Canadian miner New Gold Inc. (NGD, Financial) announced on Sept. 19 it is selling its Mesquite Mine to Equinox Gold Corp. (TSXV:EQX, Financial).
The deal, which has been valued at $158 million, is expected to close in the fourth quarter.Ă‚
New Gold said the proceeds of the sale will be used to bolster the balance sheet in order to tackle unexpected financial needs and seize investment opportunities.
The market reacted negatively to the news, sending shares lower in after-hours trading on Wednesday.
The California-based asset has been a significant contributor to the company's production. The mine accounted for 30% to 40% of New Gold’s total annual gold production over the last three years. In 2017, the mine milked 135,000 ounces of gold from its reserves versus the company's total gold production of 422,000 ounces. New Gold also produces silver and copper, but the yellow metal accounts for approximately 75% to 77% of the total annual turnover.
The sale will also impact the miner's total proven and probable gold reserves, pushing the enterprise value up to $86 per ounce of equivalent gold reserves. The value excludes copper reserves.Ă‚
The following ratios suggest New Gold is trading cheaply, but I wouldn’t recommend buying or adding to any existing positions.Â
On Wednesday, shares of New Gold closed 2.8% higher at $1.10 on the New York Stock Exchange. According to GuruFocus, the share price has fallen 70% and is now below the 200-, 100- and 50-day simple moving average lines. The 52-week range is 76 cents to $4.03.
The price-book ratio is 0.36 versus an industry median of 1.74, and that the EV-to-EBITDA ratio is -3.2 versus an industry median of 9.3.
In addition, New Gold is projected to underperform most of its competitors due to a start-up performance variability at the mill facility of Rainy River. Lower gold grades and recovery rates across the entire line of operations will also negatively impact production, sales and income. As a result of those operating issues, New Gold expects to place a lower than expected volume of gold on the market. The miner also lowered its guidance on the consolidated production of gold to 415,000 to 480,000 ounces at an all-in sustaining cost of $1,080 to $1,120 per ounce of metal sold.
With the sale of Mesquite Mine, the impact will be even stronger because the asset was projected to add 140,000 to 150,000 ounces to the consolidated production for 2018.
The annual consolidated production of copper is expected to be on par with the range of 75 million to 85 million pounds previously guided by the company.
New Gold's other mineral reserves are the New Afton and Rainy River mines in Canada and at the Cerro San Pedro mine in Mexico. It also owns the Canadian Blackwater project.
The company is hoping to gain a leading position in the gold industry as an intermediate operator through environment-focused and socially responsible mining.
The average target price is $4.01 per share. According to GuruFocus, New Gold has 579 million shares outstanding, of which 44.88% is held by institutions.
During the second quarter, Ray Dalio's Bridgewater Associates increased its holding by 10.54% to 110,029 shares and Jim Simons' Renaissance Technologies boosted its position by 1,455.16% to 2,891,034 shares.
Disclosure: I have no positions in any securities mentioned in this article.
