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New Gold $NGD sells Mesquite (from IKN487)

It was interesting to watch the way New Gold (NGD) traded yesterday, dumping 15% and removing all the premium priced into the stock the day Renaud Adams was announced new CEO. On the subject, here’s the short note we ran on NGD in IKN487, out last Sunday evening  (before yesterday’s dump, which doesn’t appear on the price chart here):
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New Gold
(NGD) sells Mesquite
(all in U$ unless stated)
Last week at this point we ran the
note “New Gold (NGD) will sell Mesquite”
and this week the only thing that changes is the verb tense. On Wednesday September
19th, New Gold (NGD) announced (38) that it was indeed selling Mesquite and the buyer was
one of the three we outlined as prospective, Equinox Gold (EQX.v). Therefore we
got the sale right, the asset right and even pointed a finger at the right
buyer. However, my assumption that NGD would want book value for Mesquite was a big
mistake because the selling price is U$158m cash.
That compares to the U$386m
carry that Mesquite
has on the NGD (here’s that chart from last week again, but don’t worry I’m not
going to repeat any others) and leaves a U$228m hole in its balance sheet. Or I
should probably say another hole, because along with the over-priced Blackwater
and the faltering Rainy
River, I’m certain the
company will have to take more impairments under the new stewardship of Renaud
Adams. Here’s how the NGD stock reacted to the news of the sale:
Down 13.5% in the last two days of
trading and 4% down on the week, despite the positive macro for mining stocks
and its own early week rally.
It was the price agreed by NGD that
hit the stock hardest, because although the cash (when it arrives Q4) will be
very useful in paying down part of its welter debt burden, it wasn’t as much as
I or most of the market expected (I’ll admit in hindsight I assumed too high,
but not this low) and moreover, the speed and size of the deal smacks of
desperation on the part of NGD, which in turn suggests Rainy River is in worse
shape than expected (we’ll find out more in the Q3 production numbers, of
course).
If and when NGD can do a deal to
sell Blackwater, it may be worth revisiting this stock. Until then it’s an easy
pass and on that, I think back to the piece I wrote on NGD in IKN453, dated
January 21st 2018. It was entitled “New Gold (NGD): Cannot get
comfortable” and at just under two pages of script, just about the shortest
fundies analysis note I’ve ever written on a stock for the main “Fundamentals…”
section of The IKN Weekly. After being prompted to look at the stock again on
its 4q17 numbers, I was at first enthusiastic about revisiting NGD but as the
numbercrunch went on, it became apparent that the company was still in serious
financial trouble. I passed on the stock and wrote the short note that I’ve
re-printed in Appendix 1 below. It was a U$3 stock at the time. Good call.

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