http://www.midasletter.com/news/0901...

New Gold Targets Million Ounce Annual Output
By James West
Wednesday, January 28, 2009

When a company says they’re planning to produce a million ounces of gold a year within three years, my ears perk up. Such brazen statements are either promotional hubris or real projections, and in the case of New Gold (TSX:NGD), it certainly tends towards the latter. In 2008, New Gold exceeded its stated target of 250,000 ounces by 22,000 – a noteworthy accomplishment in view of the goal for 2014.

New Gold, formed through a merger with Peak Gold and Metallica Resources in 2008, benefits from the experience and expertise of the best minds from all three companies. The board of directors is a who’s-who of the mining industry, with eminent names like Pierre Lassonde of Franco Nevada and Ian Telfer of Goldcorp teamed up to oversee New Gold’s evolution into the big leagues.

Strategic initiatives such as the $50 million buyback of secured debentures at 60 cents on the dollar characterize the studied stewardship of New Gold’s shareholders’ interest, and the company’s nimble approach to developing mines economically while suspending unprofitable operations quickly add up to indicate a lean and dynamic leadership. The buyback reduced the company’s debt load to CA$242 million.

Robert Gallagher’s 15 years as a Placer Dome executive and most recent 7 with Newmont have equipped him perfectly for leading the combined company into its desired role as major producer. The decision to temporarily suspend operations at the Amapari mine in northern Brazil because of higher production costs associated with elevated levels of sulphide ores in an oxide-optimized production circuit demonstrates a commitment to economic efficiency that investors should find reassuring.

In a press release dated January 22nd, he said, “New Gold exceeded production guidance for 2008 with excellent operational performance at Peak Mines and Cerro San Pedro, despite challenging markets and cost pressures. The company made some difficult decisions in 2008 in response to the uncertain market conditions and took the necessary steps to strengthen our financial position and ensure that we are well positioned to deliver on our growth strategy and guidance for 2009”.

New Gold determined that it would be more cost-effective to process the remaining oxide ore (including transition material) with the underlying sulphide resource in a new process facility for which a Preliminary Economic Assessment is being prepared. Ampari still contains an estimated 302,000 ounces of gold in the 43-101 comliant reserves category, and an additional 745,000 ounces in resource. Production will resume upon completion of the newly installed processing circuit.

The New Afton mine in British Columbia continues to advance towards a projected startup date in the second half of 2012. In recognition of global economic uncertainty, New Gold reduced its capital expenditure on the mine from $286 million down to $79 million for 2009, and will continue development of access and infrastructure.

The New Afton mine contains over 2 million ounces of gold in combined reserves and resources, 5.64 million ounces of silver, and 2.44 billion pounds of copper.

New Gold is forecasting 2009 gold production of between 190,000 and 210,000 ounces at a cash cost between $465 and $485 per ounce net of by-product sales, which will represent a substantial improvement over 2008’s average of $576 per ounce.

The big wild card for New Gold in 2009 will be its treasury. The company has roughly $220 million cash ($250 M at Sept 30 2008 - $30 M to pay off $50M in debt), though it is probably more than that after a very good Q4. Cash is worth a lot right now. They are one of the big sharks in the pond searching for junior producers – or those with the immediate potential to produce – 100K – 200K oz per year. (This is much the same strategy as the old Peak Mines had.) Valuations for those companies have been slaughtered even worse than New Gold’s.

The key to a large valuation increase for New Gold (aside from a big increase in the gold price) would be an accretive acquisition. This board of directors has had some great success in M&A in the past – Pierre Lassonde of Franco-Nevada and Newmont fame, and Ian Telfer of Wheaton River Minerals fame. Paul Sweeney was a key man at Canico Resources, a Brazilian nickel play that Vale bought for $20/share in 2005

With some operating success now under their belt, and a strong treasury, New Gold has an opportunity to be one of the gold sector’s biggest winners in 2009.