New Gold Inc.

Good morning, my name is Sylvie and I will be your conference operator today. Welcome to the New Gold's second quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. Please be advised that today's conference call and webcast is being recorded. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. And if you would like to withdraw your question, please press star, then the number two. And I would like to turn the conference over to Nkit Shah, VP of Strategy and Business Development. Please go ahead, sir.

Thank you, Sylvie, and good morning, everyone. We appreciate you joining us today for New Gold's second quarter 2021 earnings conference call and webcast. On the line today, we have Renaud Adams, President and CEO, and Rob Chauvet, our CFO. Should you wish to follow along with the webcast, please sign in from our homepage at newgold.com. Before we begin the presentation, I'd like to direct your attention to our cautionary language related to forward-looking statements found on slides two and three of the presentation. Today's commentary includes forward-looking statements relating to Newgold. In this respect, we refer you to our detailed cautionary note regarding forward-looking statements in the presentation. There are caution that actual results in future events could differ materially from those expressed or implied in forward-looking statements. Slides two and three provide additional information and should be reviewed. We also refer you to the section entitled Risk Factors in NUGLE's Latest MD&A and Other Filings available on CDAR, which set out certain material factors that could cause actual results to differ. In addition, at the conclusion of the presentation, there are a number of end notes that provide important information and should be reviewed in conjunction with the material presented. I'll now turn the call over to Rob. Rob? Thanks. Good morning.

Slide 5 provides our operating highlights for Q2. Production details are consistent with our July production press release. During Q2, the company produced approximately 105,700 gold equivalent ounces. The amount consisted of 18.2 million pounds of copper, 52,900 gold ounces from Rainy River, and 14,088 gold ounces from New Afton, totaling approximately 66,900 gold ounces. Higher equivalent gold production as compared to the prior year quarters, primarily due to higher tons and grades at Rainy River and higher copper production at New Afton. Operating expense per equivalent ounce was higher than the prior year quarter due to planned higher costs at New Afton, a strengthening Canadian dollar, and the Canadian weight subsidy received in the prior period. Consolidated all-in sustaining costs for the quarter were $15.51 per equivalent ounce, higher than the prior year quarter, primarily due to the higher operating expense, as previously noted, and increase in sustaining capital at New Afton. Turning to our financial results on slide six, second quarter revenue was $198 million, driven by sales of 68,000 gold ounces at an average realized gold price of $18.17 per ounce, and sales of 16.9 million pounds of copper at 4.43 per pound. Q2 revenue was 54% higher than the prior quarter, primarily due to higher sales volumes and metal prices. Operating cash flow before working capital adjustments was 84.7 million or 12 cents per share for the quarter, higher than the prior quarter, primarily due to higher sales volumes and metal prices. The company recorded a net loss of 15.8 million or two cents per share during the quarter, compared to a loss of $0.07 per share in the prior year quarter. After adjusting for other certain items, net earnings were $26.7 million or $0.04 per share in Q2, compared to a net loss of $3.3 million or $0.00 per share in the second quarter of 2020. The difference is driven by higher sales volumes and metal prices. Our Q2 adjusted earnings include adjustments related to unrealized adjustments on our Rainy River stream, mark to market, and the free cash flow royalty at New Afton. Our MD&A has additional details on the non-GAAP measures discussed here. Next slide covers, or sorry, on the bottom of this slide covers the capital expenditures. Our total capital expenditures for the quarter were 82.4 million, 49.2 million was spent on sustaining capital, and 33.2 million on growth capital. Sustaining spend was primarily related to planned tailings work at both operating assets, and B3 mine development at New Afton. Growth capital was focused on project development, specifically in the sea zone and the thicken and amended tailings project at New Afton and the underground intrepid zone at Rainy River. Slide seven provides details of our capital structure. At June 30th, 2021, we had $138 million in cash and $464 million in liquidity. Adding to liquidity will be the receipt this month of the remaining $50 million CAD payment related to the Blackwater sale. With that, I'll turn the call over to Renaud.

Thanks.

Thank you, Rob. And again, thank you, everyone, for joining us today. I'm on flight nine on Rainy River. So let me start by saying that there are currently no active COVID cases at Rainy. And the mine continued to use rapid testing and has also implemented vaccination clinic at site. The asset performed extremely well during the second quarter and was very well positioned at the quarter end to enter the second half of the year, which was to be focused on high grade and the lower strip ratio. The mining operations continue to execute very well during the quarter with over 158,000 tons per day mined, a third consecutive quarter at or above the operational target of 151,000 tons per day. So the focus really remains on the further operations and cost optimization as we move forward and advance in time. The mill performed at a slightly lower availability this quarter, but we expect the mill to deliver its maximum permit capacity of 27,000 tons a day in the second half of the year. The processing milling rate has been maintained at an interesting average of nearly 26,500 tons per day over the last four quarters, just compared with the permit of 27,000 tons a day. Very important is on the Entrepid. The Entrepid zone is the first underground portal located east of the pit. So the Entrepid decline advanced by another 616 meters. We've now reached the second level in ore, and we're in the process now to implement more definition drilling as we resume and develop in ore. The RAMP will continue to advance in the third quarter with the objective eventually to have a full first panel totally developed and or prior to initiate productions in the later part of 2022, while we would have also advanced the second panel. Parallel to entropid development is the default study that would eventually target the conversion of a significant portion of the resources into a reserve from the resources located below the pit. The entropid, as previously discussed, the full entropid zone was now incorporated in the reserve at the December 2020 And we have now completed a more detailed mine plan that would be incorporated in our next generations of life of mine. So we're now busy to do the same exercise. The current reserve as of December 2020 contemplates only the upper portion of the underground resources located below the pit. And we're now in the process of the use of the $1,400 reserve price. to complete the study to prove the conversion of those resources and to reserve for incorporations our next life of mine, which is targeted to increase the life of mine and the valuation of the asset. I will now refer you to a short extract of our MDNA and press release with regards to the situation and the challenge for the grade in July 2021. So in July 2021, the production was primarily from the eastern area of the ODM called the East Low. And the realized goal grade from this area was below the expected goal grade in this period. So the East Low represent approximately 50% of the planned productions for the second half of 2021. So if the realized goal grade continues to track below the expected goal grade, it will negatively impact the amount of ounces we expect to produce in the second half of 2021. So the extent of the impact is not yet known, but there is a risk that Rainier River may not achieve the lower end of its goal equivalent production guidance range of 2,075,000 to 295,000 ounces. or the high end of its all-in sustaining cost guiding range of $11.25 to $12.25 per gold equivalent ounce. So I'm now turning to the slide 10. We appreciate that the situation of July is very recent, but I would like to provide some additional comment to this disclosure. So let me start by giving a bit of the background here. So the resources at Rainy are categorized in three groups, the high, medium, and low grade. They're called the HDO, MGO, and LGO. So the combination of the HDO and MGO form what we would call the direct feed to the mill, while the LGO is stockpiled for future use. So in other words, the combination of the AGO-MGO is really what you're targeting to feed the mill at a 27,000 tons a day, while the AGO are stockpiled for future blend with the underground as we move and transition to the underground. So the reconciliation of the AGO-MGO is really what drives the performance of the mine. So as you can see on the table, historically, the mine has... reconcile extremely well with the agency and the MGO. In the last three years, as you can see, we have successfully mined and delivered on a neutral to positive reconciliation to total ounces when compared with the resource model. So with that in mind, The planned 2021 production was done using the reserve of December 2020, which was based on, of course, the resource and the fate and the reconciliation. So as mentioned, the East Lobe represents about 50% of the ton to be mined in the second half. So as we initiate the second half of the year at the higher grade plant, and that the production was primarily from the East Lobe, and that represents the 50% of stage 2. So, of course, this situation was highlighted. So, the situation of July 2021 is very early stage. There is still quite a bit of work to be done. I'd like to mention that the E-slope represents approximately only 15%, 1.5, 15% of the remaining open pit of the HGO-MGO post-2021. So we're not talking about something of a 50% range, you know, in the remaining life of mine, but this represents a significant portion of the H2, and therefore, the situation is taken, obviously, extremely seriously. So it is really early stage to predict the behavior of the E-SLOPE in the future months to come. We've been in situation very similar in the past. So not because we have reconciled on an early basis extremely well in the last three years, that every song, every day, every month, every moment was perfect. So we've been in situation before where we've seen similar situations where we had some reconciliation on the sporadic basis. But again, because of the importance of the east lobe in the second half, this was highlighted in a very early stage. So I'd like as well to notice that the RC drilling was incorporated to our strategy in 2020 and fully incorporated into our operational strategy in 2021. So I'd like to mention as well that the RC drilling that took place below the 433 and ODM earlier this year has reconfirmed the resources as planned. But our RC drilling program for the East Slope was not yet completed and will be advanced as we advance over time over the next week. We'll keep informed as the information comes to us. And there is some potential modification of the mine plan as well, if needed, to mitigate a portion of the 2021 impact. But again, early stage and more analysis require the advance in time.

I'd like to move on to slide 11 in the New Afton.

So globally, I'm extremely, extremely pleased with the New Afton solid performance of the second quarter, with approximately 50,500 gold equivalent ounces produced. with including a copper production of 18.2 million pounds. Unfortunately, we had two recent active cases of COVID in New Afton, but basically, the mine operated the whole quarter after zero active cases. I'd like to mention, as well as you're probably following in the news, the wildfire situation in British Columbia remain active. And at this time, there's been no impact to the operation in New Afton or to the supply chain. But New Afton has an active fire management plan in place, and a number of precautionary measures have been implemented in the event the risk to our employee contractor community and infrastructure increased considerably. Again, we're monitoring the situation. We have a very strong plan, but no impact has been noted to date. the asset. So the mine and mill performed within the plan, while the copper grade outperformed in the second quarter, so resulting in a very strong quarter for us. The sea zone development advanced by 919 meters during the quarter, and the site continued to focus on delivering our future on time and on budget. While later than originally planned, the B3 permit was received during the quarter and the extraction is started and will continue to ramp up over the second quarter of 2021 and 2022. But as a result of the delay, there will be less done from B3 available in our second half of the year, And therefore, a portion of the ore will be replaced by lower grade ore from the lift one and ore stopper. But overall, we continue to expect to meet our gold equivalent guidance with as strong as a midpoint of the copper guidance. A point as well to note, a very important point of New Afton, is that the reserve of December 2020, which served, of course, for the 2021 mine plan, we're estimating using a gold price of $1,400, but also a copper price as low as 275 a pound. So with the current metal prices significantly above the reserve pricing, New Afton is evaluating a potential for additional short-term opportunity using a lower cut-off grade. So we continue to maximize the total value of the asset as we transition to the CISO in 2023. So this completes the presentation portion of the call, and then I would now turn it back to the operator for the Q&A portion. Operator?

Thank you, sir. Ladies and gentlemen, if you do have any questions at this time, please press star followed by 1 on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw your question, please press star followed by 2. And if you're using a speakerphone, we do ask that you please lift your hands up before pressing any keys. Please go ahead and press star 1 now if you do have any questions. And your first question will be from Anissa Soni at CIBC. Please go ahead.

Hi. Thanks for taking my question, Renaud. And thank you for the disclosure on the reconciliation with that East Lobe. Could you just give us an idea what grade was expected and what your, I guess, if you tell us the grade that was expected, we can, you know, from the math there, figure out what you're actually getting or what you're reconciling to. But I just want the actual relative, the reference point for what grade you were expecting in the East Lobe.

We've never really, you know, like this loads on a detailed basis. But what I could say, as you know, you know, we've been performing in the point averaging, you know, 0.8 to 0.85 in the first half. And we're expecting a full year around the one gram. So, obviously, we're expecting in the second half, you know, something along the one, 1.2 grams a ton. And the 50% of the tons, you know, to achieve that is from the east load. And so, again, without breaking down into the detail, the performance of the E-SLOPE in achieving 1 to 1.2 grams in the second half of the year contributes for about 50% of it.

Okay, thank you. And then just moving on to new action with the B3 development rates, you indicated for the second half of this year you're a little bit behind on that. Can you just give us an idea of what kind of ore sources and what kind of grades we should perhaps be thinking about going into Q3? And then is it fair to say that this – can you just give us an idea of how far behind, you know, this receipt of the permit was? I'm looking at the technical report, and I think it's – you were supposed to have started developing at the beginning of this year, so I would estimate, what, three or four months behind? And is that a fair assumption to kick out the – the access in the B3 zone?

Yeah, it's a fair assumption. I mean, like, we were as disclosed prior, you know, priorly disclosed, so we were hoping for the first, for the B3 permit in the first quarter. Of course, you know, last year we were really hoping for early in the year And then, as you know, we were hit with the fatality. And quite frankly, I mean, our communities and BC government has been extremely challenged over the last short while. So we knew that there were some pending conversations to close. So we're patiently waiting. But unfortunately, really, we were planning for maybe the first quarter, and that was expanded to the second quarter. So your assumption is good. You know, there is a three to four months of ramping up that we were hoping in 21 and did not happen and which extend basically. But on the other hand, as I mentioned as well, there is numerous opportunity here to relook at some draw point that were at the east, the left one that was stopped or mining and back in time on the use of the lower metal prices. So the time will probably continue to come from lift one Anita and the lift one has been performing very well in the first two quarters. As you could see from the grade, the copper grade and there is obviously an opportunity to continue to fall beyond the reserve line towards the resource line. Remember that this block cave has a massive resource envelope around the reserve so. All that for 2021, you know, we're very confident. So in terms of grade, if you do the math and you look at our production, so we definitely see the goal that would probably drop, you know, in the 0.3 late, you know, late, not late, but between, you know, maybe the 0.35 to 0.40. So we're fine to drop the goal grade from the 0.43 you've seen. We're fine to drop the copper. Now, note that the copper grade in the first half has been hard-performing as well. I'm very pleased, but hasn't outperformed. So that gives us the opportunity, as I said, to go another area and average maybe more like a 0.65 or so, as was maybe more originally planned. So a lot of opportunities, but there is no point in continuing, you know, and try to stretch, you know, to the higher grade and leave opportunity behind. So the first two quarters would allow us to maximize the use of the lower grade for the second half and still be well positioned in our guidance. Okay.

Lower copper grades targeted. Would that also pull in some lower gold grades as well?

Yeah, we'll do as well because you cannot decouple both by pulling at the lower, but we still expect to meet the gold low end with the combination of a midpoint. Now, remember as well that our equivalent goals are calculated using a 350 copper as well. We're taking everything into account, and we believe that the right thing to do is to maximize the value of the asset as we transition to season.

Okay. And then would that imply that maybe you would perhaps fill the mills higher than the rent rate so far? I think that the rent rate that you've had was contingent upon the grades that you were seeing in your reserve envelope rather than on the resource envelope. So could we see higher tonnage going through as well?

On that one, I would be very prudent to say that as much as we want to maximize the extractions at the underground and extract the maximum value, we continue to be managing our mill in parallel to the tailings as well, capacity and managing of the water and storage. Remember that... As we transition next year to the input tailing, we're ending, you know, the life of the current storage. So it's very important that we do not try to push beyond and then have to manage some tailing situations. So I would say I'm less fuzzy, you know, in pushing the mill more than pushing the mine.

Okay, last question, then I'll pass it off. But this is more big picture. One key theme has been inflation and inflationary pressures. Could you talk about your relative exposure in terms of energy at both assets, labor, and other consumables, and what kind of pressures you're seeing there at this stage going into 2022?

I would pass it on to Rob, but just on the labor side per se, no, I wouldn't say that we feel the pressure like any other mines, you know, like we... We were very focused on controlling our turnover and that kind of thing, but now I wouldn't see that we feel pressure on the cost of the labor. Rob?

Yeah, I think the two other areas that you'd look at in that case are fuel and certainly the exchange rates. When we look at fuel, Rainier River is the site that's primarily impacted. That's where we consume most of our fuel, so You know, the impact on an annual basis there is about $3 to $4 million when we compare what the pricing of fuel came into at the beginning of the year, so approximately around $10 an ounce. And as far as FX, right now we're at about $1.25. Guidance was $1.28, and that delta, that change represents about $30 an ounce for the remainder of this year. Or, you know, maybe put another way, a $0.05 change in the CAD is around a $10 million impact on new gold.

Okay. And then is there any difference in the CAPEX, the pressures that you're seeing on or impacts on the CAPEX side of the equation?

Nothing material.

The majority of our, for instance, steel and the thickened and amended tailings, for instance, is past. We received a lot of that material. So no major material impact on our capital projects.

Okay. So we shouldn't expect the C-zone development to be escalating into next year then?

No.

Okay. All right. Thank you.

Thanks.

Thank you. Once again, as a reminder, ladies and gentlemen, if you do have any questions at this time, please press star followed by one on your touch-tone phone. And at this time, gentlemen, we have no further questions. Please proceed.

Thank you, Sylvie, and thank you, everyone, who joined us today. As always, should you have any additional questions, please do not hesitate to reach out to us by phone or email, and we hope you enjoy the rest of your summer. Thanks very much.

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.