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Investing.com -- New Gold (NYSE:NGD) Inc., the Toronto-based gold producer, has seen an upgrade in its issuer credit rating from ’B’ to ’B+’, according to S&P Global Ratings. This comes as the company is expected to generate stronger cash flows and leverage measures than previously estimated, including an adjusted debt to EBITDA below 1.5x in 2025.
New Gold Inc.’s gold and copper production are set to increase over the next few years, contributing to a significant free operating cash flow (FOCF) generation. This is due to a favorable metal price environment. As a result, S&P Global Ratings has also raised its issue-level rating on the company’s unsecured notes due 2027 from ’B’ to ’BB-’, and revised the recovery rating on these notes from ’3’ to ’2’.
In addition, S&P Global Ratings has assigned a ’BB-’ issue-level rating and ‘2’ recovery rating to New Gold Inc.’s proposed $400 million unsecured notes due 2032. The company plans to use the proceeds primarily to refinance its existing $400 million 7.5% unsecured notes due 2027.
The upgrade reflects the strengthening of the company’s recent and future cash flows and leverage metrics. Last year, the average prices of gold and copper increased about 24% and 9%, respectively, from 2023. This contributed to better-than-expected earnings and operating cash flow for New Gold Inc., compared to previous forecasts.
New Gold Inc. achieved commercial production at its C-zone at New Afton in the fourth quarter of 2024 and is currently ramping up throughput. At Rainy River, gold production is expected to gradually increase due to contribution from higher-grade underground operations. The company’s by-product cash costs are expected to improve significantly from $769 per ounce in 2024 to below $400 per ounce by 2026.
S&P Global Ratings estimates that New Gold Inc. will generate substantial FOCF over the next few years. This is due to higher production, improving cash costs, and declining capital expenditures. Under current metal price assumptions, the company is estimated to generate cumulative FOCF in the mid-$700 million area for 2025-2027.
New Gold Inc. may use the FOCF to buy back the remaining 19.9% free cash flow interest in the New Afton mine from the Ontario Teachers’ pension plan. This would increase its economic interest in the asset’s future cash flow generation. Over the next several years, the company is expected to increase its investment in its existing mines or pursue external growth opportunities.
The positive outlook on New Gold Inc. reflects the likelihood of another upgrade within the next 12 months if the company continues to generate robust cash flows and credit measures. However, the outlook could be revised to stable if the adjusted debt to EBITDA increases and stays above 1.5x due to weaker-than-expected production volumes or gold margins.
New Gold Inc. could see another upgrade within the next 12 months if it can sustain an adjusted debt to EBITDA below 1.5x while generating adjusted FOCF to debt above 40%. An upgrade could also be considered if the company significantly improves its operating breadth and production, potentially through the acquisition of additional operating assets.
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