New Gold signals delay at B.C. mine as low prices bite – by Peter Koven (National Post – December 14, 2013)

The National Post is Canada’s second largest national paper.

Thanks to plunging gold prices, a British Columbia project that looked like a priority for New Gold Inc. a year ago is not such a priority anymore.

The Vancouver-based miner announced late Thursday it will put its Blackwater project on the backburner and focus on building the smaller Rainy River project first. The announcement came as the company released results from a feasibility study on Blackwater.

The results were roughly in line with an economic assessment released last year. But the gold market is much weaker today than it was then, meaning the expected returns on the project are lower as well.

At a gold price of US$1,300 an ounce (above the current level of US$1,235), Blackwater has a net present value (NPV) of US$991-million, and a decent internal rate of return of 11.3%, according to the study. But if gold falls to US$1,150, the NPV sinks to just US$403-million. That is not attractive for a mine expected to cost US$1.9-billion.

On the other hand, Blackwater looks very attractive at US$1,600, as the NPV rises to US$2.1-billion, while the rate of return is 16.8%.

The Blackwater study demonstrates a dilemma that many gold miners are facing: whether to go ahead and build expensive and challenging projects in a bear market for gold. It also shows that even though gold prices are significantly lower than they were a year ago, industry costs remain high. The estimated capital cost of Blackwater was US$1.8-billion in September 2012, virtually identical to today.

While New Gold will now focus on Rainy River, it is still committed to Blackwater. By the time the permitting is finished at the project, the company hopes the gold price is significantly higher.

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