Peak Mines gold-copper Mine in Australia (“Peak Mines”) and the
Cerro San Pedro gold-silver Mine in Mexico (“Cerro San Pedro”). In addition, New Gold’s principal development
projects are its 100%-owned Rainy River (“the Rainy River project”) and Blackwater (“the Blackwater project”)
projects, both in Canada. In addition, the Company owns a 4% stream on gold production from the El Morro property located in Chile
(“El Morro gold stream”).
New Gold’s operating portfolio
is diverse both geographically and in the range of commodities it produces. The assets produce gold with copper and silver by-products
at total cash costs and all-in sustaining costs below the industry average. With a strong liquidity position, a simplified balance
sheet and an experienced management and Board of Directors, the Company has a solid platform to continue to execute its growth
strategy, both organically and through value-enhancing accretive acquisitions, to further establish itself as an industry-leading
intermediate gold producer.
| 5 | |
OPERATING,
DEVELOPMENT AND FINANCIAL HIGHLIGHTS
OPERATING
AND DEVELOPMENT HIGHLIGHTS
| |
Three months ended March 31 |
| |
2016 |
2015 |
| Operating information |
|
|
| Gold (ounces): |
|
|
| Produced (1) |
90,811 |
94,977 |
| Sold (1) |
86,031 |
92,398 |
| Copper (millions of pounds): |
|
|
| Produced (1) |
25.4 |
23.0 |
| Sold (1) |
25.3 |
22.1 |
| Silver (millions of ounces): |
|
|
| Produced (1) |
0.4 |
0.4 |
| Sold (1) |
0.4 |
0.3 |
| Average realized price (1) (2): |
|
|
| Gold ($/ounce) |
1,206 |
1,229 |
| Copper ($/pound) |
2.14 |
2.59 |
| Silver ($/ounce) |
14.72 |
16.65 |
| Total cash costs per gold ounce sold ($/ounce) (2)(3) |
354 |
486 |
| All-in sustaining costs per gold ounce sold ($/ounce) (2)(3) |
758 |
1,014 |
|
Total cash costs per gold ounce sold on
a co-product basis ($/ounce) (2)(3) |
641 |
729 |
|
All-in sustaining costs per gold ounce sold on
a co-product basis ($/ounce) (2)(3) |
898 |
1,069 |
| 1. | Production is shown on a total contained basis while sales are shown on a net payable basis, including
final product inventory and smelter payable adjustments,
where applicable. |
| 2. | The Company uses certain non-GAAP financial performance measures throughout this MD&A. Average
realized price, total cash costs and all-in sustaining costs per gold ounce sold and total cash costs and all-in sustaining costs
on a co-product basis are non-GAAP financial performance measures with no standard meaning under IFRS. For further information
and a detailed reconciliation, please refer to the “Non-GAAP Financial Performance Measures” section of this MD&A. |
| 3. | The calculation of total cash costs and all-in sustaining costs per gold ounce sold is net of by-product
silver and copper Revenue. Total cash costs and all-in sustaining costs on a co-product basis remove the impact of other metal
sales that are produced as a by-product of the Company’s gold production and apportions the cash costs to each metal produced
on a percentage of revenue basis. If silver and copper Revenue were treated as co-products, co-product total cash costs for the
three months ended March 31, 2016 would be $7.58 per silver ounce (2015 – $9.76) and $1.26 per pound of copper (2015 -$1.68)
and co-product all-in sustaining costs for the three months ended March 31, 2016 would be $10.72 per silver ounce (2015 - $14.37)
and $1.72 per pound of copper (2015 - $2.40). |
| 6 | |
Gold production
for the three months ended March 31, 2016 was 90,811 ounces, compared to 94,977 ounces in the prior-year period. Higher
production from New Afton, Mesquite and Peak Mines partially offset planned lower production from Cerro San Pedro, which is in
its final year of active mining.
Gold
sales were
86,031 ounces for the three months ended March 31, 2016, compared to 92,398 ounces in the prior-year period. Timing of sales
at the end of the period resulted in a difference between ounces sold and ounces produced.
Copper production for
the three months ended March 31, 2016 was 25.4 million pounds compared to 23.0 million pounds produced in the prior-year period.
Higher copper production from New Afton, reflecting increased mill throughput, was partially offset by lower copper production
at Peak Mines.
Copper
sales were 25.3 million pounds for the three months ended March 31, 2016 compared to 22.1 million pounds in the prior-year period.
Copper sales volumes were higher than the prior-year period as a result of higher production.
Silver
production for the three months ended March 31, 2016 was 0.4 million ounces, consistent with 0.4 million ounces in the prior-year
period.
Total
cash costs per gold ounce sold, net of by-product sales, were $354 per ounce for the three months ended March 31, 2016 compared
to $486 per ounce in the prior-year period. The decrease in cash
costs relative to the prior-year period was primarily driven by lower operating costs due to the depreciation of the Canadian and
Australian dollars relative to the U.S. dollar, increased copper sales volumes, and the Company’s ongoing cash flow optimization
initiatives, which was partially offset by lower by-product credits as a result of lower average realized metal prices.
All-in
sustaining costs per gold ounce sold were $758 per ounce for the three months ended March 31, 2016, compared to $1,014 ounce in
the prior-year period. The decrease in all-in sustaining costs relative to the prior-year period was driven by the decrease
in cash costs noted above and lower sustaining capital expenditures.
For a detailed review of the Company’s
operating mines, refer to the “Review of Operating Mines” sections of this MD&A.
For
the three months ended March 31, 2016, capital expenditures on the Rainy River project totalled $82.2 million, compared to
$19.0 million in the prior-year period. The increased
activity during the period resulted in the project team achieving many project advancements: notably, the erection and enclosure
of the grinding building; the completion of the assembly of the initial mine fleet; and major progress for site earthworks and
concrete placement. For a detailed project update please refer to the “Development and Exploration Review” section
of this MD&A.
The Company
has continued its exploration success. The Company’s exploration efforts during the first quarter of 2016 were centered
on New Afton and the Peak Mines. At New Afton, the primary objective of the Company’s 2016 program is to test the potential
to extend the C-zone mineralization laterally to the west and the first phase of this drilling is nearing completion. At the Peak
Mines, the Company is drill testing multiple targets. The program at the Chronos and Anjea zones, which were discovered in 2015,
is focused on resource delineation. At the same time, the Company is also completing reconnaissance drill testing of earlier stage
targets along the nine kilometre Peak Mines corridor. The Company expects to provide a more detailed update on its exploration
initiatives, including drill results, in mid-2016.
| 7 | |
FINANCIAL HIGHLIGHTS
| |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016 |
2015 |
| FINANCIAL INFORMATION |
|
|
| Revenue |
154.5 |
168.9 |
| Operating margin (1) |
72.6 |
69.3 |
| Earnings from mine operations |
15.0 |
14.2 |
| Net earnings (loss) |
26.8 |
(43.8) |
| Adjusted net loss(1) |
(0.3) |
(4.9) |
| Cash generated from operations |
61.5 |
69.8 |
| Cash generated from operations before changes in non-cash operating working capital (1) |
62.1 |
67.4 |
| Capital expenditures (sustaining capital) (1) |
22.4 |
37.8 |
| Capital expenditures (growth capital) (1) |
85.0 |
31.4 |
| Total assets |
3,735.6 |
3,907.7 |
| Cash and cash equivalents |
298.3 |
365.8 |
| Long-term debt |
788.0 |
876.9 |
| |
|
|
| Share Data |
|
|
| Earnings (loss) per share: |
|
|
| Basic ($) |
0.05 |
(0.09) |
| Diluted ($) |
0.05 |
(0.09) |
| Adjusted net loss per basic share ($) (1) |
$nil |
(0.01) |
| Share price as at March 31 (TSX – Canadian dollars) |
4.85 |
4.25 |
| Weighted average outstanding shares (basic) (millions) |
509.6 |
508.6 |
| | 1. | The Company uses certain non-GAAP financial performance measures throughout this MD&A. Operating
margin, adjusted net loss, adjusted net loss per basic share, capital expenditures (sustaining and growth) and cash generated from
operations before changes in non-cash operating working capital are non-GAAP financial performance measures with no standard meaning
under IFRS. For further information and a detailed reconciliation, please refer to the “Non-GAAP Financial Performance Measures”
section of this MD&A. |
Revenue
was $154.5 million for the three months ended March 31, 2016, compared to $168.9 million in the prior-year period. The $14.4 million,
or 9%, decrease in revenue was attributable to the combined impact of a $14.1 million decrease driven by lower metal prices and
a $0.3 million decrease in metal sales volumes. The average realized prices for the three months ended March 31, 2016 were
$1,206 per gold ounce, $2.14 per pound of copper and $14.72 per silver ounce, compared to $1,229 per gold ounce, $2.59 per pound
of copper and $16.65 per silver ounce in the prior-year period.
Earnings
from mine operations were $15.0 million for the three months ended March 31, 2016, compared to $14.2 million in the prior-year
period. Earnings from mine operations were consistent with the prior-year period despite lower realized metal prices as a result
of lower operating expenses. The Company’s total production expenses (operating expenses before production expenses capitalized
and change in inventory and work-in-progress as per Note 3 of the Company’s unaudited condensed consolidated financial statements
for the three months ended March 31, 2016 and 2015) have decreased from the prior-year period as a result of the depreciation of
the Canadian and Australian dollars relative to the U.S. dollar and the Company’s ongoing cash flow optimization initiatives.
| 8 | |
The Company’s
net earnings were $26.8 million or $0.05 per basic share for the three months ended March 31, 2016, compared to a net loss of $43.8
million or $0.09 per basic share in the prior-year period. Other gains and losses included a foreign exchange gain of $33.9
million for the three months ended March 31, 2016, compared to a foreign exchange loss of $36.0 million in the prior-year period.
The foreign exchange movements are primarily due to the loss on translation of the non-monetary assets and liabilities denominated
in currencies other than the U.S. dollar. Other gains and losses also included an unrealized loss on the revaluation of the gold
stream obligation derivative instrument of $15.1 million. The Company’s net earnings were also impacted by reduced finance
costs in the current period. For the three months ended March 31, 2016, finance costs were $4.6 million compared to $10.8 million
in the prior-year period as more interest was capitalized to the Rainy River project in the current period.
Adjusted net loss
for the three months ended March 31, 2016 was $0.3 million or $nil per basic share, compared to $4.9 million or $0.01 per basic
share in the prior-year period. Adjusted net loss was impacted by reduced corporate administration and reduced finance costs
as the Company has capitalized more interest to its qualifying development properties than in the prior-year period.
Cash generated
from operations for the three months ended March 31, 2016 was $61.5 million compared to $69.8 million in the prior-year period.
Cash generated from operations was negatively impacted by lower average realized metal prices and lower gold sales volumes.
Despite lower average realized metal prices, the Company’s operating margin increased compared to the prior-year period due
to the benefit of decreased operating expenses as a result of the Company’s ongoing cash flow optimization efforts. Additionally,
cash generated from operations in the prior-year period benefitted from an income tax refund of $7.4 million.
Cash
and cash equivalents were $298.3 million as at March 31, 2016 compared to $335.5 million as at December 31, 2015. For the three
months ended March 31, 2016, cash generated from operations of $61.5 million and $10.3 million due to the impact of foreign
exchange on cash and cash equivalents were offset by cash used by financing activities of $0.3 million and cash used in investing
activities of $108.7 million (which includes $22.4 million of sustaining capital expenditures and $85.0 million of growth capital
expenditures, primarily on the Rainy River project).
In the
current period, the Company had entered into gold price option contracts covering 270,000 ounces of New Gold’s remaining
2016 production (“gold price option contracts”). The Company entered into the gold price option contracts in
order to further increase cash flow certainty as the Company invests in the continued construction of the Rainy River project,
which is expected to begin production in mid-2017. For further information, please refer to the “Corporate Developments”
section of this MD&A.
| 9 | |
CORPORATE
DEVELOPMENTS
New Gold’s strategy is to continue strong
operational execution at its current assets while pursuing disciplined growth both through organic initiatives and value-enhancing
mergers and acquisitions. Since the middle of 2009, New Gold has focused on enhancing the value of its portfolio of assets, while
also continually looking for compelling external growth opportunities. The Company continues to evaluate assets in favourable jurisdictions
where the asset has the potential to provide New Gold shareholders with meaningful gold production, cash flow and exploration potential,
while ensuring that any potential acquisition is accretive on key per share metrics. The Company strives to maintain a strong financial
position while continually reviewing strategic alternatives with the view of maximizing long-term shareholder value. New Gold’s
objective is to pursue corporate development initiatives that will leave the Company and its shareholders in a fundamentally stronger
position.
On March 8, 2016 New Gold announced
that the Company had entered into gold price option contracts covering 270,000 ounces of New Gold’s remaining 2016 production.
New Gold purchased put options with a strike price of $1,200 per ounce covering 270,000 ounces of gold and simultaneously sold
call options with a strike price of $1,400 per ounce covering an equivalent 270,000 ounces. The gold price option contracts will
cover 30,000 ounces of gold per month for nine months beginning in April 2016. The net cost of entering into the gold price option
contracts was $2.1 million. In aggregate, the gold price option contracts provide the Company a guaranteed floor price of $1,200
per ounce while also providing exposure to further increases in the gold price up to $1,400 per ounce, for 270,000 ounces of New
Gold’s production. New Gold entered into the gold price option contracts to further increase cash flow certainty as the Company
invests in the continued construction of the Rainy River project, which is expected to begin production in mid-2017.
CORPORATE
SOCIAL RESPONSIBILITY
New Gold is committed to excellence
in corporate social responsibility. The Company considers its ability to make a lasting and positive contribution toward sustainable
development a key driver to achieving a productive and profitable business. New Gold aims to achieve this objective through the
protection of the health and well-being of its people and host communities as well as employing industry-leading practices in the
areas of environmental stewardship and community engagement and development.
| |
|
|
|
| |
|
Environmental and community HIGHlights for Q1 2016 |
| |
|
|
|
| |
|
· |
New Gold was the top-rated Canadian mining company and fifth overall by Corporate Knights in the 2016 Future 40 Responsible Corporate Leaders in Canada ranking. |
| |
|
· |
Cerro San Pedro continues to work with communities as we move toward closure by supporting an entrepreneurship program, including a local fair to encourage small business. This has been directly responsible for at least one new small business, four business expansions and employment for 17 people. |
| |
|
· |
Rainy River continues to work with local communities and First Nations and other Aboriginal partners during the project’s construction phase. |
As a participant and supporter of
the United Nations Global Compact, New Gold’s policies and practices are guided by its principles with regard to human rights,
labour, environmental stewardship and anti-corruption. As a member of the Mining Association of Canada (“MAC”), New
Gold’s operations adopt the MAC’s Towards Sustainable Mining protocols.
| 10 | |
New Gold’s corporate social responsibility
objectives include promoting and protecting the welfare of its employees through safety-first work practices, upholding fair employment
practices and encouraging a diverse workforce, where people are treated with respect and are supported to realize their full potential.
New Gold believes that its people are its most valued assets. The Company strives to create a culture of inclusiveness that begins
at the top and is reflected in its hiring, promotion and overall human resources practices. New Gold encourages tolerance and acceptance
in worker-to-worker relationships. In each of its host communities, the Company strives to be an employer of choice through the
provision of competitive wages and benefits, and through the implementation of policies of recognizing and rewarding employee performance
and promoting from within wherever possible.
The Company is committed to preserving
the long-term health and viability of the natural environments that host its operations. Wherever New Gold operates – in
all stages of mining activity, from early exploration and planning, to commercial mining operations through to eventual closure
– the Company is committed to excellence in environmental management. From the earliest site investigations, New Gold carries
out comprehensive environmental studies to establish baseline measurements for flora, fauna, earth, air and water. During operations,
the Company promotes the efficient use of raw materials and resources and works to minimize environmental impacts and maintain
robust monitoring programs. After mining activities are complete, New Gold’s objective is to restore the land to a sustainable
end land use or to an alternative land use determined through consultation with local stakeholders.
New Gold is committed to establishing
relationships based on mutual benefit and active participation with its host communities to contribute to healthy and sustainable
communities. Wherever the Company’s operations interact with Indigenous peoples, New Gold promotes understanding of, and
respect for traditional values, customs and culture and takes meaningful action to consider their interests through collaborative
agreements aimed at creating jobs, training and lasting socio-economic benefits. New Gold aims to foster open communication with
local residents and community leaders and strives to partner in the long-term sustainability of those communities. The Company
believes that by thoroughly understanding the people, their histories, and their needs and aspirations, we can engage in a meaningful
and sustainable development process.
| 11 | |
OUTLOOK
FOR 2016
New Gold is pleased to reiterate its
guidance for 2016 as follows:
| |
| |
Gold
Production |
Copper
Production |
Silver
Production(3) |
Total
Cash Costs(1) (2) |
All-in
Sustaining Costs(1) (2) |
| |
(thousands of ounces) |
(millions of pounds) |
(millions of ounces) |
(per gold ounce sold) |
(per gold ounce sold) |
| New Afton |
90 - 100 |
75 - 85 |
- |
($335) - ($295) |
$95 - $135 |
| Mesquite |
130 - 140 |
- |
- |
$590 - $630 |
$1,015 - $1,055 |
| Peak Mines |
80 - 90 |
6 - 8 |
- |
$800 - $840 |
$1,020 - $1,060 |
| Cerro San Pedro |
60 - 70 |
- |
1.3 - 1.5 |
$755 - $795 |
$765 - $805 |
| Total |
360 - 400 |
81 - 93 |
1.6 - 1.8 |
$435 - $475 |
$825 - $865 |
| 1. | Net of by-product silver and copper Revenue. |
| 2. | For details on the key assumptions, which apply to all 2016 and 2017 production and cost guidance
figures contained in this MD&A, refer to “Total Cash Costs and All-in Sustaining Costs per Gold Ounce Sold” below. |
| 3. | New Afton and the Peak Mines are expected to contribute a total of approximately 0.3 million ounces
of silver production in 2016. |
Assumptions used in 2016 guidance include
by-product pricing assumptions of $2.00 per pound of copper and $14.00 per ounce of silver. Assumptions used for the Canadian dollar,
Australian dollar and Mexican peso are exchange rates of $1.40, $1.40 and MXN18.00 to the U.S. dollar, respectively.
KEY
PERFORMANCE DRIVERS
There is a range of key performance
drivers that are critical to the successful implementation of New Gold’s strategy and the achievement of its goals. The key
internal drivers are production volumes and costs. The key external drivers are market prices of gold, copper and silver, as well
as foreign exchange rates.
Production Volumes
and Costs
New Gold’s portfolio of operating
mines produced 90,811 gold ounces for the three months ended March 31, 2016, compared to 94,977 gold ounces in the prior-year period.
For the three months ended March 31, 2016, total cash costs and all-in sustaining costs, net of by-product sales, were $354 and
$758 per gold ounce sold, respectively. For the three months ended March 31, 2015, total cash costs and all-in sustaining costs,
net of by-product sales, were $486 and $1,014 per gold ounce sold, respectively.
| 12 | |
Commodity Prices
Gold prices
The price of gold is the largest single
factor affecting New Gold’s profitability and operating cash flows. As such, the current and future financial performance
of the Company is expected to be closely related to the prevailing price of gold. In the current period, the Company entered into
gold price option contracts to match its 2016 production in order to further increase cash flow certainty and reduce exposure to
fluctuations in gold price. The Company purchased put options with a strike price of $1,200 per ounce covering 270,000 ounces of
gold and simultaneously sold call options with a strike price of $1,400 per ounce covering an equivalent 270,000 ounces. Please
refer to the “Corporate Developments” section of this MD&A for further details.
For the three months ended March 31,
2016, New Gold’s average realized gold price was $1,206 per ounce compared to the London Bullion Market Association (“LBMA”)
p.m. average gold price of $1,181 per ounce. New Gold achieved a higher realized gold price compared to the LBMA p.m. average primarily
as a result of provisionally priced sales settling in the quarter at a higher price than recorded in previous months and the mark-to-market
of unsettled ounces at the end of the period.
As a low cost producer, we believe
New Gold is in a strong position to operate both in a low gold price environment and to take advantage of higher gold prices through
the Company’s existing operations and growth projects.
Copper prices
For the three months ended March 31,
2016, New Gold’s average realized copper price was $2.14 per pound, which was consistent with the average London Metals Exchange
copper price of $2.12 per pound.
Silver prices
For the three months ended March 31,
2016, New Gold’s average realized silver price was $14.72 per ounce compared to the LBMA p.m. average silver price of $14.83
per ounce. The average realized silver price was lower than the market price due to the timing of sales.
| 13 | |
Foreign Exchange Rates
The Company operates in Canada, the
United States, Australia and Mexico, while Revenue are predominantly generated in U.S. dollars. As a result, the Company has foreign
currency exposure with respect to costs not denominated in U.S. dollars. New Gold’s operating results and cash flows are
influenced by changes in various exchange rates against the U.S. dollar. The Company has exposure to the Canadian dollar through
New Afton, the Rainy River project and the Blackwater project, as well as through corporate administration costs. The Company also
has exposure to the Australian dollar through Peak Mines, and to the Mexican peso through Cerro San Pedro.
The spot Canadian dollar strengthened
against the spot U.S. dollar by approximately 6% from December 31, 2015 to March 31, 2016. The average Canadian dollar weakened
against the average U.S. dollar by approximately 11% during the first quarter of 2016 when compared to the first quarter of 2015.
A weaker Canadian dollar decreases costs in U.S. dollar terms at the Company’s Canadian operations, as well as capital costs
at the Company’s Canadian development properties as a significant portion of the capital costs are denominated in Canadian
dollars.
The spot Australian dollar strengthened
against the spot U.S. dollar by approximately 5% from December 31, 2015 to March 31, 2016. The average Australian dollar weakened
against the average U.S. dollar by approximately 9% during the first quarter of 2016 when compared to the first quarter of 2015.
The strengthening or weakening of the Australian dollar impacts costs in U.S. dollar terms at the Company’s Australian operation,
Peak Mines.
The spot Mexican peso against the spot
U.S. dollar as at March 31, 2016 remained consistent with December 31, 2015. The average Mexican peso weakened against the U.S.
dollar by approximately 21% during the first quarter of 2016 when compared to the first quarter of 2015. A significant portion
of costs at Cerro San Pedro are incurred in U.S. dollars and, as such, the movement in the Mexican peso exchange rate is not a
significant driver of U.S. dollar-denominated costs.
For an analysis of the impact of foreign
exchange fluctuations on operating costs for the three months ended March 31, 2016 relative to prior-year periods, refer to the
“Review of Operating Mines” sections for New Afton, Peak Mines and Cerro San Pedro.
| 14 | |
Economic Outlook
The LBMA p.m. spot gold price increased
by approximately 17% during the first quarter of 2016. Gold has benefitted from lowered market expectations for the trajectory
of increases in US interest rates. Economic data has been varied and global markets remain volatile, with the result that the pace
of interest rate rises is now anticipated to be more gradual than previously assumed, and gold has reacted strongly during 2016
to date. As a low cost producer with a pipeline of development projects, New Gold believes it is particularly well positioned both
to operate in a lower gold price environment and to take advantage of higher prices in the gold market.
Economic events can have significant effects
on the price of gold, through currency rate fluctuations, the relative strength of the U.S. dollar, supply of and demand for gold,
and macroeconomic factors such as interest rates and inflation expectations. Management anticipates that the long-term economic
environment should provide support for precious metals and for gold in particular, and believes the prospects for the business
are favourable. New Gold’s growth plan is focused on organic and acquisition-led growth, and the Company plans to remain
flexible in the current environment to be able to respond to opportunities as they arise.
| 15 | |
FINANCIAL
RESULTS
Summary of Quarterly
Financial Results
Revenue
Revenue for the three months ended
March 31, 2016 was $154.5 million compared to $168.9 million in the prior-year period.
The $14.4 million, or 9%, decrease in revenue for the three months ended March 31, 2016 was attributable to the combined impact
of a $14.1 million decrease driven by lower metal prices and a $0.3 million decrease in metal sales volumes. A detailed
discussion of production is included in the “Review of Operating Mines” section of this MD&A.
Operating expenses
Operating expenses were $81.9 million
for the three months ended March 31, 2016 compared to $99.6 million in the prior-year period. The Company’s
total production costs (operating expenses before production expenses capitalized and change in inventory and work-in-progress
as per Note 3 of the Company’s unaudited condensed consolidated
financial statements for the three months ended March 31, 2016 and 2015) have decreased to $100.8 million from $118.6 million
in the prior-year period. The reduction in New Gold’s consolidated production costs reflects the combined benefit of the
depreciation of the Canadian and Australian dollars relative to the U.S. dollar and the benefit of the Company’s
cash flow optimization efforts.
Depreciation
and depletion
Depreciation and depletion was $57.6
for the three months ended March 31, 2016, consistent with $55.1 million in the prior-year period. Higher depreciation and depletion
at New Afton, Mesquite and Peak Mines was partially offset by lower depreciation and depletion at Cerro San Pedro.
Earnings from
mine operations
Earnings from mine operations for the
three months ended March 31, 2016 were $15.0 million, consistent with $14.2 million in the prior-year period. Lower operating expenses
were offset by lower realized metal prices and gold sales volumes.
Corporate administration
and share-based payment expenses
Corporate administration costs were
$5.7 million for the three months ended March 31, 2016, compared to $6.0 million in the prior-year period. These costs were positively
impacted by the Company’s cash flow optimization efforts and the weaker Canadian dollar as the Company’s corporate
office is located in Canada.
Share-based compensation costs were
$3.0 million for the three months ended March 31, 2016, compared to $2.1 million recognized in the prior-year period. The increase
was primarily driven by the appreciation of the Company’s share price in the current year, which resulted in higher share-based
compensation costs for the Company’s cash-settled share-based payment arrangements.
Exploration and
business development
Exploration and business development
expense was $2.5 million for the three months ended March 31, 2016, compared to $1.1 million in the prior-year period. Expensed
exploration in the current period was primarily incurred at Peak Mines. The prior-year period included expensed exploration costs
primarily incurred at Peak Mines and the Blackwater project. Exploration costs at the Rainy River project were capitalized to mineral
interest in both current and prior-year periods.
Capitalized exploration costs were
$1.8 million for the three months ended March 31, 2016 compared to $2.8 million in the prior-year period. Capitalized exploration
in the current period was primarily incurred at the Peak Mines, the New Afton C-zone and the Rainy River project. The prior-year
period included capitalized exploration primarily incurred at the Peak Mines and the Rainy River project. The decrease in capitalized
exploration costs was due to reduced exploration activity at the Rainy River project as compared to the prior-year period.
| 16 | |
Please refer to the “Development
and Exploration review” section of this MD&A for further details on the Company’s exploration and business development
activities.
Other gains and
losses
The following other gains and losses
are added back for the purposes of adjusted net earnings:
Share purchase warrants
For the three months ended March 31,
2016, the Company recorded a loss of $0.4 million compared to a gain of $4.5 million in the prior-year period relating to share
purchase warrants. The Company’s functional currency is the U.S. dollar, however, the share purchase warrants are denominated
in Canadian dollars and are therefore treated as a derivative liability. As the traded value of the New Gold share purchase warrants
increases or decreases, a related loss or gain on the mark-to-market of the liability is reflected in earnings.
Gold stream obligation
For the three months ended March 31,
2016, the Company had an unrealized loss on the revaluation of the gold stream obligation derivative instrument of $15.1 million
included within other gains and losses and an unrealized loss of $6.8 million included within other comprehensive income related
to the change in the risk adjusted discount rate used to value this obligation and the increase in gold prices.
Gold price option contracts
During the first quarter of 2016, the
Company entered into gold price option contracts whereby it sold a series of call option contracts and purchased a series of put
option contracts. Derivative instruments are fair valued at the end of each reporting period. The Company has not applied hedge
accounting to these derivative transactions. For the three months ended March 31, 2016, the Company recognized a gain on the revaluation
of this derivative instrument of $3.3 million within other gains and losses.
Foreign exchange
For the three months ended March 31,
2016, the Company recognized a foreign exchange gain of $33.9 million compared to a foreign exchange loss of $36.0 million in the
prior-year period. Movements in foreign exchange are due to the revaluation of the non-monetary assets and liabilities at the balance
sheet date and the appreciation of both the Canadian and Australian dollars compared to the U.S. dollar in the current period.
Income tax
Income tax recovery for the three months
ended March 31, 2016 was $5.7 million compared to an income tax expense of $6.8 million in the prior-year period, reflecting an
effective tax rate of 27% for the first quarter of 2016 compared to 18% in the prior-year period. The primary reason for the change
in the unadjusted effective tax rate is the impact of foreign exchange movements on the deferred tax related to non-monetary assets
and liabilities. For the three months ended March 31, 2016, the Company recorded a foreign exchange gain of $33.9 million on non-monetary
assets and liabilities as compared to a foreign exchange loss of $36.0 million in the prior-year period with no associated tax
impact. The effect on the tax rate is higher in the first quarter of 2016, primarily as a result of the weakening of the spot U.S
dollar from December 31, 2015 to March 31, 2016.
On an adjusted net (loss) earnings
basis, the adjusted tax recovery for the three months ended March 31, 2016 was $0.5 million, compared to an adjusted tax expense
of $0.7 million in the prior-year period. The adjusted tax recovery excludes the impact of foreign exchange, the loss on revaluation
of the gold stream obligation and the gain on revaluation of the gold price option contracts.
| 17 | |
Net earnings
(loss)
For the three months ended March 31,
2016, the Company had net earnings of $26.8 million, or $0.05 per basic share. This compares with a net loss of $43.8 million,
or $0.09 per basic share in the prior-year period.
Adjusted net loss
For the three months ended March 31, 2016,
adjusted net loss was $0.3 million or $nil per basic share, compared to $4.9 million or $0.01 per basic share in the prior-year
period.
The net earnings have been adjusted,
including the associated tax impact, for costs in “Other gains (losses)” on the unaudited condensed consolidated income
statement. Key entries in this grouping are: the fair value changes for the gold stream obligation; share purchase warrants and
the gold option contracts; foreign exchange gain or loss; and loss on disposal of assets. Other adjustments to net earnings also
include inventory write-downs. The adjusted entries are also impacted for tax to the extent that the underlying entries are impacted
for tax in the unadjusted net earnings.
| 18 | |
Key Quarterly Operating
and Financial Information
Selected financial and operating information
for the current and previous quarters is as follows:
| |
(in millions of U.S. dollars,
except where noted) |
Q1
2016 |
Q4
2015 |
Q3
2015 |
Q2
2015 |
Q1
2015 |
Q4
2014 |
Q3
2014 |
Q2
2014 |
Q1
2014 |
| Operating information |
|
|
|
|
|
|
|
|
|
| Gold production (ounces) |
90,811 |
131,719 |
122,580 |
86,442 |
94,977 |
105,992 |
93,367 |
89,460 |
91,317 |
| Gold sales (ounces) |
86,031 |
133,005 |
115,695 |
87,754 |
92,398 |
104,224 |
88,168 |
84,736 |
94,052 |
| |
|
|
|
|
|
|
|
|
|
| Revenue |
154.5 |
199.0 |
177.3 |
167.7 |
168.9 |
188.1 |
169.3 |
178.1 |
190.5 |
| |
|
|
|
|
|
|
|
|
|
| Net earnings (loss) per share: |
26.8 |
(157.8) |
(157.8) |
9.4 |
(43.8) |
(431.9) |
(59.6) |
16.2 |
(1.8) |
| Basic ($) |
0.05 |
(0.02) |
(0.31) |
0.02 |
(0.09) |
(0.86) |
(0.12) |
0.03 |
0.00 |
| Diluted ($) |
0.05 |
(0.02) |
(0.31) |
0.02 |
(0.09) |
(0.86) |
(0.12) |
0.03 |
0.00 |
| |
|
|
|
|
|
|
|
|
|
| Adjusted net (loss) earnings per share: |
(0.4) |
2.6 |
(8.5) |
(1.3) |
(4.9) |
13.4 |
5.4 |
8.2 |
18.2 |
| Basic ($) |
$nil |
0.01 |
(0.02) |
(0.00) |
(0.01) |
0.03 |
0.01 |
0.02 |
0.04 |
| Diluted ($) |
$nil |
0.01 |
(0.02) |
(0.00) |
(0.01) |
0.03 |
0.01 |
0.02 |
0.04 |
A detailed discussion of production
is included in the “Operating Highlights” section of this MD&A.
| 19 | |
REVIEW
OF OPERATING MINES
|
New Afton Mine, British
Columbia, Canada
The New Afton gold-copper Mine is located
near Kamloops, British Columbia, Canada. The mine is a large underground gold-copper deposit. New Afton’s property package
consists of the nine square kilometre Afton mining lease which centers on the New Afton Mine as well as 118 square kilometres of
exploration licenses covering multiple mineral prospects within the historic Iron Mask mining district. At December 31, 2015, the
mine had 1.2 million ounces of Proven and Probable gold Mineral Reserves and 1.1 billion pounds of Proven and Probable copper Mineral
Reserves, with 1.2 million ounces of Measured and Indicated gold Mineral Resources, exclusive of Mineral Reserves, and 971 million
pounds of Measured and Indicated copper Mineral Resources, exclusive of Mineral Reserves. A summary of New Afton’s operating
results is provided below. |
|
|
AT-A-GLANCE
2016
GUIDANCE:
Gold:
90,000 - 100,000 ounces
copper:
75 - 85 million pounds
Total
cash costs/oz: ($335) - ($295)
ALL-IN
SUSTAINING COSTS/OZ: $95 - $135
Q1
2015 Production:
Gold:
25,068 Ounces
copper:
22.4 million pounds
Total
cash costs/oz: ($641)
ALL-IN
SUSTAINING COSTS/OZ: ($268) |
| |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016 |
2015 |
| Operating information |
|
|
| Ore mined (thousands of tonnes) |
1,554 |
1,209 |
| Ore processed (thousands of tonnes) |
1,388 |
1,216 |
| Average grade: |
|
|
| Gold (grams/tonne) |
0.69 |
0.76 |
| Copper (%) |
0.87 |
0.90 |
| Recovery rate (%): |
|
|
| Gold |
81.8 |
80.1 |
| Copper |
84.6 |
81.7 |
| Gold (ounces): |
|
|
| Produced (1) |
25,068 |
23,912 |
| Sold (1) |
25,131 |
22,880 |
| Copper (millions of pounds): |
|
|
| Produced (1) |
22.4 |
19.6 |
| Sold (1) |
22.0 |
19.0 |
| Silver (millions of ounces): |
|
|
| Produced (1) |
0.1 |
0.1 |
| Sold (1) |
0.1 |
0.1 |
| Average realized price (1)(2): |
|
|
| Gold ($/ounce) |
1,196 |
1,257 |
| Copper ($/pound) |
2.13 |
2.58 |
| Silver ($/ounce) |
14.78 |
15.96 |
| Total cash costs per gold ounce sold ($/ounce) (2)(3) |
(641) |
(834) |
| All-in sustaining costs per gold ounce sold ($/ounce) (2)(3) |
(268) |
(359) |
| Total cash costs on a co-product basis (2)(3) |
|
|
| Gold ($/ounce) |
487 |
494 |
| Copper ($/pound) |
0.87 |
1.01 |
| All-in sustaining costs on a co-product basis (2)(3) |
|
|
| Gold ($/ounce) |
631 |
667 |
| Copper ($/pound) |
1.12 |
1.37 |
| 20 | |
| |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016 |
2015 |
| Financial Information: |
|
|
| Revenue |
70.6 |
72.6 |
| Operating margin(2) |
46.2 |
47.9 |
| Earnings from mine operations |
11.3 |
14.6 |
| Capital expenditures (sustaining capital) (2) |
8.9 |
10.6 |
| Capital expenditures (growth capital) (2) |
1.0 |
9.0 |
| 1. | Production is shown on a total contained basis while sales are shown on a net payable basis, including
final product inventory and smelter payable adjustments, where applicable. |
| 2. | We use certain non-GAAP financial performance measures throughout our MD&A. Total cash costs
and all-in sustaining costs per gold ounce sold, total cash costs and all-in sustaining costs on a co-product basis, average realized
price, operating margin, and capital expenditures (sustaining capital and growth capital) are non-GAAP financial performance measures
with no standard meaning under IFRS. For further information and a detailed reconciliation, please refer to the “Non-GAAP
Financial Performance Measures” section of this MD&A. |
| 3. | The calculation of total cash costs per gold ounce is net of by-product revenue while total cash
costs and all-in sustaining costs on a co-product basis removes the impact of other metal sales that are produced as a by-product
of our gold production and apportions the cash costs to each metal produced on a percentage of revenue basis. |
Quarterly operating
results
Production
For the three months ended March 31,
2016, New Afton produced 25,068 gold ounces compared to 23,912 gold ounces in the prior-year period and produced 22.4 million pounds
of copper compared to 19.6 million pounds of copper in the prior-year period. The increase in gold production was primarily due
to the combined benefit of a 14% increase in mill throughput and a 2% increase in gold recovery more than offsetting a planned
decrease in gold grade. As a result of the successful completion of the mill expansion in mid-2015, New Afton’s average mill
throughput during the first quarter of 2016 was 15,250 tonnes per day.
The increase in copper production was
primarily due to the combined benefit of higher mill throughput and a 3% increase in copper recovery. Copper grade remained in
line with the prior-year period.
Revenue
For the three months ended March 31,
2016, revenue was $70.6 million compared to $72.6 million in the prior-year period. The
$2.0 million, or 3%, decrease in revenue was attributed to the impact of an $11.6 million decrease driven by lower metal prices,
partially offset by a $9.6 million increase as a result of higher metal sales volumes. The average realized gold price for
the three months ended March 31, 2016 was $1,196 per gold ounce compared to $1,257 per gold ounce in the prior-year period. The
average realized copper price for the three months ended March 31, 2016 was $2.13 per pound of copper compared to $2.58 per pound
of copper in the prior-year period.
At the end of the period, New Afton’s
exposure to the impact of movements in market metal prices for provisionally priced contracts was 19,100 ounces of gold and 34.3
million pounds of copper. Exposure to these movements in market metal prices is reduced by 18,400 ounces of gold swaps and 32.4
million pounds of copper swaps outstanding as at March 31, 2016, with settlement periods ranging from May 2016 to June 2016.
Earnings from mine operations
For the three months ended March 31,
2016, New Afton generated $11.3 million in earnings from mine operations compared to $14.6 million in the prior-year period. These
differences were primarily driven by the impact of production and revenue described above, partially offset by the benefit of the
weaker Canadian dollar on operating costs and the Company’s
ongoing cash flow optimization initiatives.
| 21 | |
Total cash costs and
all-in sustaining costs
For the three months ended March 31,
2016, total cash costs per gold ounce sold, net of by-product sales, were ($641) per ounce compared to ($834) per ounce in the
prior-year period. The increase in costs was primarily attributable a $2 million, or $281 per ounce, decrease in by-product revenue
relative to the prior-year period as the benefit of higher copper sales volumes was more than offset by the decrease in the realized
price. All-in sustaining costs per gold ounce sold were ($268) per ounce compared to ($359) per ounce in the prior-year period
with the increase primarily attributable to the increase in total cash costs, which was partially offset by a decrease in sustaining
capital expenditures compared to the prior-year period.
Capital expenditures
For the three months ended March 31,
2016, capital expenditures totalled $9.9 million, of which $8.9 million related to sustaining capital and $1.0 million related
growth capital. This compares to $19.6 million in the prior-year period, of which $10.6 million related to sustaining capital and
$9.0 million related to growth capital. In both the current period and the prior-year period, sustaining capital expenditures primarily
related to mine development costs and the dam raise projects. The decrease in growth capital expenditures was as a result of the
completion of the mill expansion in the second quarter of 2015.
Impact of foreign exchange
on operations
New Afton’s operations continue
to be impacted by fluctuations in the valuation of the U.S. dollar against the Canadian dollar. The value of the U.S. dollar for
the three months ended March 31, 2016 averaged $1.37 against the Canadian dollar compared to $1.24 in the prior-year period, resulting
in a positive impact on cash costs of $131 per gold ounce sold.
Exploration
activities
During
the first quarter of 2016 an underground drilling program commenced at New Afton to test the potential to expand the C-zone block
cave mineral reserve to the west beyond its currently defined limits with the goal of expanding the mineral reserve to improve
the economics of the C-zone expansion. The Company expects to provide a more detailed update on its exploration initiatives, including
drill results, in mid-2016.
| 22 | |
|
Mesquite Mine, California,
USA
The Company’s Mesquite Mine
is located in Imperial County, California, approximately 70 kilometres northwest of Yuma, Arizona and 230 kilometres east of San
Diego, California. It is an open pit, run-of-mine heap leach operation. The mine was operated between 1985 and 2001 by Goldfields
Mining Corporation, subsequently Santa Fe Minerals Corporation, and finally Newmont Mining Corporation with Western Goldfields
Inc. acquiring the mine in 2003. The mine resumed production in 2008. New Gold acquired Mesquite as part of the business combination
with Western Goldfields in mid-2009. At December 31, 2015, the mine had 1.5 million ounces of Proven and Probable gold Mineral
Reserves and 831,000 ounces of Measured and Indicated gold Mineral Resources, exclusive of Mineral Reserves. A summary of Mesquite’s
operating results is provided below. |
|
|
AT-A-GLANCE
2016
GUIDANCE:
Gold:
130,000 - 140,000 ounces
Total
cash costs/oz: $590 - $630
ALL-IN
SUSTAINING COSTS/OZ: $1,015 - $1,055
Q1
2016 Production:
Gold:
27,371 ounces
Total
cash costs/oz: $626
ALL-IN
SUSTAINING COSTS/OZ: $1,101 |
| |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016 |
2015 |
| Operating information |
|
|
| Ore mined and placed on leach pad (thousands of tonnes) |
5,233 |
1,498 |
| Waste mined (thousands of tonnes) |
10,363 |
13,779 |
| Ratio of waste to ore |
1.98 |
9.20 |
| Average grade: |
|
|
| Gold (grams/tonne) |
0.37 |
0.32 |
| Gold (ounces): |
|
|
| Produced (1)(2) |
27,371 |
25,687 |
| Sold (1) |
24,929 |
27,834 |
| Average realized price (3): |
|
|
| Gold ($/ounce) |
1,202 |
1,216 |
| Total cash costs per gold ounce sold ($/ounce) (3) |
626 |
889 |
| All-in sustaining costs per gold ounce sold ($/ounce) (3) |
1,101 |
1,708 |
| |
|
|
| FINANCIAL INFORMATION |
|
|
| Revenue |
30.0 |
33.8 |
| Operating margin(3) |
14.7 |
9.4 |
| Earnings from mine operations |
5.8 |
1.3 |
| Capital expenditures (sustaining capital)(3) |
11.5 |
22.5 |
| 1. | Production is shown on a total contained basis while sales are shown on a net payable basis, including
final product inventory, where applicable. |
| 2. | Tonnes of ore processed each period does not necessarily correspond to ounces produced during the
period, as there is a time delay between placing tonnes on the leach pad and pouring gold ounces. |
| 3. | We use certain non-GAAP financial performance measures throughout our MD&A. Total cash costs
and all-in sustaining costs per gold ounce sold, average realized price, operating margin and capital expenditures (sustaining
capital) are non-GAAP financial performance measures with no standard meaning under IFRS. For further information and a detailed
reconciliation, please refer to the “Non-GAAP Financial Performance Measures” section of this MD&A. |
Quarterly operating
results
Production
For the three months ended March 31,
2016, gold production at Mesquite was 27,371 ounces compared to 25,687 ounces in the prior-year period. The increase in production
relative to the prior-year period was primarily attributable to a 250% increase in ore tonnes placed on the leach pad as the focus
in the first quarter of 2015 was on waste stripping. The significant increase in ore tonnes mined and placed in the first quarter
is expected to benefit Mesquite’s gold production in future quarters.
| 23 | |
Revenue
For the three months ended March 31,
2016, revenue was $30.0 million compared to $33.8 million in the prior year. The $3.8 million, or 11%, decrease in revenue for
the three months ended March 31, 2016 was attributed to the combined impact of a $0.3 million decrease driven by lower metal prices
and a $3.5 million decrease in metal sales volumes. The average realized gold price for the three months ended March 31, 2016 was
$1,202 per ounce compared to $1,216 per ounce in the prior-year period.
Earnings from mine operations
For the three months ended March 31,
2016, Mesquite generated $5.8 million in earnings from mine operations compared to $1.3 million in the prior-year period. The increase
in earnings from mine operations is attributable to lower operating expenses as a result of lower diesel prices partially offset
by lower Revenue.
Total cash costs and
all-in sustaining costs
Total cash costs for the three months
ended March 31, 2016 were $626 per ounce compared to $889 per ounce in the prior-year period with the decrease primarily attributable
to higher production and lower diesel prices. All-in sustaining costs per gold ounce sold were $1,101 for the three months ended
March 31, 2016 compared to $1,708 in the prior-year period. The decrease in all-in sustaining costs was primarily attributable
to lower cash costs and sustaining capital expenditures in the current period.
Capital expenditures
For the three months ended March 31,
2016, capital expenditures totalled $11.5 million, all of which is sustaining capital, compared to $22.5 million in the prior-year
period. The decrease was as a result of lower capitalized waste stripping expenditures and additional spending in the prior-year
period as a result of the leach pad expansion conducted in 2015.
Exploration activities
No exploration activities were conducted
at Mesquite during the first quarter of 2016.
| 24 | |
|
Peak Mines, New South Wales,
Australia
The Company’s Peak Mines gold-copper
mining operation is an underground mine/mill operation located in the Cobar Mineral Field near Cobar, New South Wales, Australia.
Peak Mines was originally built by Rio Tinto Plc and commenced production in 1992. At December 31, 2015, the mine had 267,000 ounces
of Proven and Probable gold Mineral Reserves and 82 million pounds of Proven and Probable copper Mineral Reserves, with 440,000
ounces of Measured and Indicated gold Mineral Resources, exclusive of Mineral Reserves, and 94 million pounds of Measured and Indicated
copper Mineral Resources, exclusive of Mineral Reserves. A summary of Peak Mines’ operating results is provided below: |
|
|
AT-A-GLANCE
2016
GUIDANCE:
Gold:
80,000 – 90,000 ounces
copper:
6 – 8 million pounds
Total
cash costs/oz: $800 - $840
ALL-IN
SUSTAINING COSTS/OZ: $1,020 - $1,060
Q1
2016 Production:
Gold:
19,596 ounces
copper:
3.0 million pounds
Total
cash costs/oz: $780
ALL-IN
SUSTAINING COSTS/OZ: $1,024
|
| |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016 |
2015 |
| Operating information |
|
|
| Ore mined (thousands of tonnes) |
170 |
172 |
| Ore processed (thousands of tonnes) |
163 |
178 |
| Average grade: |
|
|
| Gold (grams/tonne) |
3.72 |
3.55 |
| Copper (%) |
0.91 |
0.96 |
| Recovery rate (%): |
|
|
| Gold |
94.1 |
92.7 |
| Copper |
92.2 |
89.6 |
| Gold (ounces): |
|
|
| Produced (1) |
19,596 |
19,428 |
| Sold (1) |
17,149 |
19,729 |
| Copper (millions of pounds): |
|
|
| Produced (1) |
3.0 |
3.4 |
| Sold (1) |
3.3 |
3.0 |
| Average realized price (2): |
|
|
| Gold ($/ounce) |
1,250 |
1,225 |
| Copper ($/pound) |
2.20 |
2.66 |
| Silver ($/ounce) |
14.08 |
18.13 |
| Total cash costs per gold ounce sold (2)(3) |
780 |
846 |
| All-in sustaining costs per gold ounce sold (2)(3) |
1,024 |
1,189 |
| |
|
|
| FINANCIAL INFORMATION |
|
|
| Revenue |
27.7 |
31.5 |
| Operating margin (2) |
7.5 |
7.0 |
| Loss from mine operations |
(5.5) |
(4.0) |
| Capital expenditures (sustaining capital) (2) |
1.7 |
5.8 |
| 1. | Production is shown on a total contained basis while sales are shown on a net payable basis, including
final product inventory and smelter payable adjustments, where applicable. |
| 2. | We use certain non-GAAP financial performance measures throughout our MD&A. Total cash costs
and all-in sustaining costs per gold ounce sold, total cash costs and all-in sustaining costs on a co-product basis, average realized
price, operating margin and capital expenditures (sustaining capital) are non-GAAP financial performance measures with no standard
meaning under IFRS. For further information and a detailed reconciliation, please refer to the “Non-GAAP Financial Performance
Measures” section of this MD&A. |
| 3. | The calculation of total cash costs per gold ounce is net of by-product copper revenue. Total cash
costs and all-in sustaining costs on a co-product basis removes the impact of other metal sales that are produced as a by-product
of our gold production and apportions the cash costs to each metal produced on a percentage of revenue basis. If copper revenue
were treated as a co-product, the average total cash costs at Peak Mines for the three months ended March 31, 2016 would be $887
per gold ounce (2015 - $928) and 1.67 per pound of copper (2015 - $2.15). All-in sustaining costs on a co-product basis would be
$1,068 per gold ounce (2015 -$1,181) and $1.98 per pound of copper (2015 -$2.71). |
| 25 | |
Quarterly operating
results
Production
For the three months ended March 31,
2016, Peak Mines produced 19,596 gold ounces, consistent with 19,428 gold ounces produced in the prior-year period as the impact
of the decrease in tonnes processed was offset by an increase in gold grade. Copper production for the period was 3.0 million pounds
of copper compared to 3.4 million pounds of copper in the prior-year period, as the impact of the decrease in tonnes processed
and a slight decrease in copper grade was only partially offset by a 2% increase in copper recovery.
Revenue
For the three months ended March 31,
2016, revenue was $27.7 million compared to $31.5 million in the prior-year period. The
$3.8 million, or 12%, decrease in revenue was attributed to the combined impact of a $1.2 million decrease driven by lower metal
prices and a $2.6 million decrease as a result of reduced metal sales volumes. The average realized gold price was $1,250
per ounce for the three months ended March 31, 2016 compared to $1,225 per ounce in the prior-year period. The average realized
copper price was $2.20 per pound compared to $2.66 per pound in the prior-year period.
At the end of the period, Peak Mines’
exposure to the impact of movements in market metal prices for provisionally priced contracts was 4,900 ounces of gold and 4.7
million pounds of copper. Exposure to these movements in market metal prices was reduced by 4.4 million pounds of copper swaps
outstanding at the end of the period, with settlement periods ranging from May 2016 to August 2016.
Earnings (loss) from
mine operations
For the three months ended March 31,
2016, Peak Mines generated a $5.5 million loss from operations compared to $4.0 million in the prior-year period. The loss from
operations for the three months ended March 31, 2016 was primarily attributable to lower average realized gold and copper prices
and lower sales volumes, partially offset by the benefit of the weaker Australian dollar on operating costs and the
Company’s ongoing cash flow optimization initiatives.
Total cash costs and
all-in sustaining costs
For the three months ended March 31,
2016, total cash costs per gold ounce sold, net of by-product sales, were $780 per ounce compared to $846 per ounce in the prior-year
period. All-in sustaining costs per gold ounce sold were $1,024 per ounce for the three months ended March 31, 2016 compared to
$1,189 in the prior-year period. The decrease in cash costs were primarily due to the depreciation of the Australian dollar relative
to the U.S. dollar. By-product Revenue remained consistent with the prior-year period as an increase in copper sales volumes offset
the decrease in the average realized price. The decrease in all-in sustaining costs were a result of the decrease in cash costs
described above and the decrease in sustaining capital expenditures.
Capital expenditures
For the three months ended March 31,
2016, capital expenditures totalled $1.7 million, all of which is sustaining capital, compared to $5.8 million in the prior-year
period. The decrease in capital expenditures is a result of reductions in capital development as there was loader and truck
purchases in the prior-year period and a reduction in capitalized exploration. Capital expenditures are related to mine and infrastructure
development.
Impact of Foreign Exchange
on Operations
Peak Mines’ operations continue
to be impacted by fluctuations in the valuation of the U.S. dollar against the Australian dollar. The value of the U.S. dollar
for the three months ended March 31, 2016 averaged $1.38 against the Australian dollar compared to $1.27 in the prior-year period,
resulting in a positive impact on cash costs of $109 per gold ounce sold.
| 26 | |
Exploration Activities
During the first quarter of 2016,
exploration at the Peak Mines operation continued to focus on delineating mineral resources in the Chronos and Anjea zones as
well as earlier stage prospects along the Peak Mine Corridor. Results of this work continue to offer good potential to extend
the long-term life of the Peak Mines operation. The Company expects to provide a more detailed update on its exploration initiatives
in mid-2016.
|
Cerro San Pedro Mine,
San Luis Potosí, Mexico
The Cerro San Pedro Mine is located
in the state of San Luis Potosí in central Mexico, approximately 20 kilometres east of the city of San Luis Potosí.
The mine is a gold-silver, open pit, run-of-mine heap leach operation. At December 31, 2015, the mine had 13,000 ounces of Proven
and Probable gold Mineral Reserves and 419,000 ounces of Proven and Probable silver Mineral Reserves. A summary of Cerro San Pedro’s
operating results is provided below: |
|
|
AT-A-GLANCE
2016
GUIDANCE:
Gold:
60,000 – 70,000 ounces
silver:
1.3 – 1.5 million ounces
Total
cash costs/oz: $755 - $795
ALL-IN
SUSTAINING COSTS/OZ: $765 - $805
Q1
2016 Production:
Gold:
18,776 ounces
SILVER:
0.3 MILLION OUNCES
Total
cash costs/oz: $934
ALL-IN
SUSTAINING COSTS/OZ: $952
|
| |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016 |
2015 |
| Operating information |
|
|
| Ore mined and placed on leach pad (thousands of tonnes) |
1,691 |
3,174 |
| Waste mined (thousands of tonnes) |
2,104 |
4,922 |
| Ratio of waste to ore |
1.24 |
1.55 |
| Average grade: |
|
|
| Gold (grams/tonne) |
0.38 |
0.40 |
| Silver (grams/tonne) |
11.24 |
20.16 |
| Gold (ounces) |
|
|
| Produced (1)(2) |
18,776 |
25,950 |
| Sold (1) |
18,822 |
21,956 |
| Silver (millions of ounces) |
|
|
| Produced (1)(2) |
0.3 |
0.3 |
| Sold (1) |
0.3 |
0.3 |
| Average realized price (3): |
|
|
| Gold ($/ounce) |
1,185 |
1,219 |
| Silver ($/ounce) |
14.77 |
16.67 |
| Total cash costs per gold ounce sold ($/ounce) (3)(4) |
934 |
1,027 |
| All-in sustaining costs per gold ounce sold ($/ounce) (3)(4) |
952 |
1,041 |
| |
|
|
| FINANCIAL INFORMATION |
|
|
| Revenue |
26.2 |
31.0 |
| Operating margin (3) |
4.2 |
5.0 |
| Earnings from mine operations |
3.4 |
2.3 |
| Capital expenditures (sustaining capital)(3) |
0.2 |
0.3 |
| 1. | Production is shown on a total contained basis while sales are shown on a net payable basis, including
final product inventory adjustments, where applicable. |
| 2. | Tonnes of ore processed each period does not necessarily correspond to ounces produced during the
period, as there is a time delay between placing tonnes on the leach pad and pouring gold ounces. |
| 27 | |
| 3. | We use certain non-GAAP financial performance measures throughout our MD&A. Total cash costs
and all-in sustaining costs per gold ounce sold, total cash costs and all-in sustaining costs on a co-product basis, average realized
price, operating margin and capital expenditures (sustaining and growth) are non-GAAP financial performance measures with no standard
meaning under IFRS. For further information and a detailed reconciliation, please refer to the “Non-GAAP Performance Measures”
section of this MD&A. |
| 4. | The calculation of total cash costs per gold ounce sold and all-in
sustaining costs per gold ounce sold is net of by-product silver revenue. Total cash costs and all-in sustaining costs on a co-product
basis removes the impact of other metal sales that are produced as a by-product of our gold production and apportions the cash
costs to each metal produced on a percentage of revenue basis. If the silver revenue were treated as a co-product, the average
total cash costs at Cerro San Pedro for the three months ended March 31, 2016 would be $972 per gold ounce (2015 - $1,053) and
$12.11 per silver ounce (2015 - $14.40). For the three months ended March 31, 2016, all-in sustaining costs on a co-product basis
would be $987 per gold ounce (2015 - $1,066) and $12.31 per
silver ounce (2015 - $14.57). |
Quarterly operating
results
Production
For the three months ended March 31,
2016, Cerro San Pedro’s gold production was 18,776 ounces compared to 25,950 ounces in the prior-year period. The planned
decrease in production was primarily attributable to a decrease in ore tonnes mined and placed on the leach pad due to Cerro San
Pedro being in its final year of active mining. Gold grade and recovery remained consistent with the prior-year period. Silver
production was 0.3 million ounces for the three months ended March 31, 2016, consistent with 0.3 million ounces in the prior-year
period.
Revenue
For the three months ended March 31,
2016, revenue was $26.2 million compared to $31.0 million in the prior-year period. The $4.8 million, or 15%, decrease in revenue
for the three months ended March 31, 2016 was attributable to the combined impact of a $3.6 million decrease in metal sales volumes
and a $1.2 million decrease driven by lower metal prices. The average realized gold price for the three months ended March 31,
2016 was $1,185 per ounce compared to $1,219 per ounce in the prior-year period. The average realized silver price for the three
months ended March 31, 2016 was $14.77 per ounce compared to $16.67 per ounce in the prior-year period.
Earnings (loss) from
mine operations
For the three months ended March 31,
2016, Cerro San Pedro generated earnings from mine operations of $3.4 million compared to $2.3 million in the prior-year period.
Earnings from mine operations were positively impacted by lower operating expenses and depreciation and depletion when compared
to the prior-year period.
Total cash costs and
all-in sustaining costs
For the three months ended March 31,
2016, total cash costs per gold ounce sold were $934 per ounce compared to $1,027 per ounce in the prior-year period. All-in sustaining
costs per gold ounce sold were $952 per ounce for the three months ended March 31, 2016 compared to $1,041 in the prior-year period.
Cash costs and all-in sustaining costs per gold ounce sold were positively impacted by the depreciation of the Mexican peso relative
to the U.S. dollar, partially offset by lower by-product credits as a result of lower average realized silver prices.
Capital expenditures
For the three months ended March 31,
2016, capital expenditures totalled $0.2 million, all of which was sustaining capital. This is consistent with sustaining capital
expenditures of $0.3 million incurred in the prior-year period.
Impact of Foreign
Exchange on Operations
Cerro San Pedro was impacted by changes
in the value of the Mexican peso against the U.S. dollar. The value of the Mexican peso weakened from an average of MXN15.0 to
the U.S. dollar for the three months ended March 31, 2015 to MXN18.0 to the U.S. dollar for the three months ended March 31, 2016.
This had a positive impact on cash costs of $229 per gold ounce sold.
| 28 | |
DEVELOPMENT
AND EXPLORATION REVIEW
|
Rainy River Project,
Ontario, Canada
Rainy River is a gold project located
approximately 50 kilometres northwest of Fort Frances, a town of approximately 8,000 people, in northwestern Ontario, Canada. The
project property is located near infrastructure and is comprised of approximately 192 square kilometres of freehold and leasehold
patented surface rights and mining rights, properties and unpatented mining claims. |
|
|
AT-A-GLANCE
AS
AT DECEMBER 31, 2015
PROVEN
AND PROBABLE RESERVES
GOLD:
3.8 MILLION OUNCES
SILVER:
9.4 MILLION OUNCES
MEASURED
AND INDICATED RESOURCES
(Exclusive of reserves)
Gold:
2.6 MILLION OUNCES
SILVER:
9.3 MILLION OUNCES
|
The Rainy River project enhances
New Gold’s growth pipeline through its manageable capital costs, significant production scale at below current industry average
costs and exciting longer-term exploration potential in a great mining jurisdiction. Rainy River is expected to generate significant
gold production growth for New Gold at costs below the Company’s 2016 guidance for all-in sustaining costs. Relative to the
Company’s consolidated 2016 gold production guidance of 360,000 to 400,000 ounces, Rainy River alone is expected to produce
an average of 325,000 ounces of gold annually, which will more than offset the decrease in production and cash flow arising from
the transition of Cerro San Pedro to residual leaching. The Company looks forward to advancing the Rainy River project and providing
further updates on its development.
Project advancement
| |
|
|
|
| |
|
Rainy River – Q1 2016 Key PROJECT UPDATES |
| |
|
|
|
| |
|
· |
Overall construction progress is currently over 30% complete |
| |
|
· |
Plant site earthworks over 90% complete |
| |
|
· |
Concrete placement over 50% complete |
| |
|
· |
Grinding building fully enclosed with steel erection in progress on process building |
| |
|
· |
Installation of mechanical, piping, electrical and instrumentation in grinding building began in April |
| |
|
· |
Power line construction is 85% complete |
| |
|
· |
Construction of water and tailings management facilities impacted by ground conditions |
| |
|
· |
Assembly of initial mine fleet complete |
| |
|
· |
Material moved for mine development on target |
| |
|
· |
No Lost Time Incidents since New Gold acquired the project in 2013 |
| |
|
|
|
During the first quarter of 2016, work
progressed on engineering, procurement and construction of the project.
The construction of the process facilities
and the pre-production mining activities are both advancing well. The grinding building is fully enclosed and the team is positioned
to commence installation of the mechanical, piping, electrical and instrumentation equipment, with the first mill shell scheduled
to be installed later in the second quarter. Construction of the process building is also progressing with the final structural
steel truss ready to be installed. In the first quarter, the mine operations team moved approximately 2.4 million tonnes of waste
and overburden at costs 9% below budget. The team continues to increase the mining rate with a project-to-date record set in April
of approximately 65,000 tonnes moved in one day.
| 29 | |
During the course of the construction
of the water management facility, New Gold identified discrete areas where the strength of the foundation is less than was estimated
for the original designs. Based on the analysis completed to date, which includes the results of additional geotechnical drilling,
the Company’s remediation plan is expected to include the addition of rock toe buttresses at the base of the water management
berms where required. New Gold further extended its supplemental geotechnical drilling with a focus on the foundations of the tailings
management facility. Based on the results received to date, one section of the starter dam, which represents approximately 30%
of the initial structure, is expected to be redesigned to incorporate flatter slope angles and wick drains. The planned improvements
to the design of the water and tailings management facilities require amendments to existing permits. The Company expects to apply
for the amendment for the water management facility in early May and the amendment for the tailings management facility early in
the third quarter, and resume construction on the facilities immediately after receiving the respective approvals.
As construction of the processing facilities
and other components of the project remains ongoing and on schedule, and based on the expected adjustments to the permitting and
construction schedule for the water and tailings management facilities, the Company continues to target first production at Rainy
River in mid-2017. New Gold estimates the additional costs associated with the improvements to the facilities to total approximately
$35 million, with the balance of the project costs remaining consistent with the $877 million estimate outlined at New Gold’s
February 2016 Investor Day.
Permitting activities
In January 2015, the Canadian Environmental
Assessment Agency granted Federal environmental regulatory approval and the Ontario Ministry of Environment and Climate Change
granted Provincial environmental regulatory approval for the Rainy River project.
Key construction-related permits have
subsequently been issued by the Ontario Ministry of Environment & Climate Change as well as the Ontario Ministry of Natural
Resources & Forestry. As noted above, the Company expects to apply for amendments to certain existing permits. Receipt of additional
provincial construction and operations phase permits is progressing in line with the project development schedule. New
Gold continues to work closely with Environment Canada towards obtaining the required mine waste Schedule 2 authorization, which
is expected to be received in 2017.
Exploration
During the first quarter of 2016 exploration
efforts at Rainy River were directed toward the continued identification and prioritization of areas of prospective gold mineralization
within several kilometres of the central mine development area.
Environmental and community
activities
New Gold holds Participation or Impact
Benefit Agreements with Naicatchewenin & Rainy River First Nations, Big Grassy First Nation, communities of the Fort Frances
Chiefs Secretariat and the Metís Nation of Ontario. The Participation or Impact Benefit Agreements provide for how the local
First Nation and Métis communities will benefit from the development of the Rainy River project and throughout the life
of the mine. New Gold continues to meet with all its Aboriginal partners. New Gold also sends out regular newsletters on Rainy
River to all communities in the Rainy River District and parts of the Kenora District. Other engagement activities include community
presentations, communication with local neighbors and regular communication with the local municipality.
Project costs
and outlook
As of March 31, 2016, approximately
70% of total development capital costs had been incurred or committed. Of the outstanding commitments approximately $90 million
are for contracts with fixed price and quantities, with approximately $90 million related to contracts with fixed unit prices.
| 30 | |
For the three months ended March 31,
2016, capital expenditures at the Rainy River project totalled $82.2 million which includes $81.9 million for development capital
costs with the remainder primarily for exploration. This compares to $19.0 million in the prior-year period.
As the Company plans to spend approximately
$500 million on the development of Rainy River in 2016, spending in the remaining three quarters of the year is expected to increase
when compared to the first quarter. The focus of the 2016 development activities is on the construction of the processing facilities
and supporting infrastructure as well as the initial stripping of the open pit. Key construction activities include: installation
of mechanical, piping, electrical and instrumentation, completion of the power line, completion of the water management ponds,
and commencement of construction of the tailings dam.
|
Blackwater Project, British
Columbia, Canada
Blackwater is a bulk-tonnage gold and
silver project located approximately 160 kilometres southwest of Prince George, a city of approximately 80,000 people, in central
British Columbia, Canada. The project property position covers over 1,000 square kilometres and is located near infrastructure.
Exploration
During the first quarter of 2016, no
exploration activities were conducted at Blackwater following the Company’s decision to temporarily suspend exploration activities
in order to direct financial resources toward other opportunities. |
|
|
AT-A-GLANCE
AS
AT DECEMBER 31, 2015
PROVEN
AND PROBABLE RESERVES
GOLD:
8.2 MILLION OUNCES
SILVER:
60.8 MILLION OUNCES
MEASURED
AND INDICATED RESOURCES
(Exclusive of reserves)
Gold:
1.3 MILLION OUNCES
SILVER:
7.8 MILLION OUNCES |
Environmental and
permitting activities
The following environmental and permitting
related activities occurred at Blackwater during the first quarter of 2016:
| · | The Provincial and Federal environmental assessment public review started January 2016, with approvals
anticipated in late 2016 to early 2017. |
| · | A joint Provincial and Federal environmental assessment public comment period was held, including
community open houses. |
| · | Continued key engineering studies for advancement of post-environmental assessment approval permits. |
| · | Continued discussions with key First Nations on Participation Agreements. |
Project costs
For the three months ended March 31,
2016, capital expenditures totaled $1.8 million compared to $2.0 million in the prior-year period. Expenditures in the current
period related to the continued advancement of the environmental assessment process and related environmental and engineering
studies.
|
New Afton C-zone, British
Columbia, Canada
The C-zone is the down plunge extension of the B-zone block cave currently being mined at New Afton. Following
from the 2015 scoping study, New Gold completed detailed
technical studies and site investigation work for a feasibility study evaluating mining the C-zone extension. |
|
|
AT-A-GLANCE
AS
AT DECEMBER 31, 2015
MEASURED
AND INDICATED RESOURCES
(Included in New Afton
Measured and Indicated Resources)
Gold:
1.05 MILLION OUnces
copper:
816 million pounds
|
| 31 | |
In the first quarter of 2016, New Gold
completed a feasibility study which confirmed the viability and positive economics for the C-zone deposit. The feasibility study
relates to the C-zone mineral reserves which have demonstrated economic viability at the New Afton property and is not part of,
and should be distinguished from, the current mining of the B-zone reserves. Work expected to be completed in 2016 includes additional
exploration drilling, permit amendment preparation and submission, mine optimization and planning reviews. The detailed results
from the feasibility study can be found in the Company’s Management’s Discussion and Analysis for the year ended December
31, 2015.
Project update
and costs
During the first quarter of 2016, New Afton proceeded
with an exploration drilling program, permit amendments and continued baseline environmental work. For the three months ended March
31, 2016, project capital expenditures totalled $1.0 million, which includes exploration drilling expenditures of $0.8 million
and project development expenditures of $0.2 million.
| 32 | |
FINANCIAL
CONDITION REVIEW
Balance Sheet Review
| |
As at March 31 |
As at December 31 |
| (in millions of U.S. dollars) |
2016 |
2015 |
| balance sheet information |
|
|
| Cash and cash equivalents |
298.3 |
335.5 |
| Other current assets |
284.6 |
279.1 |
| Non-current assets |
3,152.7 |
3,060.9 |
| Total assets |
3,735.6 |
3,675.5 |
| |
|
|
| Current liabilities |
159.2 |
147.3 |
| Non-current liabilities excluding long-term debt |
654.9 |
641.0 |
| Long-term debt |
788.0 |
787.6 |
| Total liabilities |
1,602.1 |
1,575.9 |
| Total equity |
2,133.5 |
2,099.6 |
| Total liabilities and equity |
3,735.6 |
3,675.5 |
Assets
Total assets were $3,735.6 million
as at March 31, 2016 compared to $3,675.5 million as at December 31, 2015. The increase in total assets is primarily attributable
to growth capital expenditures at the Rainy River project.
Cash and cash equivalents
The change in cash and cash equivalents
was primarily driven by the increase in growth capital expenditures at the Rainy River project as $82.2 million was spent during
the first quarter of 2016. This was partially offset by operating cash flows generated during the current period.
Cash generated from operations for
the three months ended March 31, 2016 of $61.5 million and $10.3 million from the impact of foreign exchange on cash and cash equivalents
was offset by cash used in investing activities of $108.7 million (which includes $22.4 million of sustaining capital expenditure
and $85.0 million of growth capital expenditure) and cash used by financing activities of $0.3 million.
Current assets
Other current assets primarily consist
of trade and other receivables, inventories and prepaid expenses. Other current assets were $284.6 million as at March 31, 2016,
consistent with other current assets of $279.1 million as at December 31, 2015.
Non-current assets
Non-current assets primarily consist
of mining interests which include the Company’s mining properties, development projects and property, plant and equipment.
For the three months ended March 31, 2016, the Company spent $107.4 million primarily focused on continued project advancement
at Rainy River, and sustaining capital expenditure at the Company’s operating sites.
Liabilities
Total liabilities were $1,602.1 million
as at March 31, 2016, compared to $1,575.9 million as at December 31, 2015. The increase in liabilities is primarily attributable
to the increase in fair value of the gold stream obligation and increase in trade and other payables at the Rainy River project
where development activity on the project has increased.
| 33 | |
Non-current liabilities
Non-current liabilities consist primarily
of reclamation and closure cost obligations, the gold stream obligation, long-term debt and deferred tax liabilities.
Reclamation and closure
cost obligations
The Company’s asset retirement
obligations consist of reclamation and closure costs for New Afton, Mesquite, Peak Mines, Cerro San Pedro, Blackwater and Rainy
River. Significant reclamation and closure activities include land rehabilitation, demolition of buildings and mine facilities,
ongoing care and maintenance and other costs.
The long-term discounted portion of
the liability as at March 31, 2016 was $71.4 million compared to $67.5 million as at December 31, 2015. The increase was primarily
due to the decrease in the discount rates and the strengthening of the Canadian and Australian dollar relative to the U.S. dollar
from December 31, 2015 to March 31, 2016. The Company intends to spend $1.4 million in the next year on reclamation activities,
and the remainder in future periods.
Long-term debt and other
contractual obligations
The majority of the Company’s
contractual obligations consist of long-term debt and interest payable. As at March 31, 2016, the Company had $788.0 million in
long-term debt compared to $787.6 million as at December 31, 2015. Long-term debt as at March 31, 2016 includes senior unsecured
notes.
On July 20, 2015 the Company entered
into a $175 million streaming transaction with RGLD Gold Ag, a wholly-owned subsidiary of Royal Gold Inc. (“Royal Gold”).
The gold stream obligation is accounted for as a financial liability under the scope of IFRS 9.
Accordingly, the Company values the liability at the present value of its expected future cash flows at each reporting period with
changes in fair value reflected in the condensed consolidated income statements and condensed consolidated statements of comprehensive
income. The gold stream obligation contains a maximum leverage ratio covenant (net debt to EBITDA) of 3.5 : 1.0, with the exception
that the net leverage covenant limit may increase to 4.0 : 1.0 for two consecutive quarters, provided that it thereafter returns
to a maximum of 3.5 : 1.0. However, Royal Gold has agreed to adjust this leverage ratio to match the revised maximum leverage ratio
under the revolving credit facility for the four consecutive quarters ended June 30, 2017.
On April 5, 2012, the Company issued
$300.0 million of senior unsecured notes (“2020 Unsecured Notes”). As at September 30, 2015 the face value was $300.0
million. The 2020 Unsecured Notes are denominated in U.S. dollars, mature and become due and payable on April 15, 2020, and bear
interest at the rate of 7% per annum. Interest is payable in arrears in equal semi-annual instalments on April 15 and October 15
of each year.
On November 15, 2012, the Company issued
$500.0 million of senior unsecured notes (“2022 Unsecured Notes”). As at September 30, 2015 the face value was $500.0
million. The 2022 Unsecured Notes are denominated in U.S. dollars, mature and become due and payable on November 15, 2022, and
bear interest at the rate of 6.25% per annum. Interest is payable in arrears in equal semi-annual instalments on May 15 and November
15 of each year.
The 2020 and 2022 Unsecured Notes are
subject to a minimum interest coverage incurrence covenant (EBITDA to interest) of 2.0 : 1.0. The test is applied on a pro-forma
basis prior to the Company incurring additional debt, entering into business combinations or acquiring significant assets, or certain
other corporate actions. There are no maintenance covenants with respect to the Company’s 2020 and 2022 Unsecured Notes.
| 34 | |
The Company holds a $300.0 million
revolving credit facility (the “Credit Facility”) which expires on August 14, 2019. The Credit Facility also provides
the Company with the option to draw an additional $50.0 million above and beyond the base $300.0 million, subject to lender participation.
Net debt is used to calculate leverage for the purpose of covenant tests and pricing levels. The Credit Facility contains various
covenants customary for a loan facility of this nature, including limits on indebtedness, asset sales and liens. The Credit Facility
contains two covenant tests, the minimum interest coverage ratio (EBITDA to interest) and the maximum leverage ratio (net debt
to EBITDA), both of which are measured on a rolling four-quarter basis at the end of every quarter.
The Company regularly reviews its expected
financial commitments and financial resources to evaluate covenant compliance. Based on prevailing spot prices of gold, copper
and silver and the prevailing exchange rate for the Canadian dollar as of the date of this MD&A, management believes that New
Gold has sufficient liquidity and capital resources to complete the construction of the Rainy River project as currently contemplated
within the financial covenants provided in the Credit Facility. However, in order to provide additional flexibility in the event
of a decline in metal prices and/or appreciation of the Canadian dollar relative to the U.S. dollar, on February 17, 2016, the
Company amended the Credit Facility to vary the maximum leverage ratio from 3.5 : 1.0. Specifically, for the quarter ending September
30, 2016, the maximum leverage ratio will increase to 4.0 : 1.0, and for the next three quarters, the maximum leverage ratio will
increase to 4.5 : 1.0. Following that period, the maximum leverage ratio will return to 3.5 : 1.0.
Significant financial covenants applicable
as at March 31, 2016 and December 31, 2015 are as follows:
| |
Three months ended
March 31 |
Year ended
December 31 |
| Applicable Financial Covenant |
2016 |
2015 |
| financial covenants |
|
|
|
| Minimum interest coverage ratio (EBITDA to interest) |
> 3.0 : 1 |
5.0 : 1 |
5.1 : 1 |
| Maximum leverage ratio (net debt to EBITDA) |
< 3.5 : 1 |
2.3 : 1 |
2.0 : 1 |
The interest margin on drawings under
the Credit Facility ranges from 1.00% to 3.25% over LIBOR, the Prime Rate or the Base Rate, based on the Company’s net debt
to EBITDA ratio and the currency and type of credit selected by the Company. The standby fees on undrawn amounts under the Credit
Facility range from 0.45% to 0.73%, depending on the Company’s net debt to EBITDA ratio. Based on the Company’s net
debt to EBITDA ratio, the rate is 0.62% as at March 31, 2016 (December 31, 2015 – 0.62%).
As at March 31, 2016, the Company had
not drawn any funds under the Credit Facility; however, the Credit Facility has been used to issue letters of credit of $121.7
million as at March 31, 2016 (December 31, 2015 - $115.9 million). No new letters of credit have been issued in the current period,
with the increase due to the appreciation of the Canadian and Australian dollars relative to the U.S. dollar. Letters of credit
relate to reclamation bonds, worker’s compensation security and other financial assurances required with various government
agencies.
Current and Deferred
Income Taxes
The net deferred income tax liability
decreased from $275.5 million as at December 31, 2015 to $233.1 million as at March 31, 2016. The change is mainly driven by the
impact of foreign exchange movements on the deferred tax related to non-monetary assets and liabilities. For the three months ended
March 31, 2016, the Company recorded a foreign exchange gain of $30.7 million on non-monetary assets and liabilities. This was
primarily due to the deferred tax liabilities being denominated in currencies other than the U.S. dollar and has no tax impact.
The net current income tax receivable
balance was $12.7 million as at March 31, 2016, consistent with $13.0 million as at December 31, 2015.
| 35 | |
Liquidity and Cash
Flow
As at March 31, 2016, the Company had
cash and cash equivalents of $298.3 million compared to $335.5 million at December 31, 2015. The Company’s investment policy
is to invest its surplus funds in permitted investments consisting of treasury bills, bonds, notes and other evidences of indebtedness
of Canada, the U.S. or any of the Canadian provinces with a minimum credit rating of R-1 mid from the DBRS or an equivalent rating
from Standard & Poor’s or Moody’s and with maturities of 12 months or less at the original date of acquisition.
In addition, the Company is permitted to invest in bankers’ acceptances and other evidences of indebtedness of certain financial
institutions. Surplus corporate funds are only invested with approved government or bank counterparties.
The Company’s cash flows from
operating, investing and financing activities, as presented in the unaudited condensed consolidated statements of cash flows, are
summarized in the following table for the three months ended March 31, 2016 and 2015:
| |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016 |
2015 |
| cash flow information |
|
|
| Cash generated from operating activities |
61.5 |
69.8 |
| Cash used in investing activities (sustaining capital expenditure and other) (1) |
(23.7) |
(37.4) |
| Cash used in investing activities (growth capital expenditure) (1) |
(85.0) |
(31.4) |
| Cash used in financing activities |
(0.3) |
0.1 |
| Effect of exchange rate changes on cash and cash equivalents |
10.3 |
(5.8) |
| Change in cash and cash equivalents |
(37.2) |
(4.7) |
| 1. | We use certain non-GAAP financial performance measures throughout our MD&A. For further information
and a detailed reconciliation, please refer to the “Non-GAAP Financial Performance Measures” section of this MD&A. |
Operating Activities
Cash generated from operating activities
for the three months ended March 31, 2016 was $61.5 million compared to $69.8 million in the prior-year period. Cash generated
from operations in the prior-year period benefitted from an income tax refund of $7.4 million.
| 36 | |
Investing Activities
Cash used in investing activities is
primarily for the continued capital investment in the Company’s operating mines and development projects. Spending was higher
than in the prior-year period, with the Company spending $108.7 million during the first quarter of 2016 compared to $68.8 million
in the prior-year period. Investing activities during the period primarily focused on continued project advancement at Rainy River.
Investing activities in the prior-year period focused on project advancement at Rainy River, the mill expansion at New Afton and
the leach pad expansion and stripping projects at Mesquite.
The following table summarizes the
capital expenditures (mining interests per the unaudited condensed consolidated statements of cash flows) for the three months
ended March 31, 2016 and 2015:
| |
Three months ended March 31 |
| (in millions of U.S. dollars) |
2016 |
2015 |
| CAPital EXpenditures by site |
|
|
| New Afton |
9.9 |
19.6 |
| Mesquite |
11.5 |
22.5 |
| Peak Mines |
1.7 |
5.8 |
| Cerro San Pedro |
0.2 |
0.3 |
| Rainy River |
82.2 |
19.0 |
| Blackwater |
1.8 |
2.0 |
| Corporate |
0.1 |
- |
| Total Capital Expenditures |
107.4 |
69.2 |
Financing Activities
Cash used by financing activities of $0.3
million was primarily due to the effect of interest paid and financing initiation costs, net of cash proceeds from stock options
exercised.
The Company’s March 31, 2016
cash balance of $298.3 million together with the receivable for Royal Gold’s second instalment under the stream agreement
of $75.0 million (the receipt of which is subject to the satisfaction of certain conditions and is expected to be received mid-year
2016) and the $178.3 million available for drawdown under New Gold’s revolving credit facility provide the Company with approximately
$551 million of liquidity, in addition to the net cash the Company’s operating mines are expecting to generate.
In the opinion of management, the Company’s
liquidity position as at March 31, 2016, together with cash flows from operations, are sufficient to support the Company’s
normal operating requirements on an ongoing basis and the remaining development capital expenditure at the Rainy River project.
The Company has outstanding notes in the principal amount of $300 million maturing in 2020 and $500 million maturing in 2022.
Assuming the continuation of prevailing commodity prices and exchange rates, operations performing in accordance with mine plans,
and successful construction of the Rainy River project on schedule, the Company could choose to repay this indebtedness from internally
generated cash, depending on management’s views on the attractiveness of other uses of such cash. The Company will decide
whether to repay or refinance some or all of such note indebtedness before the respective stated maturities.
The Company’s future operating
cash flow and cash position are highly dependent on metal prices, including gold, copper and silver, as well as other factors,
including the Canadian/U.S. dollar exchange rate. Based on prevailing spot prices of gold, copper and silver and the prevailing
exchange rate for the Canadian dollar as of the date of this MD&A, management believes that New Gold has sufficient liquidity
and capital resources to complete the construction of the Rainy River project based on the current construction cost estimate.
In addition, as discussed under the heading “Balance Sheet Review”, the Company has amended certain financial ratios
in its Credit Facility to provide additional flexibility in the event of a decline in metal prices or appreciation of the Canadian
dollar relative to the U.S. dollar.
| 37 | |
Taking into consideration the Company’s
current cash position, volatile equity markets and foreign exchange rates, global uncertainty in the capital markets and increasing
cost pressures, the Company regularly reviews expenditures and assesses business opportunities to enhance liquidity in order to
ensure adequate liquidity and flexibility to support its growth strategy, including the development of its projects, while continuing
production at its current operations. In addition, the Company regularly evaluates the magnitude and timing of its capital commitments
at the Rainy River project in relation to the Company’s current and projected future financial resources, while also taking
into account any potential implications for the project’s development schedule. Even with the additional flexibility provided
by the amendment to the financial covenants in the Credit Facility, and the gold price option contracts, a period of continuous
low gold and copper prices may necessitate the deferral of capital expenditures which may impact the timing of development work
and project completion, as well as production from mining operations. In such a price environment, the Company may be required
to adopt one or more alternatives to increase liquidity. In addition, a sustained significant appreciation of the Canadian dollar
relative to the U.S. dollar could impact the timing of the development work and project completion at the Rainy River project.
Commitments
The Company has entered into a number
of contractual commitments for capital items relating to operations and development. At March 31, 2016, these commitments totalled
$288.0 million, $193.6 million of which are expected to fall due over the next 12 months. This compares to commitments of $262.2
million as at December 31, 2015, $184.4 million of which were expected to fall due over the upcoming year. The increase is due
to the Rainy River project entering into additional capital purchase commitments. Certain contractual commitments may contain cancellation
clauses; however, the Company discloses its commitments based on management’s intent to fulfill the contracts.
Contingencies
In assessing the loss contingencies
related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the
Company and its legal counsel evaluate the perceived merits of any legal proceedings or unasserted claims as well as the perceived
merits of the amount of relief sought or expected to be sought. If the assessment of a contingency suggests that a loss is probable,
and the amount can easily be estimated, then a loss is recorded. When a contingent loss is not probable but is reasonably possible,
or is probable but the amount of the loss cannot be reliably estimated, then details of the contingent loss are disclosed. Loss
contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the Company discloses
the nature of the guarantees. Legal fees incurred in connection with pending legal proceedings are expensed as incurred. If the
Company is unable to resolve these disputes favourably, it may have a material adverse impact on our financial condition, cash
flow and results of operations.
Cerro San Pedro Mine
After public consultation, in March
2011, the municipality of Cerro de San Pedro approved a new municipal land use plan, which clearly designates the area of the Cerro
San Pedro Mine for mining. New Gold believes this plan resolves any ambiguity regarding the land use in the area in which Cerro
San Pedro is located, and which has had a history of ongoing legal challenges related to the environmental authorization (“EIS”)
for the mine. In April 2011, a request was filed for a new EIS based on the new Municipal Plan and on August 5, 2011 a new EIS
was granted. The new EIS is subject to a number of ongoing conditions that will need to be fulfilled through the continued operation
and eventual closure of the mine. In addition, some authorizations necessary for the operation of the Cerro San Pedro Mine have
durations of one year or one quarter, or other periods that are shorter than the remaining mine life or leach pad life. During
2015, New Gold experienced challenges relating to its annual operations license. While the issues relating to the 2015 annual operations
license have been resolved and the 2016 annual operations license has been issued, it is possible that authorizations required
in the future may also be subject to challenges or issues. This could result in a suspension or termination of operations at the
Cerro San Pedro Mine and/or additional costs, any of which could adversely affect the Company’s production, cash flow and
profitability.
| 38 | |
Rainy River
A contractor involved in the construction
of the Rainy River project has asserted various claims and potential claims against New Gold. The Company disputes the validity
of the claims and potential claims asserted and/or the amount asserted. The Company intends to vigorously defend itself against
the claims that have no merit, and has accrued a loss with respect to those asserted claims where the Company has determined that
a loss is probable and the amount can be easily estimated.
Contractual Obligations
The following is a summary of the Company’s
payments due under contractual obligations:
| |
As at
March 31 |
As at
December 31 |
| (in millions of U.S. dollars, except where noted) |
< 1 year |
1-3 Years |
4-5 Years |
After 5
Years |
2016
Total |
2015
Total |
| CONTRACTUAL OBLIGATIONS(1) |
|
|
|
|
|
|
| Long-term debt |
- |
- |
300.0 |
500.0 |
800.0 |
800.0 |
| Interest payable on long-term debt |
52.3 |
104.5 |
94.0 |
62.5 |
313.3 |
313.3 |
| Operating lease commitments |
3.1 |
0.3 |
- |
- |
3.4 |
6.5 |
| Capital expenditure commitments |
193.6 |
94.4 |
- |
- |
288.0 |
262.2 |
| Reclamation and closure cost obligations |
1.4 |
2.4 |
2.4 |
86.4 |
92.6 |
90.9 |
| Gold stream obligation |
- |
23.5 |
38.7 |
173.5 |
235.7 |
235.7 |
| Total contractual obligations |
250.4 |
225.1 |
435.1 |
822.4 |
1,733.0 |
1,708.6 |
| 1. | The majority of the Company’s contractual obligations consist of long-term debt and interest
payable. Long-term debt obligations are comprised of senior unsecured notes issued on April 5, 2012 and November 15, 2012. Refer
to the section “Financial Condition Review – Balance Sheet Review – Long-term debt” for further details. |
Related Party Transactions
The Company did not enter into any
related party transactions during the three months ended March 31, 2016.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet
arrangements.
Outstanding Shares
As at April 27, 2016, there were 510,217,750
common shares of the Company outstanding. The Company had 16,574,170 stock options outstanding under its share option plan, exercisable
for up to 16,574,170 common shares. In addition, there are warrants outstanding exercisable for up to 28,112,490 common shares.
| 39 | |
NON-GAAP
FINANCIAL PERFORMANCE MEASURES
Total Cash Costs per
Gold Ounce
“Total cash costs per gold ounce”
is a non-GAAP measure that is a common financial performance measure in the gold mining industry but with no standard meaning under
IFRS. New Gold reports total cash costs on a sales basis. The Company believes that, in addition to conventional measures prepared
in accordance with IFRS, certain investors use this information to evaluate the Company’s performance and ability to generate
liquidity through operating cash flow to fund future capital expenditures and working capital needs. New Gold believes that this
measure, along with sales, is a key indicator of a company’s ability to generate operating earnings and cash flow from its
mining operations.
Total cash cost figures are calculated
in accordance with a standard developed by The Gold Institute, a worldwide association of suppliers of gold and gold products that
ceased operations in 2002. Adoption of the standard is voluntary and the cost measures presented may not be comparable to other
similarly titled measures of other companies. Total cash costs include mine site operating costs such as mining, processing and
administration costs, royalties, production taxes and realized gains and losses on fuel contracts, but are exclusive of amortization,
reclamation, capital and exploration costs and net of by-product sales. Total cash costs are then divided by gold ounces sold to
arrive at the total cash costs per ounce sold.
The Company produces copper and silver
as by-products of its gold production. The calculation of total cash costs per gold ounce for Cerro San Pedro is net of by-product
silver sales revenue, and the calculation of total cash costs per gold ounce sold for Peak Mines and New Afton is net of by-product
silver and copper sales revenue. New Gold notes that in connection with New Afton, the copper by-product revenue is sufficiently
large to result in a negative total cash cost on a single mine basis. Notwithstanding this by-product contribution, as a company
focused on gold production, New Gold aims to assess the economic results of its operations in relation to gold, which is the primary
driver of New Gold’s business. New Gold believes this metric is of interest to its investors, who invest in the Company primarily
as a gold mining company. To determine the relevant costs associated with gold only, New Gold believes it is appropriate to reflect
all operating costs, as well as any revenue related to metals other than gold that are extracted in its operations.
To provide additional information to
investors, New Gold has also calculated total cash costs on a co-product basis, which removes the impact of other metal sales that
are produced as a by-product of gold production and apportions the cash costs to each metal produced on a percentage of revenue
basis, and subsequently divides the amount by the total gold ounces, silver ounces or pounds of copper sold, as the case may be,
to arrive at per ounce or per pound figures. Unless indicated otherwise, all total cash cost information in this MD&A is net
of by-product sales.
Total cash costs are intended to provide
additional information only and do not have any standardized meaning under IFRS and may not be comparable to similar measures presented
by other mining companies. They should not be considered in isolation or as a substitute for measures of performance prepared in
accordance with IFRS. The measure is not necessarily indicative of cash flow from operations under IFRS or operating costs presented
under IFRS.
All-in Sustaining Costs
per Gold Ounce
“All-in sustaining costs per
gold ounce” is a non-GAAP measure based on guidance announced by the World Gold Council (“WGC”) in June 2013.
The WGC is a non-profit association of the world’s leading gold mining companies established in 1987 to promote the use of
gold to industry, consumers and investors. The WGC is not a regulatory body and does not have the authority to develop accounting
standards or disclosure requirements. The WGC has worked with its member companies, including New Gold, to develop a measure that
expands on IFRS measures such as operating expenses and non-GAAP measures to provide visibility into the economics of a gold mining
company. Current IFRS measures used in the gold industry, such as operating expenses, do not capture all of the expenditures incurred
to discover, develop and sustain gold production. New Gold believes the all-in sustaining costs measure provides further transparency
into costs associated with producing gold and will assist analysts, investors and other stakeholders of the Company in assessing
its operating performance, its ability to generate free cash flow from current operations and its overall value.
| 40 | |
All-in sustaining costs per gold ounce
is intended to provide additional information only and does not have any standardized meaning under IFRS and may not be comparable
to similar measures presented by other mining companies. It should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with IFRS. The measure is not necessarily indicative of cash flow from operations under IFRS
or operating costs presented under IFRS.
New Gold defines all-in sustaining
costs per ounce as the sum of total cash costs, capital expenditures that are sustaining in nature, corporate general and administrative
costs, capitalized and expensed exploration that is sustaining in nature, and environmental reclamation costs, all divided by the
total gold ounces sold to arrive at a per ounce figure. To determine sustaining capital expenditures, New Gold uses cash flow related
to mining interests from its statement of cash flows and deducts any expenditures that are non-sustaining. Capital expenditures
to develop new operations or capital expenditures related to major projects at existing operations where these projects will materially
increase production are classified as non-sustaining and are excluded. The table “Sustaining Capital Expenditure Reconciliation”
reconciles New Gold’s sustaining capital to its cash flow statement. The definition of sustaining versus non-sustaining is
similarly applied to capitalized and expensed exploration costs. Exploration costs to develop new operations or that relate to
major projects at existing operations where these projects are expected to materially increase production are classified as non-sustaining
and are excluded.
Costs excluded from all-in sustaining
costs are non-sustaining capital expenditures and exploration costs, financing costs, tax expense, transaction costs associated
with mergers and acquisitions, and any items that are deducted for the purposes of adjusted earnings.
By including total cash costs as a
component of all-in sustaining costs, the measure deducts by-product revenue from gross cash costs. Refer to the discussion above
regarding total cash costs per gold ounce for the discussion of deduction of by-product revenue.
| 41 | |
Cash Costs and All-in
Sustaining Costs (“AISC”) per Ounce Reconciliation Tables
The following tables reconciles these
non-GAAP measures to the most directly comparable IFRS measure on an aggregate and mine-by-mine basis.
| |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016 |
2015 |
| Total cash costs AND AISC reconciliation |
|
|
| Operating expenses |
81.9 |
99.6 |
| Treatment and refining charges on concentrate sales |
8.6 |
7.4 |
| Adjustments(1) |
(0.8) |
0.7 |
| Total cash costs before by-product revenue |
89.7 |
107.7 |
| By-product copper and silver sales |
(59.4) |
(62.8) |
| Total cash costs net of by-product revenue |
30.3 |
44.9 |
| Gold ounces sold |
86,031 |
92,398 |
| Total cash costs per gold ounce sold ($/ounce) |
354 |
486 |
| Total cash costs per gold ounce sold on a co-product basis(2) ($/ounce) |
641 |
729 |
| Total cash costs net of by-product revenue |
30.3 |
44.9 |
| Sustaining capital expenditures(3) |
22.4 |
39.2 |
| Sustaining exploration - expensed |
2.2 |
0.6 |
| Corporate G&A including share-based compensation(4) |
8.7 |
8.0 |
| Reclamation expenses |
1.3 |
1.0 |
| Total all-in sustaining costs |
64.9 |
93.7 |
| All-in sustaining costs per gold ounce sold ($/ounce) |
758 |
1,014 |
| All-in sustaining costs per gold ounce sold on a co-product basis(2) ($/ounce) |
898 |
1,069 |
| 1. | Adjustments include non-cash items related to inventory write-downs, the amortization of Mesquite’s
Purchase Price Allocation (“PPA”) associated with royalties and social closure costs included in operating expenses. |
| 2. | Amounts presented on a co-product basis remove the impact of other metal sales that are produced
as a by-product of our gold production and apportions the cash costs to each metal produced on a percentage of revenue basis. |
| 3. | See “Total Sustaining Capital Expenditure Reconciliation” below to reconcile sustaining
capital expenditures to mining interests per the statement of cash flows. |
| 4. | Includes the sum of corporate administration costs and share-based payment expense per the income
statement, net of any non-cash depreciation within those figures. |
| 42 | |
| |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016 |
2015 |
| NEW AFTON cash costs and AISC reconciliation |
|
|
| Operating expenses |
24.4 |
24.7 |
| Treatment and refining charges on concentrate sales |
7.4 |
6.3 |
| New Afton cash costs before by-product revenue |
31.8 |
31.0 |
| By-product copper and silver sales |
(47.9) |
(50.0) |
| New Afton cash costs net of by-product revenue |
(16.1) |
(19.1) |
| Gold ounces sold |
25,131 |
22,880 |
| New Afton cash costs per gold ounce sold ($/ounce) |
(641) |
(834) |
| New Afton cash costs per gold ounce sold on a co-product basis(1) ($/ounce) |
487 |
494 |
| New Afton cash costs net of by-product revenue |
(16.1) |
(19.1) |
| Sustaining capital expenditures(2) |
8.9 |
10.6 |
| Sustaining exploration - expensed |
0.2 |
- |
| Reclamation expenses |
0.3 |
0.3 |
| New Afton all-in sustaining costs |
(6.7) |
(8.2) |
| All-in sustaining costs per gold ounce sold ($/ounce) |
(268) |
(359) |
| All-in sustaining costs per gold ounce sold on a co-product basis(2) ($/ounce) |
631 |
667 |
| 1. | Amounts presented on a co-product basis remove the impact of other metal sales that are produced as
a by-product of our gold production and apportions the cash costs to each metal produced on a percentage of revenue basis. |
| 2. | See “New Afton Sustaining Capital Expenditure Reconciliation” below to reconcile sustaining
capital expenditures to capital expenditures per the segmented information note. |
| |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016 |
2015 |
| Mesquite cash costs and AISC reconciliation |
|
|
| Operating expenses |
15.3 |
24.4 |
| Adjustments(1) |
0.2 |
0.3 |
| Mesquite cash costs |
15.5 |
24.7 |
| Gold ounces sold |
24,929 |
27,834 |
| Mesquite cash costs per gold ounce sold ($/ounce) |
626 |
889 |
| Mesquite cash costs |
15.5 |
24.7 |
| Sustaining capital expenditures |
11.5 |
22.5 |
| Sustaining exploration - expensed |
- |
- |
| Reclamation expenses |
0.4 |
0.3 |
| Mesquite all-in sustaining costs |
27.4 |
47.5 |
| All-in sustaining costs per gold ounce sold ($/ounce) |
1,101 |
1,708 |
| 1. | Adjustments includes amortization of Mesquite’s Purchase Price Allocation (“PPA”)
associated with royalties. |
| 43 | |
| |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016 |
2015 |
| Peak Mines cash costs and AISC reconciliation |
|
|
| Operating expenses |
20.2 |
24.5 |
| Treatment and refining charges on concentrate sales |
1.2 |
1.2 |
| Adjustments(1) |
(0.5) |
(0.5) |
| Peak Mines cash costs before by-product revenue |
20.9 |
25.2 |
| By-product copper and silver sales |
(7.5) |
(8.5) |
| Peak Mines cash costs net of by-product revenue |
13.4 |
16.7 |
| Gold ounces sold |
17,149 |
19,729 |
| Peak Mines cash costs per gold ounce sold ($/ounce) |
780 |
846 |
| Peak Mines cash costs per gold ounce sold on a co-product basis(2) ($/ounce) |
887 |
928 |
| Peak Mines cash costs net of by-product revenue |
13.4 |
16.7 |
| Sustaining capital expenditures |
1.7 |
5.8 |
| Sustaining exploration - expensed |
2.1 |
0.6 |
| Reclamation expenses |
0.4 |
0.3 |
| Peak Mines all-in sustaining costs |
17.6 |
23.4 |
| All-in sustaining costs per gold ounce sold ($/ounce) |
1,024 |
1,189 |
| All-in sustaining costs per gold ounce sold on a co-product basis(2) ($/ounce) |
1,068 |
1,181 |
| 1. | Adjustments include non-cash items related to inventory write-downs. |
| 2. | Amounts presented on a co-product basis remove the impact of other metal sales that are produced
as a by-product of our gold production and apportions the cash costs to each metal produced on a percentage of revenue basis. |
| 44 | |
| |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016 |
2015 |
| Cerro San Pedro cash costs and AISC reconciliation |
|
|
| Operating expenses |
22.0 |
26.0 |
| Adjustments(1) |
(0.5) |
0.9 |
| Cerro San Pedro cash costs before by-product revenue |
21.5 |
26.9 |
| By-product silver sales |
(3.9) |
(4.3) |
| Cerro San Pedro cash costs net of by-product revenue |
17.6 |
22.6 |
| Gold ounces sold |
18,822 |
21,956 |
| Cerro San Pedro cash costs per gold ounce sold ($/ounce) |
934 |
1,027 |
| Cerro San Pedro cash costs per gold ounce sold on a co-product basis(2) ($/ounce) |
972 |
1,053 |
| Cerro San Pedro cash costs net of by-product revenue |
17.6 |
22.6 |
| Sustaining capital expenditures |
0.2 |
0.3 |
| Reclamation expenses |
0.2 |
0.1 |
| Cerro San Pedro all-in sustaining costs |
18.0 |
23.0 |
| All-in sustaining costs per gold ounce sold ($/ounce) |
952 |
1,041 |
| All-in sustaining costs per gold ounce sold on a co-product basis(2) ($/ounce) |
987 |
1,066 |
| 1. | Adjustments in the current period related to social closure costs included in operating expenses.
Adjustments in the prior-year period include non-cash items related to inventory write-downs. |
| 2. | Amounts presented on a co-product basis remove the impact of other metal sales that are produced
as a by-product of our gold production and apportions the cash costs to each metal produced on a percentage of revenue basis. |
Sustaining Capital Expenditure
Reconciliation Tables
| |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016 |
2015 |
| Total sustaining capital expenditure |
|
|
| Mining interests per statement of cash flows |
107.4 |
69.2 |
| New Afton growth capital expenditure(1) |
(1.0) |
(9.0) |
| Rainy River growth capital expenditure |
(82.2) |
(19.0) |
| Blackwater growth capital expenditure |
(1.8) |
(2.0) |
| Total sustaining capital expenditures |
22.4 |
39.2 |
| 1. | Growth capital expenditures at New Afton in the current year relate to exploration for the C-zone.
Growth capital expenditures at New Afton in the prior-year period relate to the mill expansion and scoping study/preliminary economic
assessment and exploration for the C-zone. |
| 45 | |
| |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016 |
2015 |
| New Afton sustaining capital expenditure |
|
|
| Capital expenditure per segmented information |
9.9 |
19.6 |
| New Afton growth capital expenditure(1) |
(1.0) |
(9.0) |
| New Afton sustaining capital expenditures |
8.9 |
10.6 |
| 1. | Growth capital expenditures at New Afton in the current year relate to exploration for the C-zone.
Growth capital expenditures at New Afton in the prior-year period relate to the mill expansion and scoping study/preliminary economic
assessment and exploration for the C-zone. |
Adjusted Net Earnings
and Adjusted Net Earnings per Share
“Adjusted net earnings”
and “adjusted net earnings per share” are non-GAAP financial measures with no standard meaning under IFRS which exclude
the following from net earnings:
| · | Items included in “Other gains and losses” as per Note 3 of the Company’s unaudited
condensed consolidated financial statements; and |
| · | Certain non-recurring items. |
Net earnings have been adjusted, including
the associated tax impact, for the group of costs in “Other gains and losses” on the unaudited condensed consolidated
income statements. Key entries in this grouping are: the fair value changes for the gold stream obligation; share purchase warrants
and the gold option contracts; foreign exchange gain or loss; and loss on disposal of assets. Other adjustments to net earnings
also include inventory write downs. The adjusted entries are also impacted for tax to the extent that the underlying entries are
impacted for tax in the unadjusted net loss.
The Company uses adjusted net earnings
for its own internal purposes. Management’s internal budgets and forecasts and public guidance do not reflect the items which
have been excluded from the determination of adjusted net earnings. Consequently, the presentation of adjusted net earnings enables
shareholders to better understand the underlying operating performance of our core mining business through the eyes of management.
Management periodically evaluates the components of adjusted net earnings based on an internal assessment of performance measures
that are useful for evaluating the operating performance of our business and a review of the non-GAAP measures used by mining industry
analysts and other mining companies.
Adjusted net earnings is intended to
provide additional information only and does not have any standardized meaning under IFRS and may not be comparable to similar
measures presented by other companies. It should not be considered in isolation or as a substitute for measures of performance
prepared in accordance with IFRS. The measure is not necessarily indicative of operating profit or cash flows from operations as
determined under IFRS.
| 46 | |
The following table reconciles this
non-GAAP measure to the most directly comparable IFRS measure.
| |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016 |
2015 |
| adjusted net earnings reconciliation |
|
|
| Net earnings (loss) before taxes |
21.1 |
(37.0) |
| Other (gains) losses (1) |
(21.6) |
31.4 |
| Inventory write-down |
0.7 |
- |
| Adjusted net earnings (loss) before taxes |
0.2 |
(5.6) |
| Income tax recovery (expense) |
5.7 |
(6.8) |
| Income tax adjustments |
(6.2) |
7.5 |
| Adjusted income tax (expense) recovery |
(0.5) |
0.7 |
| Adjusted net earnings (loss) |
(0.3) |
(4.9) |
| Adjusted earnings (loss) per share (basic and diluted) |
$nil |
(0.01) |
| Adjusted effective tax rate |
250% |
13% |
| 1. | Please refer to Note 3 of the Company’s unaudited condensed consolidated financial statements
for a detailed breakdown of other gains and losses. |
Cash Generated from
Operations, before Changes in Non-Cash Operating Working Capital
“Cash generated from operations,
before changes in non-cash operating working capital” is a non-GAAP financial measure with no standard meaning under IFRS,
which excludes changes in non-cash operating working capital. Management uses this measure to evaluate the Company’s ability
to generate cash from its operations before temporary working capital changes.
Cash generated from operations, before
non-cash changes in working capital is intended to provide additional information only and does not have any standardized meaning
under IFRS; it should not be considered in isolation or as a substitute for measures of performance prepared in accordance with
IFRS. Other companies may calculate this measure differently and this measure is unlikely to be comparable to similar measures
presented by other companies.
| |
Three months ended March 31 |
| (in millions of U.S. dollars) |
2016 |
2015 |
| cash reconciliation |
|
|
| Cash generated from operations |
61.5 |
69.8 |
| Add back (deduct): Change in non-cash operating working capital |
0.6 |
(2.4) |
| Cash generated from operations before changes in non-cash operating working capital |
62.1 |
67.4 |
Operating Margin
“Operating margin” is a
non-GAAP financial measure with no standard meaning under IFRS, which management uses to evaluate the Company’s aggregated
and mine-by-mine contribution to net earnings before non-cash depreciation and depletion charges. Operating margin is calculated
as Revenue less operating expenses and therefore does not include depreciation and depletion.
| 47 | |
Operating margin is intended to provide
additional information only and does not have any standardized meaning under IFRS; it should not be considered in isolation or
as a substitute for measures of performance prepared in accordance with IFRS. Other companies may calculate this measure differently
and this measure is unlikely to be comparable to similar measures presented by other companies. The following tables reconcile
this non-GAAP measure to the most directly comparable IFRS measure on an aggregated and mine-by-mine basis.
Operating Margin Reconciliation
Tables
| |
Three months ended March 31 |
| (in millions of U.S. dollars) |
2016 |
2015 |
| TOTAL OPERATING MARGIN |
|
|
| Revenue |
154.5 |
168.9 |
| Less: Operating expenses |
(81.9) |
(99.6) |
| Total operating margin |
72.6 |
69.3 |
| |
Three months ended March 31 |
| (in millions of U.S. dollars) |
2016 |
2015 |
| New Afton OPERATING MARGIN |
|
|
| Revenue |
70.6 |
72.6 |
| Less: Operating expenses |
(24.4) |
(24.7) |
| New Afton operating margin |
46.2 |
47.9 |
| |
Three months ended March 31 |
| (in millions of U.S. dollars) |
2016 |
2015 |
| Mesquite OPERATING MARGIN |
|
|
| Revenue |
30.0 |
33.8 |
| Less: Operating expenses |
(15.3) |
(24.4) |
| Mesquite operating margin |
14.7 |
9.4 |
| |
Three months ended March 31 |
| (in millions of U.S. dollars) |
2016 |
2015 |
| Peak Mines OPERATING MARGIN |
|
|
| Revenue |
27.7 |
31.5 |
| Less: Operating expenses |
(20.2) |
(24.5) |
| Peak Mines operating margin |
7.5 |
7.0 |
| |
Three months ended March 31 |
| (in millions of U.S. dollars) |
2016 |
2015 |
| CERRO San Pedro OPERATING MARGIN |
|
|
| Revenue |
26.2 |
31.0 |
| Less: Operating expenses |
(22.0) |
(26.0) |
| Cerro San Pedro operating margin |
4.2 |
5.0 |
| 48 | |
Average Realized Price
“Average realized price per ounce
of gold sold” is a non-GAAP financial measure with no standard meaning under IFRS. Management uses this measure to better
understand the price realized in each reporting period for gold sales.
Average realized price is intended
to provide additional information only and does not have any standardized meaning under IFRS; it should not be considered in isolation
or as a substitute for measures of performance prepared in accordance with IFRS. Other companies may calculate this measure differently
and this measure is unlikely to be comparable to similar measures presented by other companies. The following tables reconcile
this non-GAAP measure to the most directly comparable IFRS measure on an aggregate and mine-by-mine basis.
Average Realized Price
Reconciliation Tables
| |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016 |
2015 |
| Total AVERAGE REALIZED PRICE |
|
|
| Revenue from gold sales |
100.3 |
110.3 |
| Treatment and refining charges on gold concentrate sales |
3.5 |
3.1 |
| Gross revenue from gold sales |
103.8 |
113.4 |
| Gold ounces sold |
86,031 |
92,398 |
| Total average realized price per gold ounce sold ($/ounce) |
1,206 |
1,229 |
| |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016 |
2015 |
| new afton AVERAGE REALIZED PRICE |
|
|
| Revenue from gold sales |
27.2 |
26.5 |
| Treatment and refining charges on gold concentrate sales |
2.8 |
2.2 |
| Gross revenue from gold sales |
30.0 |
28.7 |
| Gold ounces sold |
25,131 |
22,880 |
| New Afton average realized price per gold ounce sold ($/ounce) |
1,196 |
1,257 |
| |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016 |
2015 |
| Mesquite AVERAGE REALIZED PRICE |
|
|
| Revenue from gold sales |
30.0 |
33.8 |
| Gold ounces sold |
24,929 |
27,834 |
| Mesquite average realized price per gold ounce sold ($/ounce) |
1,202 |
1,216 |
| 49 | |
| |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016 |
2015 |
| Peak Mines AVERAGE REALIZED PRICE |
|
|
| Revenue from gold sales |
20.8 |
23.3 |
| Treatment and refining charges on gold concentrate sales |
0.7 |
0.8 |
| Gross revenue from gold sales |
21.5 |
24.1 |
| Gold ounces sold |
17,149 |
19,728 |
| Peak Mines average realized price per gold ounce sold ($/ounce) |
1,250 |
1,225 |
| |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016 |
2015 |
| Cerro San Pedro AVERAGE REALIZED PRICE |
|
|
| Revenue from gold sales |
22.3 |
26.7 |
| Gold ounces sold |
18,822 |
21,956 |
| Cerro San Pedro average realized price per gold ounce sold ($/ounce) |
1,185 |
1,219 |
ENTERPRISE
RISK MANAGEMENT AND RISK FACTORS
The Company is subject to various
financial and other risks that could materially adversely affect the Company’s future business, operations and financial
condition. The following is a summary of certain risks facing the Company. For a more comprehensive discussion of these and other
risks facing Company, please refer to the section entitled “Risk Factors” in the Company’s most recent Annual
Information Form and the section entitled “Enterprise Risk Management” in the Company’s Management’s Discussion
and Analysis for the year ended December 31, 2015, both filed on SEDAR at www.sedar.com. There were no significant changes
to those risks or to the Company’s management of exposure to those risks during the three months ended March 31, 2016, except
as noted below:
Metal price risk
The Company’s earnings, cash flows
and financial condition are subject to risk due to fluctuations in the market price of gold, copper and silver.
For the three months ended March 31,
2016, the Company’s Revenue and cash flows were impacted by gold prices in the range of $1,077 to $1,278 per ounce, and by
copper prices in the range of $1.95 to $2.31 per pound. Low metal prices could cause continued development of, and commercial production
from, the Company’s properties to be uneconomic. In addition, there is a time lag between the shipment of gold and copper
and final pricing, and changes in pricing can impact the Company’s revenue and working capital position. As at March 31,
2016, working capital includes unpriced gold and copper concentrate receivables totalling 5,553 ounces of gold and 2.2 million
pounds of copper relating to the Peak Mines and New Afton not offset by copper swap contracts.
The Company’s exposure to changes
in gold prices has been significantly reduced during the three months ended March 31, 2016 as the Company has entered into gold
price option contracts (whereby it sold a series of call option contracts and purchased a series of put option contracts) to reduce
exposure to changes in gold prices.
| 50 | |
The details of the contracts are
as follows as at March 31, 2016:
| |
Quantity
outstanding |
Remaining term |
Exercise
price ($) |
Fair value - asset
(liability) (1) |
| Gold option contracts outstanding |
|
|
|
|
| Gold call contracts - sold |
270,000 oz |
April – December 2016 |
1,400 |
(3.1) |
| Gold put contracts - purchased |
270,000 oz |
April – December 2016 |
1,200 |
8.5 |
| 1. | The Company presents the fair value of its put and call options on a net basis on the condensed
consolidated statements of financial position. The Company has a legally enforceable right to set off the amounts under its options
contracts and intends to settle on a net basis. The contracts cover 30,000 oz of gold per month. |
A $100 change in the gold price per
ounce would have an impact of $0.6 million on the Company’s working capital position. A $0.10 change in the copper price
per pound would have an impact of $0.2 million on the Company’s working capital position.
An increase in gold, copper and silver
prices would increase the Company’s net. A 10% change in commodity prices would impact the Company’s net earnings
before taxes and other comprehensive income before taxes as follows:
| |
Three months ended March 31 |
Three months ended March 31 |
| (in millions of U.S. dollars, except where noted) |
2016
Net Earnings |
2016
Other
Comprehensive
Income |
2015
Net Earnings |
2015
Other
Comprehensive
Income |
| IMPACT OF 10% CHANGE IN COMMODITY PRICES |
|
|
|
|
| Gold price |
10.4 |
- |
11.4 |
- |
| Copper price |
5.4 |
- |
5.7 |
- |
| Silver price |
0.4 |
- |
0.4 |
- |
| 51 | |
CRITICAL
JUDGMENTS AND ESTIMATION UNCERTAINTIES
The preparation of the Company’s
consolidated financial statements in conformity with IFRS requires the Company’s management to make judgments, estimates
and assumptions about the future events that affect the amounts reported in the consolidated financial statements and related notes
to the financial statements. Estimates and assumptions are continually evaluated and are based on management’s experience
and other facts and circumstances. Revisions to estimates and the resulting effects on the carrying amounts of the Company’s
assets and liabilities are accounted for prospectively.
The areas which require management
to make significant judgments, estimates and assumptions in determining carrying values are described in the Company’s audited
consolidated financial statements for the years ended December 31, 2015 and 2014.
accounting
policies
The Company's significant accounting
policies and future changes in accounting policies are presented in the audited consolidated financial statements for the year
ended December 31, 2015, and have been consistently applied in the preparation of the unaudited condensed consolidated financial
statements.
| 52 | |
CONTROLS
AND PROCEDURES
Disclosure Controls
and Procedures
The Company’s management, with
the participation of and under the supervision of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (“Exchange Act”) and in National Instrument 52-109 Certification of Disclosure in Issuers’
Annual and Interim Filings, as of December 31, 2015. Based on that evaluation, the Company’s Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of the period covered by this MD&A, the Company’s disclosure
controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by the Company
in reports it files is recorded, processed, summarized and reported, within the appropriate time periods.
Internal Controls over
Financial Reporting
New Gold’s management, with the
participation of its Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate
internal controls over financial reporting. Internal controls over financial reporting is a process designed by, or under the supervision
of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with International Financial Reporting Standards. New Gold’s
management assessed the effectiveness of the Company’s internal controls over financial reporting as at December 31, 2015
based on the 2013 updated Committee of Sponsoring Organization of the Treadway Commission (“COSO”) and has concluded
that New Gold’s internal controls over financial reporting are effective as at December 31, 2015.
The Company’s internal controls
over financial reporting as at December 31, 2015 have been audited by Deloitte LLP, Independent Registered Public Accounting Firm
who also audited the Company’s consolidated financial statements for the year ended December 31, 2015. In their report that
immediately precedes the Company’s audited consolidated financial statements for the year ended December 31, 2015, Deloitte
LLP expressed an unqualified opinion on the effectiveness of the Company’s internal controls over financial reporting.
Limitations of Controls
and Procedures
The Company’s management, including
its Chief Executive Officer and Chief Financial Officer, believe that any internal controls and procedures for financial reporting,
no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met. Furthermore, the design of a control system must reflect the fact that there are resource constraints and the benefits
of controls must be considered relative to their costs. Due to the inherent limitations of all control systems, they cannot provide
absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented and/or detected.
These inherent limitations include the realities that judgments in decision-making can be faulty and breakdowns can occur because
of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of
two or more people, or by unauthorized override control. The design of any system of controls is also based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal
Controls over Financial Reporting
There has been no change in the Company’s
design of internal controls and procedures over financial reporting that has materially affected, or is reasonably likely to materially
affect, the Company’s internal controls over financial reporting during the period covered by this MD&A.
| 53 | |
CAUTIONARY
NOTES
Cautionary Note to U.S.
Readers Concerning Estimates of Mineral Reserves and Mineral Resources
Information concerning the properties
and operations of New Gold has been prepared in accordance with Canadian standards under applicable Canadian securities laws, and
may not be comparable to similar information for United States companies. The terms “Mineral Resource”, “Measured
Mineral Resource”, “Indicated Mineral Resource” and “Inferred Mineral Resource” used in this MD&A
are Canadian mining terms as defined in the CIM Definition Standards for Mineral Resources and Mineral Reserves adopted by the
CIM Council on May 10, 2014 and incorporated by reference in National Instrument 43-101 (“NI 43-101”). While the terms
“Mineral Resource”, “Measured Mineral Resource”, “Indicated Mineral Resource” and “Inferred
Mineral Resource” are recognized and required by Canadian securities regulations, they are not defined terms under standards
of the United States Securities and Exchange Commission. As such, certain information contained in this MD&A concerning descriptions
of mineralization and resources under Canadian standards is not comparable to similar information made public by United States
companies subject to the reporting and disclosure requirements of the United States Securities and Exchange Commission.
An “Inferred Mineral Resource”
has a great amount of uncertainty as to its existence and as to its economic and legal feasibility. Under Canadian rules, estimates
of Inferred Mineral Resources may not form the basis of feasibility or pre-feasibility studies. It cannot be assumed that all or
any part of an “Inferred Mineral Resource” will ever be upgraded to a higher confidence category through additional
exploration drilling and technical evaluation. Readers are cautioned not to assume that all or any part of an “Inferred Mineral
Resource” exists or is economically or legally mineable.
Under United States standards, mineralization
may not be classified as a “Reserve” unless the determination has been made that the mineralization could be economically
and legally produced or extracted at the time the Reserve estimation is made. Readers are cautioned not to assume that all or any
part of the Measured or Indicated Mineral Resources will ever be converted into Mineral Reserves. In addition, the definitions
of “Proven Mineral Reserves” and “Probable Mineral Reserves” under CIM standards differ in certain respects
from the standards of the United States Securities and Exchange Commission.
Cautionary Note Regarding
Forward-Looking Statements
Certain information contained in this
MD&A, including any information relating to New Gold’s future financial or operating performance are “forward looking”.
All statements in this MD&A, other than statements of historical fact, which address events, results, outcomes or developments
that New Gold expects to occur are “forward-looking statements”. Forward-looking statements are statements that are
not historical facts and are generally, but not always, identified by the use of forward-looking terminology such as “plans”,
“expects”, “is expected”, “budget”, “scheduled”, “targeted”, “estimates”,
“forecasts”, “intends”, “anticipates”, “projects”, “potential”, “believes”
or variations of such words and phrases or statements that certain actions, events or results “may”, “could”,
“would”, “should”, “might” or “will be taken”, “occur” or “be
achieved” or the negative connotation of such terms. Forward-looking statements in this MD&A include those under the
heading “Outlook for 2016” and include, among others, statements with respect to: guidance for production, total cash
costs and all-in sustaining costs, and the factors contributing to those expected results, as well as expected capital expenditures;
mine life; Mineral Reserve and Mineral Resource estimates; grades expected to be mined at the Company’s operations; the expected
production, costs, economics and operating parameters of the Rainy River project and New Afton C-zone; planned activities for 2016
and beyond at the Company’s operations and projects, as well as planned exploration activities and expenses; plans to advance
the New Afton C-zone project, including permitting activities, exploration and stabilization of the estimated area of subsidence;
expected permitting and development activities for the Blackwater project; targeting timing for development, first production and
other activities related to Rainy River; and statements with respect to the payment of the remaining $75 million from Royal Gold.
| 54 | |
All forward-looking statements in this
MD&A are based on the opinions and estimates of management as of the date such statements are made and are subject to important
risk factors and uncertainties, many of which are beyond New Gold’s ability to control or predict. Certain material assumptions
regarding such forward-looking statements are discussed in this MD&A, New Gold’s Annual Information Form and its Technical
Reports filed on SEDAR at www.sedar.com. In addition to, and subject to, such assumptions discussed in more detail elsewhere, the
forward-looking statements in this MD&A are also subject to the following assumptions: (1) there being no significant disruptions
affecting New Gold’s operations; (2) political and legal developments in jurisdictions where New Gold operates, or may in
the future operate, being consistent with New Gold’s current expectations; (3) the accuracy of New Gold’s current Mineral
Reserve and Mineral Resource estimates; (4) the exchange rate between the Canadian dollar, Australian dollar, Mexican peso and
U.S. dollar being approximately consistent with current levels; (5) prices for diesel, natural gas, fuel oil, electricity and other
key supplies being approximately consistent with current levels; (6) equipment, labour and material costs increasing on a basis
consistent with New Gold’s current expectations; (7) arrangements with First Nations and other Aboriginal groups in respect
of the Rainy River and Blackwater projects being consistent with New Gold’s current expectations; (8) all required permits,
licenses and authorizations being obtained from the relevant governments and other relevant stakeholders within the expected timelines;
(9) the results of the feasibility studies for the Rainy River project, the New Afton C-zone and the Blackwater project being realized;
(10) in the case of production, cost and expenditure outlooks at operating mines for 2016 and 2017, commodity prices and exchange
rates being consistent with those estimated for the purposes of 2016 guidance; and (11) conditions to the payment of the remaining
$75 million from Royal Gold being satisfied mid-2016.
Forward-looking statements are necessarily
based on estimates and assumptions that are inherently subject to known and unknown risks, uncertainties and other factors that
may cause actual results, level of activity, performance or achievements to be materially different from those expressed or implied
by such forward-looking statements. Such factors include, without limitation: significant capital requirements and the availability
and management of capital resources; additional funding requirements; price volatility in the spot and forward markets for metals
and other commodities; fluctuations in the international currency markets and in the rates of exchange of the currencies of Canada,
the United States, Australia and Mexico; discrepancies between actual and estimated production, between actual and estimated Mineral
Reserves and Mineral Resources and between actual and estimated metallurgical recoveries; changes in national and local government
legislation in Canada, the United States, Australia and Mexico or any other country in which New Gold currently or may in the future
carry on business; taxation; controls, regulations and political or economic developments in the countries in which New Gold does
or may carry on business; the speculative nature of mineral exploration and development, including the risks of obtaining and maintaining
the validity and enforceability of the necessary licenses and permits and complying with the permitting requirements of each jurisdiction
in which New Gold operates, including, but not limited to: in Canada, obtaining the necessary permits for the Rainy River, New
Afton C-zone and Blackwater projects; and in Mexico, where Cerro San Pedro has a history of ongoing legal challenges related to
our environmental authorization; the lack of certainty with respect to foreign legal systems, which may not be immune from the
influence of political pressure, corruption or other factors that are inconsistent with the rule of law; the uncertainties inherent
to current and future legal challenges New Gold is or may become a party to; diminishing quantities or grades of Mineral Reserves
and Mineral Resources; competition; loss of key employees; rising costs of labour, supplies, fuel and equipment; actual results
of current exploration or reclamation activities; uncertainties inherent to mining economic studies including the feasibility studies
for Rainy River, New Afton C-zone and Blackwater; the uncertainty with respect to prevailing market conditions necessary for a
positive development or construction decision at Blackwater; changes in project parameters as plans continue to be refined; accidents;
labour disputes; defective title to mineral claims or property or contests over claims to mineral properties; unexpected delays
and costs inherent to consulting and accommodating rights of First Nations and other Aboriginal groups; uncertainties and unanticipated
delays associated with obtaining and maintaining necessary licenses, permits and authorizations and complying with permitting requirements,
including those associated with the environmental assessment process for Blackwater. In addition, there are risks and hazards associated
with the business of mineral exploration, development and mining, including environmental events and hazards, industrial accidents,
unusual or unexpected formations, pressures, cave-ins, flooding and gold bullion losses (and the risk of inadequate insurance or
inability to obtain insurance to cover these risks) as well as “Risk Factors” included in New Gold’s disclosure
documents filed on and available on SEDAR at www.sedar.com. Forward-looking statements are not guarantees of future performance,
and actual results and future events could materially differ from those anticipated in such statements. All of the forward-looking
statements contained in this MD&A are qualified by these cautionary statements. New Gold expressly disclaims any intention
or obligation to update or revise any forward-looking statements whether as a result of new information, events or otherwise, except
in accordance with applicable securities laws.
| 55 | |
Technical Information
The scientific and technical information
contained in this MD&A has been reviewed and approved by Mark A. Petersen, Vice President, Exploration, New Gold. Mr. Petersen
is an AIPG Certified Professional Geologist and a “Qualified Person” under NI 43-101.
The estimates of Mineral Reserves and
Mineral Resources discussed in this MD&A may be materially affected by environmental, permitting, legal, title, taxation, sociopolitical,
marketing and other relevant issues. New Gold’s current Annual Information Form and the NI 43-101 Technical Reports for its
mineral properties, all of which are available on SEDAR at www.sedar.com, contain further details regarding Mineral Reserve and
Mineral Resource estimates, classification and reporting parameters, key assumptions and associated risks for each of New Gold's
mineral properties.
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