S&P rates New Gold Inc (Part-1)

— 2:23 PM ET 03/27/2012

Overview
-- We are assigning our 'BB-' long-term corporate credit rating and
stable outlook to Vancouver-based gold producer New Gold Inc. (NGD)
-- We are also assigning our 'BB-' issue-level rating and '3' recovery
rating to New Gold's (NGD) US$300 million senior unsecured notes. Proceeds
from the
unsecured notes issuance will be used to repay the company's balance of senior
secured notes outstanding as well as for general corporate purposes.
-- New Gold (NGD) operates three gold mines in the U.S., Mexico, and Australia,
and holds interests in various advanced development projects that include the
New Afton and El Morro mines.
-- The stable outlook reflects our view that New Gold's (NGD) expanding
production profile at declining cash costs should support steady credit
measures in the next few years while debt increases to build El Morro.

Rating Action
On March 27, 2012, Standard & Poor's Ratings Services assigned its 'BB-'
long-term corporate credit rating and stable outlook to Toronto-based gold
miner New Gold Inc. (NGD)

At the same time, Standard & Poor's assigned its 'BB-' issue-level rating and
'3' recovery rating to New Gold's (NGD) US$300 million senior unsecured notes. A '3'
recovery rating indicates our expectation of meaningful (50%-70%) recovery in
a default scenario. We understand that proceeds from the unsecured notes
issuance will be used to fund the repayment of the company's senior secured
notes outstanding and for general corporate purposes.

Rationale
The ratings on New Gold (NGD) reflect Standard & Poor's view of the company's
limited operating diversity, exposure to volatile metals prices, and short
reserve lives at the company's gold mines. These risks are counterbalanced by
what we consider the company's low debt leverage, its attractive
second-quartile cost position, low political risk, and expected double-digit
growth rates in gold production.

New Gold (NGD) operates three gold mines in the U.S., Mexico, and Australia, and
holds interests in various advanced development projects that include New
Afton in British Columbia and El Morro in Chile.

Standard & Poor's considers New Gold's (NGD) business risk profile as weak due to
the company's limited operating diversity and a reliance on volatile and
generally correlated gold, silver, and copper prices. This is counterbalanced
by its attractive second-quartile cost position and assets that are located in
low-risk mining jurisdictions. New Gold's (NGD) operating diversity is limited by
its exposure to only three producing mines. That said, earnings contributions
are fairly even among the three assets, posing unusually low cash flow
concentration for an issuer with such limited mine diversity. We expect that
the ramp-up of New Afton in the second half of 2012 will improve operating
diversity modestly, adding a high-quality asset to New Gold's (NGD) portfolio, but eventually concentrating its cash flows as New Afton's attractive earnings
contribution significantly outweighs the other three assets.

New Gold's (NGD) fair geographic diversification is enhanced by the relatively low
political risk of the countries in which it operates. We take this view on the
company's geographic profile given that it operates in jurisdictions with
stable and predictable regulatory and tax regimes, which we believe reduces
country risk relative to other similarly sized mining companies with expanding
global operations.

In our opinion, New Gold's (NGD) position on the lower end of the global cost curve
supports its overall business risk profile. On a consolidated basis, we
believe that its byproduct cash costs, averaging about US$420-US$440 per ounce
(oz) in the past few years, position the company in the industry's second
quartile. Moreover, we believe that, unlike some other speculative-grade
mining companies, New Gold's (NGD) cost profile should allow it to maintain its
output in a potentially weaker metals price environment. Despite possible
inflationary and foreign currency cost pressures, we expect that consolidated
unit costs will decline as the low-cost New Afton mine ramps up production and
joins its Mexico-based Cerro San Pedro asset as the company's lowest cost
mines. That said, we believe that New Gold's (NGD) heavy reliance on byproduct
credits (comprising more than 30% of forecast 2012 revenues assuming an annual
price of $1,400 per oz of gold, $3.50 per pound of copper, and $25 per oz of
silver) compared with other gold producers we rate, exposes the company's
profitability to more volatile copper and silver prices.

Notwithstanding a pending lawsuit, we believe that the El Morro project could
enhance New Gold's (NGD) business risk profile by adding diversity and further
extending the company's overall reserve life. However, the potential benefits
to the business risk profile are long term in nature as the project is several
years away from achieving commercial production. As such, we expect that New Gold's (NGD) 10-year reserve life is supported by the individual mines' track record
of converting resources into reserves.

We base our operating performance expectations for New Gold (NGD) on a base-case
scenario that incorporates a gold price of US$1,400 per oz, a copper price of
US$3.50 per pound, and a silver price of US$25 per oz, which are somewhat
higher than our price assumptions published in January 2012. The prices in our
base-case scenario incorporate the assumption of about 2% GDP growth in North
American, 4%-8% GDP growth in Asia, and next to no growth in Europe. In this
base-case scenario, Standard & Poor's expects that New Gold's (NGD) profitability
will improve in 2012 and 2013, as higher production and low cash costs drive
EBITDA generation to more than US$375 million per year. In particular, the New
Afton mine's low production costs will likely increase overall EBITDA margins
above 50%, given our expectation that the mine will generate disproportionate
operating income at currently high gold and copper prices.

New Gold's (NGD) financial risk profile is significant, based on credit measures
that we expect will be strong for the rating, supported by a low pro forma
debt burden and growing funds from operations (FFO). Pro forma to the proposed
US$300 million notes, we estimate that New Gold's (NGD) expanding production at
contemporary metals prices should generate debt to EBITDA of below 1.5x and
FFO to debt of more than 60% through 2013. Assuming that El Morro is
constructed under current agreements between New Gold (NGD) and Goldcorp Inc.
(BBB+/Stable/--), we expect that New Gold's (NGD) credit measures will moderate by
2014 with the inclusion of its portion of debt obligations for the project.

In the next several years, we believe that stronger free operating cash flow
should translate into significant increases in cash, which enhances New Gold's (NGD)
financial flexibility during a time of industrywide cost pressures. A
considerable portion of the free operating cash flow increase is due to an
expected 50% reduction in capital expenditures once New Afton begins
commercial production in mid-2012, considering that New Gold's (NGD) share of cash
outlays for El Morro will be funded by Goldcorp. Conversely, it is unlikely
that New Gold (NGD) will receive any meaningful cash flows from El Morro before the
end of this decade, considering the project's five-to-six-year construction
time line followed by several years of mine-level cash flows repaying New
Gold's (NGD) carried funding obligations.
Liquidity
We view New Gold's (NGD) liquidity as strong in the next 12 months, based on the
following factors:
-- We expect that sources of liquidity will be greater than 1.5x of uses
in the next 12 months and greater than 1.0x over the ensuing 24 months.
-- We expect sources would be greater than uses even if forecast EBITDA
declines by 30%.
-- New Gold (NGD)
should begin generating positive free cash flow