New Gold’s Rainy River project in northwestern Ontario is located in a politically secure, mining friendly jurisdiction, offers tax synergies with New Gold’s other Canadian assets, and has compelling economics.
The project is potentially the centre of a whole new gold district. Ideally located, it benefits from its proximity to existing infrastructure, including hydroelectric power, a railway line and a network of all-weather roads that branch off from the well-maintained Trans-Canada Highway.
Rainy River achieved an important milestone in January 2015, when the federal and provincial governments approved the project’s Environmental Assessment, enabling the processing of construction-related permits. This is a credit to our team working closely with First Nations, Métis and other local stakeholders. Rainy River has completed Impact and Benefits Agreements with key First Nations and Métis communities in the area and is discussing contracting opportunities.
In January 2015, New Gold also completed the acquisition of Bayfield Ventures Ltd., further consolidating our holdings in the district and adding gold and silver mineral resources to the project’s inventory.
During 2014, the project completed 70 percent of the detailed engineering studies to move this project forward. To maintain financial flexibility, New Gold extended the construction period at Rainy River by six months to 2.5 years, giving the Company the potential to generate additional cash flow from operations during the construction period.
With cash in the bank of $371 million at year-end 2014, and an undrawn credit facility of $258 million, New Gold is well positioned to fund Rainy River. Nevertheless, the Company continues to maintain the flexibility to adjust our project development schedules as market conditions evolve.
The project’s economics continue to be very attractive. To reflect market conditions, we lowered our price assumption for silver and the C$/US$ exchange rate from those used in our 2014 feasibility study. This lowered both the estimated development and operating costs for the project. Based on assumptions for gold of $1,300 per ounce, silver of $16 per ounce and a Canadian exchange rate of $1.25 to the U.S. dollar, the after-tax IRR is projected to be 13.7 percent. The payback period for this $877 million development project, which has $808 million remaining to spend, is expected to be approximately five years.
During 2015, we expect delivery of the initial mining fleet and related equipment, and process plant equipment and motors. As well, project activities will include land clearing, construction of temporary accommodations, road building, and initial work on construction of the mill, as well as the water line, pump station and tailings dam foundation. Capital expenditures for the year are expected to be $300 million, which is approximately $120 million lower than was estimated under the 24-month development schedule.
Rainy River presents New Gold with the opportunity for $1 billion in value creation, after acquisition and development costs. The project provides solid returns with strong leverage to higher gold prices, manageable capital costs, and below industry average costs.