New Gold's Growing Short Interest Makes It An Interesting Trade

New Gold (NGD) is a mid-tier Canadian based gold mining company with operations in North and South America. The company's shares trade on the NYSEAMEX with a market capitalization $4.62B and 462.87M shares outstanding.

According to a recent short report published by the TSX, New Gold short interest has grown over the past two weeks to about 56.15M shares, making it the third most shorted company on the exchange. To short a stock, an institution, or an individual must borrow the particular company's shares to sell in the open market in hopes of repurchasing those shares at a lower price.

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At this point, the short interest on New Gold's shares represents a significant amount of the total outstanding share number of 462.87M, or 12.13 percent. This means that it will take over 23 trading days to cover the total short position on the company's shares at the current average daily volume of 2.35M shares. Therefore, a particular event, or a positive news release can send short sellers of the stock rushing to cover their positions and thereby pushing the price of New Gold shares higher in the short-run.

Thus the buildup of shorts in the company's shares represents a short-term trading opportunity that comes shortly before the company is due to release its Q4-2012 earnings report on February 27. Holding the price of gold constant, as we get closer and closer to the earnings release date, some shorts are bound to cover their position out of fear that good news will come out from the company, putting buying pressure on the company's shares.

New Gold Quarterly Gold Production:

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The company already illustrated its ability and operational expertise by bringing the New Afton mill throughput to full capacity a month ahead of schedule, making the unexpected release of bad news less likely. The big short-squeeze is likely to take place on February 27, when the company releases its fourth quarter earnings report. A positive report with growing production figures and cost restraint is more likely to move the company's shares higher than not, causing panic among shorts and a rush to cover their positions.

The company's fourth quarter results should show production growth rate similar to Q3 gold production of 104,577 ounces, which was a 16 percent increase over Q3-2011. This is a reasonable assumption as Q4-2012 production will include ounces produced from the newly producing New Afton mine in British Colombia. Thus on a year-over-year comparison, production figures should show positive growth rates and New Gold's share price is likely to react positively to the news.