TEXT - S&P rates New Gold's proposed notes 'BB-'

Thu Nov 8, 2012 10:31am EST

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Overview
     -- We are assigning our 'BB-' issue-level and '3' recovery ratings to New 
Gold Inc.'s proposed US$500 million senior unsecured notes. We assume
that the proceeds from the notes will be used to advance the company's growth 
aspirations rather than for any major shareholder-friendly initiatives.
     -- At the same time, we are affirming all our ratings on New Gold, 
including our 'BB-' long-term corporate credit rating. 
     -- The stable outlook reflects our view that New Gold's expanding 
production profile at declining cash costs should support financial 
flexibility and credit measure generation in the next 12-18 months.
Rating Action
On Nov. 8, 2012, Standard & Poor's Ratings Services assigned its 'BB-' 
issue-level rating and '3' recovery rating to New Gold Inc.'s US$500 million 
senior unsecured notes. 

A '3' recovery rating indicates our expectation of meaningful (50%-70%) 
recovery in a default scenario. We expect the notes will rank equally with all 
of New Gold's existing and future unsecured and unsubordinated indebtedness. 
We assume that the proceeds of the notes will be used to advance the company's 
growth aspirations rather than for any major shareholder-friendly initiatives.

At the same time, Standard & Poor's affirmed its ratings on New Gold, 
including its 'BB-' long-term corporate credit rating. The outlook is stable.

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

New Gold operates four gold mines in Canada, the U.S., Mexico, and Australia, 
and holds interests in several development projects in British Columbia and 
Chile. 

Standard & Poor's considers New Gold's business risk profile as weak due to 
the company's limited operating diversity and its reliance on volatile and 
generally correlated gold, silver, and copper prices. This is counterbalanced, 
we believe, by its attractive first-quartile cost position and assets that are 
located in low-risk mining jurisdictions. New Gold's operating diversity is 
limited by its narrow asset base with only four producing mines despite 
unusually low cash flow concentration levels for an issuer with such a narrow 
asset base. We expect that the current ramp-up of commercial operations at New 
Afton will improve operating diversity modestly heading into next year, adding 
a high-quality asset to New Gold's portfolio, but eventually concentrating its 
cash flows as New Afton's attractive earnings contribution significantly 
outweighs the other three assets.

New Gold's 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 
relatively 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 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 first 
quartile. Moreover, we believe that, unlike some other speculative-grade 
mining companies, New Gold's 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 heavy reliance on byproduct 
credits (comprising more than 30% of forecast 2012 revenues assuming an annual 
price of US$1,400 per oz of gold, US$3.50 per pound of copper, and US$25 per 
oz of silver) compared with other gold producers we rate, exposes the 
company's profitability to more volatile copper and silver prices.

We believe that the El Morro project could enhance New Gold's 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 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 on a base-case 
scenario that incorporates the following:
     -- A gold price of US$1,400 per oz, a copper price of US$3.50 per pound, 
and a silver price of US$25.00 per oz. We believe these prices are about the 
minimum levels that would compel the company to advance its growth plans 
without materially diminishing its financial risk profile.
     -- New Gold's profitability will improve heading into the next year, as 
higher production and low cash costs drive EBITDA generation to more than 
US$500 million in 2013. 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 
contemporary gold and copper prices.

New Gold's financial risk profile is significant, based on growing funds from 
operations (FFO) and improving financial flexibility. That said, we do believe 
that its higher pro forma debt burden (New Gold's carried funding at the El 
Morro project is treated as debt) makes the company much more sensitive to 
both output stability and gold price fluctuations. We expect that any 
prolonged production disruptions at its New Afton mine--by far the company's 
most profitable operation going forward-- would lead to a sharp deterioration 
in credit metrics with its adjusted debt-to-EBITDA leverage ratio rising 
beyond 3x. Moreover, we estimate that its adjusted debt-to-EBITDA leverage 
ratio would increase by more than half a turn for every US$200 per oz decline 
in the company's gold margin (realized gold price less cash costs). 
Nevertheless, in our base case scenario we expect New Gold should generate an 
adjusted debt to EBITDA close to 2x and an adjusted FFO to debt of more than 
40% through next year. 

In the next several years, we believe that stronger free operating cash flow 
should translate into significant increases in the company's cash balances, 
which should enhance New Gold's financial flexibility at 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, 
partially related to the winding down of major construction activity at New 
Afton this past summer, and takes into consideration that New Gold's share of 
cash outlays for El Morro will be funded by Goldcorp Inc. (BBB+/Stable/--). 
Conversely, it is unlikely that New Gold will receive any significant cash 
flows from El Morro before the end of this decade as the project's 
five-to-six-year construction time line is followed by several years of 
mine-level cash flows repaying New Gold's carried funding obligations.

Liquidity
We view New Gold's liquidity as strong in the next 24 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 in the ensuing 24 months.
     -- We expect sources would be greater than uses even if forecast EBITDA 
declines by 30%.
     -- New Gold should begin generating positive free operating cash flow 
through the next few years as the recent completion of the New Afton mine 
ushers in a period of lower capital expenditures that is skewed toward 
maintenance spending. 
     -- The company has no debt maturities through 2012 and most of 2013. The 
largest maturity in the next two years occurs when its US$150 million 
revolving credit facility--currently undrawn--is due for repayment in December 
2013.

New Gold has several financial covenants in its revolving credit facility 
including a maximum 3x leverage ratio and a minimum 4x interest coverage 
ratio, with which it was in compliance as of Sept. 30, 2012. We estimate that 
headroom on its leverage ratio covenant can withstand a 70% decline in EBITDA 
relative to our base case operating performance expectations.

Recovery analysis
For the complete recovery analysis, see the recovery report on New Gold to be 
published on RatingsDirect on the Global Credit Portal following this report.

Outlook
The stable outlook reflects our view that New Gold's expanding production 
profile at declining cash costs should support financial flexibility and 
credit measure generation in the next 12-18 months. Under our base case 
assumptions, we expect New Gold to generate fully adjusted debt to EBITDA of 
about 2x and an FFO to debt of above 40%, with increasing free cash flow after 
the second half of 2012 as New Afton growth capital spending subsides.

We could lower the rating if unexpected operational disruptions, higher costs, 
or weaker metals prices compress the company's gold margins while credit 
measures deteriorate sustainably with an adjusted debt to EBITDA of more than 
3.5x and an adjusted FFO to debt below 25%.

We could consider a positive rating action if New Gold continues to enhance 
its operating profile by adding producing assets that optimize cash flow 
diversity and reserve life, while maintaining its significant financial risk 
profile.

Related Research
     -- Criteria | Corporates | Industrials: S&P Lowers Its Nickel And 
Aluminum Price Assumptions For The Rest of 2012; Other Metals Price 
Assumptions Unchanged, July 12, 2012
     -- Methodology and Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Key Credit Factors: Methodology And Assumptions On Risks In The Mining 
Industry, June 23, 2009 
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
New Gold Inc.
Ratings Affirmed/Recovery Rating Unchanged
Corporate credit rating       BB-/Stable/--
US$300 million notes          BB- 
 Recovery rating              3

Ratings Assigned
US$500 million notes          BB- 
 Recovery rating              3
FILED UNDER:
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