-- 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.
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.
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
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
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.
We view New Gold's liquidity as strong in the next 24 months, based on the
-- 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
-- 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
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.
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.
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
-- 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
New Gold Inc.
Ratings Affirmed/Recovery Rating Unchanged
Corporate credit rating BB-/Stable/--
US$300 million notes BB-
Recovery rating 3
US$500 million notes BB-
Recovery rating 3