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VIDEOHow New Gold's Crisis Could Be Investors' Opportunity
Recently New Gold's share price has come down due to a negative decision by a Mexican court regarding its mine, Cerro San Pedro.
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New Gold (NGD) has been one of my long-term recommendations -- since May of 2009, when it was selling at $2.50. I've always been impressed by the quality of assets New Gold owns. It's unique in the mining sector it's leading the sector in increasing production and reducing cash costs. In two years, this company has gone from being in debt to having a comfortable net cash position.
New Gold has three operating mines in mining-friendly jurisdictions, and cash costs have significantly decreased. Costs are expected to go down further when New Afton in British Columbia and El Morro in Chile get started. Both mines have huge amounts of copper. The copper byproduct decreases the cash costs of the gold to almost nil. It becomes pure profit. Their major development project, El Morro in Chile, is one of the world's major gold copper mines and New Afton is an exciting mine that has close to a billion pounds of copper reserve and a million ounces of gold.
The El Morro project is joint ventured with Goldcorp (GG) and is one of the world's largest gold/copper mines, with 6.7 million ounces of gold reserve and 5.7 billion pounds of copper. Like New Afton, this is also a large gold and copper mine that will add huge profits in New Gold's future and decrease cash costs due to its high amount of copper. I believe this is a company with impressive assets and growth ahead.
Recently the share price has come down due to a negative decision by a Mexican court regarding one of its three mines, Cerro San Pedro -- a massive mine with a million ounces of gold and 50 million ounces of silver. The issue was regarding a technicality in the original Environmental Impact Statement, even though the Cerro San Pedro mine is internationally recognized for its standard on minimizing its affects on the environment. Actually the whole case is over a land-use issue, not environmental issues. Prior to this decision, New Gold received an injunction to continue operations while the legal issues are being resolved. Due to past precedents, during the appeals process New Gold is likely to continue operations.
It's important to realize that this locale is dependent on mining as a way of life. There are over 1,600 jobs that are reliant on the mine remaining open. The government certainly doesn't want this mine shut down as it indirectly contributes half a billion pesos to the Mexican government, which is battling many problems including unemployment and crime. A skyrocketing unemployment rate in the region could be chaotic. The economic health of the region requires the mine to remain open and running. A newly elected council of landowners in the area are challenging the old council who started the legislation by attempting to drop all litigation against New Gold.
I believe this will be resolved in due time with New Gold revising the Environmental Impact Statement, or that the decision eventually will be overturned. This may become a long, drawn-out affair. However, I highly doubt that this mine will be shut down during this process because, as mentioned before, it would spur an economic disaster for the local area.
New Gold has been one of the best-performing stocks in the mining sector. It has a top management team that includes directors who have built major mining companies and resolved minor setbacks. I believe this will be one leading gold stock over the next several years because it has the assets and the financial condition to grow. This pullback could be a great opportunity for a long-term holder. Notice how it has pulled back to previous resistance at $5, which is now support. Also, it has come in play with the long-term upward sloping trendline which it's touched five times successfully. It's currently close to historically oversold levels. Coming in play with support, coupled with the oversold conditions could provide long-term investors a prudent market entry point.
(Currently, New Gold is up 0.83% and Goldcorp is up 0.54%. Other gold stocks include Newmont Mining (NEM), which is up 0.83%, Freeport McMoRan Copper & Gold (FCX) up 2.22%, and Royal Gold (RGLD) up 1.16%.)
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