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Edited Transcript of NGD.TO earnings conference call or presentation 6-Nov-19 1:30pm GMT

Q3 2019 New Gold Inc Earnings Call

Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of New Gold Inc earnings conference call or presentation Wednesday, November 6, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anne L. Day

New Gold Inc. - VP of IR

* Michele Della Libera

* Renaud Adams

New Gold Inc. - President, CEO & Director

* Robert J. Chausse

New Gold Inc. - Executive VP & CFO

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Conference Call Participants

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* Anita Soni

CIBC Capital Markets, Research Division - Analyst

* Matthew Wyatt Fields

BofA Merrill Lynch, Research Division - Director

* Nicholas Jarmoszuk

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the New Gold Third Quarter Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I'd now like to hand the conference over to your speaker today, Anne Day, Vice President, Investor Relations. Please go ahead, Ms. Day.

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Anne L. Day, New Gold Inc. - VP of IR [2]

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Thank you, operator, and good morning, everyone. We appreciate you joining us today for New Gold's Third Quarter Earnings Conference Call and Webcast. On the line today, we have Renaud Adams, President and CEO; Rob Chausse, CFO; and Michele Della Libera. Other members of the management team have also joined us and will be available during the Q&A period at the end of the call. Should you wish to follow along with the webcast, please sign in from our website at newgold.com.

Before the team begins the presentation, I would like to direct your attention to our cautionary language related to forward-looking statements found in the presentation. Today's commentary includes forward-looking statements relating to New Gold. In this respect, we refer you to our detailed cautionary note regarding forward-looking statements in the presentation. You are cautioned that actual results and future events could differ materially from those expressed or implied in forward-looking statements.

Slide 2 provides additional information and should be reviewed. We also refer you to the section entitled Risk Factors in New Gold's latest MD&A and other filings available on SEDAR, which set out certain material factors that could cause actual results to differ.

Please note that all amounts are presented in U.S. dollars, unless otherwise indicated. In addition, at the conclusion of the presentation, there are a number of end notes that provide important information and should be reviewed in conjunction with the material presented.

I will now turn the call over to Renaud Adams.

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Renaud Adams, New Gold Inc. - President, CEO & Director [3]

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Thank you, Anne, and thank you, everyone, for joining us today. We are very pleased to report a fourth consecutive quarter of improving operational and cost performance from both assets as we continue to advance on our short-term operational plan and reposition the company for long-term success.

Highlights for the quarter include improvement in our performers -- performance has underpinned the completion of the strategic equity financing, which allowed us to reduce our long-term debt position by $100 million. The Rainy River mine achieved a significant milestone, delivering the first full quarter of milling rate above the 24,000 tonnes per day. Also, when following the debt repayment of $100 million, the company had maintained available liquidity of $421 million, including $135 million in cash and cash equivalents.

We have maintained and will continue to maintain a diligent approach on managing our capital execution with the objective to complete substantially all remaining construction project at Rainy in order to reposition the asset for efficient and profitable mining as we also continue to advance the development of the C-zone at New Afton.

On the mid-, long-term note, we continue to advance our updated life of mine plans for Rainy River and New Afton, which are now expected to be released at the latest in the mid-first quarter 2020.

Also, we have advanced on our global exploration plan in order to position strategic drilling as one of our main focus in 2020.

I will now pass the call over to Rob Chausse, CFO, for a quick review of our third quarter financial results.

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Robert J. Chausse, New Gold Inc. - Executive VP & CFO [4]

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Thanks, Renaud, and good morning. With details that are consistent with our early October production press release, Slide 5 provides our operating highlights. Also, data discussed today is on a continuing ops basis.

During Q3, the company produced 129,000 gold equivalent ounces. The amount consisted of 20.1 million pounds of copper, approximately 75,000 gold ounces from Rainy River and 16,000 gold ounces from New Afton, giving us a total of approximately 91,000 gold ounces.

The higher gold production as compared to the prior year quarter is primarily due to higher productivity at Rainy River.

Operating expense per equivalent ounce was 15% higher than the prior year quarter due to an increase in operating waste tonnes mined during Q3 at Rainy River.

All-in sustaining costs at Rainy River and New Afton for the quarter were $1,593 per equivalent ounce and $869 per equivalent ounce, respectively. Amounts are higher than prior year quarter due to sustained -- higher sustaining capital spend.

Consolidated all-in sustaining costs for the quarter were $1,318 per equivalent ounce, 20% higher than the prior year quarter due to higher sustaining capital spend and the increased OpEx per ounce.

Turning to our financial results on Slide 6. Third quarter revenue from continuing operations was $168 million driven by sales of approximately 86,000 gold ounces at an average realized price of $1,383 per ounce and sales of 20.6 million pounds of copper at $2.62 per pound.

Q3 revenue was 14% higher than the prior year quarter due to production increases related to the ramp-up of Rainy River and higher realized gold prices, partially offset by lower copper sales.

Operating cash flow, before working capital adjustments, was $67.4 million or $0.11 per share for the quarter, lower than the prior year quarter, primarily due to a higher strip at Rainy during Q3 '19.

The company recorded a net loss from continuing operations of $24.7 million or $0.04 per share during Q3 compared to a loss of $0.00 per share in Q3 '18. After adjusting for certain charges, the net loss was $10.3 million or $0.02 per share in Q3 compared to a loss of $0.01 per share in the third quarter of '18.

Our Q3 adjusted earnings includes adjustments related to other gains and losses that include unrealized loss on our gold price option contracts and our stream mark-to-market. Our MD&A has additional details on the non-GAAP measures that discussed.

Turning to Slide 7 on our CapEx. This slide provides a breakdown of our Q3 '19 CapEx. Our total sustaining capital and leases for the quarter was $56.3 million and the spend was primarily related to tailings work and the purchase of the Rainy River cap facility. Growth capital was focused on project development at New Afton.

Slide 8. As Renaud mentioned, during the quarter, we completed the repurchase of $100 million of bonds in early October. And with that, we had $135 million remaining in cash and approximately $420 million in liquidity.

With that, I'll turn the call back to Renaud.

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Renaud Adams, New Gold Inc. - President, CEO & Director [5]

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Thank you, Rob. I'm now on Slide 10. The Rainy River mine reported increase of gold equivalent production of 76,092 ounces for the quarter and is on track to achieve the lower end of annual production guidance despite the lower grade planned for the fourth quarters of between 0.8 and 1 grams per tonne, a lower throughput achieved in October as a result of managing water in the tailings area and as we continue to focus on the waste mining in order to better position the asset for the short term and mid-term objective.

Total cash cost per gold equivalent ounces of $922 for the quarter or $877 for the 9-month period, on track to achieve the annual guidance of between $870 and $950 per gold equivalent ounce.

Sustaining capital and sustaining lease payment increased to $46.3 million in the third quarter or $110 million for the 9-month period. Sustaining capital and sustaining lease payments are now estimated to be between $175 million and $190 million for the year. While we are deferring approximately $20 million to 2020, we're also very pleased that we have achieved a net reduction of approximately $15 million related to the tailings area and rescoping of the maintenance and warehouse facilities.

As I mentioned in my opening remarks, we have and will continue to maintain a disciplined approach with regards to capital execution with focus on positioning the asset for the future while we continue to manage our short-term financial position. As a result of lower estimated sustaining capital for the year, our all-in sustaining capital are now expected to achieve the lower end or below the annual guidance.

On Slide 11. During the quarter, approximately 1.7 million ore tonne and 8.5 million waste tonne were mined at an average strip ratio of 5:1 as Phase 2 stripping continued to be prioritized. Additionally, 2.6 million tonne of out-pit mine -- out-pit material were mined in preparation for dam raises over the balance of the year.

The mill achieved a significant milestone in the third quarter, delivering a full quarter above the design criteria of 24,000 tonnes per day while maintaining the recovery at approximately 91%. The effort continue on achieving additional circuit optimization.

The operation experienced significant rainfall in the third quarter and into October. During the month of October, the mill operated at a lower capacity in order to manage water levels in the tailings area, also scheduled maintenance planned for the fourth quarter were completed in October.

In late October, the planned 2.5 million (sic) [2.5 meter] raise was completed, which provide now approximately 7 million to 8 million cubic meters of additional capacity in the tailing area.

We are very pleased to report that the mill facility managed to operate in approximately 18,000 tonnes per day in October and is now expected to operate at full capacity over the balance of the year. While we may not achieve a new mark in fourth quarter, we remain very positive to achieve a potential 24,000 tonnes per day, considering expected high availability and throughput in November and December.

On Slide 12. While the asset continued to face some challenges with regards to require stripping over the next 4 years, which include dealing with overburden of 30 to 60 meters and related rehandling and need for additional work at the waste dump, we are now turning our focus on significant opportunity for improvement. With the stage 2 down raise nearly completed and the reduction of out-pit material requirement plan for 2020, the mine will now enter a phase of optimization, which will include: commissioning of the new 4 drills to improve performance, the wider benches in Phase 2 and 3, overall equipment utilization improvement in order to productivity -- to enhance the productivity from the mining fleet, the mining fleet availability and maintenance performance and optimization of cost driver, including both operational and procurement practices.

We will remain focused on improving the mill availability should will -- which will result in a potential higher throughput from the current 24,000 tonnes per day. Company plans to use external consultant in 2020 to support all optimization efforts.

With regards to our strategic review and the new life of mine plans to be released at the latest in mid-first quarter 2020, I will summarize the slides 13 and 14 as follow: we have now landed on a final scenario, which will include open pit and underground mining. The elevated cut-off grade in order to focus on medium, high grade ore with strategic approach to recover the low grade ore during the open pit mining while the new pit shelf will focus on a high, medium grade, some low grade mine -- ore will be mined and effort will be made to benefit from them.

The maximizing of the high and medium grade ore during the open pit mining, but with potential ounces of high, medium grades, minus an underground mining approach, which will support our overall strategic approach of significant reduction of waste mining requirement. Reductions of mining, milling and G&A unit cost through cost reduction efforts. Focus on managing capital requirement to include the completion of 2019 construction project, stripping requirements for open pit mining, tailings requirement, elimination of need for waste -- for the West waste term stabilization and the capital component of open pit mining while minimum capital requirement for underground will be the priority. The reduced footprint for overall closure cost is also an area of focus. Plan to be based on the reserve gold price, which will imply open pit scenario to be locked in at the reserve price and the upside on the gold price to be kept to enhance the profitability from the open pit scenario. The underground scenario to include scenario upside at higher gold price, defining further depth and capital intensity at higher prices.

On Slide 15. With regards to New Afton, the mine produced 52,807 gold equivalent ounces for the quarter and nearly 180,000 gold equivalent ounces for the 9 months and is on track to achieve annual production guidance of 215,000 to 245,000 gold equivalent ounces. The cash cost per gold equivalent ounces were $682 for the quarter or $596 for the 9 months period. While the gold and copper production coupled with operating expenses per gold and per copper basis remain well positioned to achieve our annual guidance, the cash cost per gold equivalent ounces are now expected to achieve the high end of annual guidance mainly due to the lower copper price impact on the per gold equivalent basis.

Sustaining capital and sustaining lease payment increased in the third quarter, but are now expected to be slightly below our annual guidance of $45 million to $55 million due to the improved cost efficiency realized on the development meter as well as deferral of other capital project with the payment of this project now expected in the first quarter of 2020.

The mining and milling performance were in line with the plan laid out and the gold and copper recoveries were kept at the -- are at or above 80% mark despite the lower grade achieved in the quarter.

The lower grade achieved were mainly due to some short-term operational underground issues and the lower-than-anticipated performance of the ore segregation during the quarter. The grades are expected to improve in the fourth quarter.

Growth capital increased in the third quarter mainly due to improved development rates. But the growth capital for the year are now expected to be slightly below our annual guidance of $40 million to $45 million mainly due to realized cost efficiencies in development meter and some payment now planned for Q1 2020.

On Slide 16, our internal key objective for 2019. The B3 and C-Zone development rates significantly improved in the third quarter with a total of 2,100 meters achieved, showing some good realized cost efficiencies. The mill recoveries continued to perform well with commissioning of Phase 2 mill upgrade planned for the fourth quarter in order to deal with supergene ore. The ore scanner in order to improve the mill grade via ore segregation was commissioned and improved performance are expected over the next quarters.

Work on updated life of mine plan continues in the third quarter with release planned at the latest mid-first quarter 2020. The updated plan to focus on the geotechnical study update with regards to the subsidence and corrective actions, a tailing update with the use of in-pit disposal using thickened and amended tailings to increase the stability while we would provide an update on stabilization of current and old tailings area, the updated permitting timeline and the capital and OpEx cost optimization.

On Slide 17. The reevaluation of the Blackwater project continues in the third quarter. The new potential plan to include higher grade above 1 grams a tonne while maintaining a low strip ratio targeted at 2.1. The lower operating cost structure on a per ounce basis, resulting from higher grade while mining costs would potentially continue to benefit from low strip ratio. A lower initial capital resulting from potential reevaluation of project sizing. More to come on the Blackwater project as we advance in 2020.

I will now pass the call over to Michele Della Libera, Director of Exploration, for a quick review of our ongoing exploration efforts. Michele?

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Michele Della Libera, [6]

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Thank you, Renaud, and good morning, everybody. Slide 19 is exploration program highlights at Rainy River. We break on near-mine opportunity and district level opportunity to date.

So we drilled 7 hole on, what we call, the Intrepid North Target area. And we are now pausing the drilling because we had mixed assay result. And we need to readdress and reinterpret the geology and the alteration system there. And we may resume the drilling in 2020. And we move our exploration team on the district level, regional reconnaissance and where we are developing and progressing our soil geochemical survey that will be done before winter to have all the data and to refine the drill-ready target for 2020.

On Slide 19 (sic) [Slide 20], the exploration program at New Afton. The underground drilling done during this year that was completed at the end of October was related with infill and delineation on the SLC sub level cave area with good results. So that will be incorporated into the 2019 mineral resource and reserve update.

At the same time, we defined a new zone that is parallel to the B3/C-zone down plunge of the ore body with interesting results that we are planning to follow-up during 2020. And we call this area East Extension target that is becoming one of the key target underground for the next year.

D-zone, we drilled 5 holes, completed in this week, and we define the edge of the mineralization underneath C-zone. And also, these result will be incorporated in the resource statement for 2019.

On the Regional Exploration Program (inaudible) we are focusing on the Cherry Creek Corridor, which has both potential for epithermal gold close to surface and underlying deep porphyry and copper-gold target. We define with coincidental geochemical and geophysical anomalies 7 targets ready to drill, and we are planning to start drilling in the next weeks and the first southern hole will be the first phase going towards the end of the year.

Thank you. And now I'm turning back to Anne Day.

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Anne L. Day, New Gold Inc. - VP of IR [7]

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Thanks, Michele. We're now going to move to the Q&A section of this call. So I'm going to turn it back over to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Matthew Fields with Bank of America.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [2]

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Appreciate the progress you made on deleveraging the balance sheet in the quarter with the equity raise and the partial repayment on the 22s. Slide 8 still says additional debt optimization scenario is currently under review. Can you just give us an idea about what additional plans you still have to deleverage or term out the balance sheet?

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Robert J. Chausse, New Gold Inc. - Executive VP & CFO [3]

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Yes. And listen, I think the -- as I've mentioned in previous calls and meetings, we're looking at all strategic and capital markets options available to us and assessing opportunities as they come. One of the things I'll say in addition to that is, we've paid off $100 million. We've still got $420 million of liquidity available. So it allows us to be disciplined and prudent around any of the options. But again, we're looking at many options and alternatives and how we can strategically use our assets or options within capital markets, but nothing more specific than that.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [4]

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Okay. As just a follow-up. Is -- now that you've paid down $100 million, do you -- is the focus more on terming out or further absolute debt reduction the focus of that?

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Robert J. Chausse, New Gold Inc. - Executive VP & CFO [5]

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I think our focus is to improve our balance sheet. Again, though, the market will present options, and we'll decide as we move along, but we would like to see an improved balance sheet as we move along.

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Operator [6]

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(Operator Instructions) Your next question comes from the line of Nick Jarmoszuk from Stifel.

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Nicholas Jarmoszuk, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [7]

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A question for you on Rainy River. The grade guidance was maintained for the year at 1.1 grams per tonne. That's lower than the -- what we're looking at year-to-date. Should we anticipate a decline going into the fourth quarter? Or should we expect it to be relatively flat with what we've seen year-to-date?

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Renaud Adams, New Gold Inc. - President, CEO & Director [8]

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No, definitely, we're planning a lower grade in the fourth quarter, as it was actually discussed after the second going towards the third in the fourth quarter, I did mention in my remarks on the Rainy River. So we see potentially the fourth quarter to be in the 0.8 to 1 gram. So on the overall year, we have maintained our 1.1 approach for -- from currently trending above, but yes, at 1 quarter below 1 and potentially below 1, and we feel comfortable to maintain our 1.1 target.

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Nicholas Jarmoszuk, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [9]

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Okay. And then looking forward into 2020. Granted the updated 43-101s aren't out yet. But when you think about the capital required for Rainy River, New Afton and potentially even Blackwater, do you view those projects, the development there being funded through internally generated cash flows and liquidity that you currently have? Or do you think you're going to have to go out and raise additional capital?

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Renaud Adams, New Gold Inc. - President, CEO & Director [10]

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I won't comment at this stage on the Blackwater because obviously, at this stage, our short-term priority is definitely around completing the short-term, midterm capital execution, and we'll deal first of all to land on what could be the potential scenario for Blackwater. So we're not there yet. We will continue at Blackwater to improve our plans as we advance in 2020. With regards to Rainy and New Afton, it will be a mix use of our current liquidity and also internal cash flow, what -- at the New Afton, this remains our priority and objective.

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Operator [11]

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Your next question comes from the line of Anita Soni with CIBC.

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Anita Soni, CIBC Capital Markets, Research Division - Analyst [12]

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So my question is with regards to Rainy River. Just looking at Slide 11, where you've got some of the 2019 estimates, and you're showing your year-to-date numbers. I'm just trying to understand, should we be still targeting those estimates? Like, if you look at ore tonnes mined, it was sort of a 31,000 tonne per day, and you're running I guess closer to like 18,000 to 20,000 tonnes per day on the ore tonnes mined. And just wondering how that plays out for the course of the year? And secondly, in terms of where -- the lower strip ratio that you have this year? How does that -- again, how does that work into the fourth quarter? Should we be targeting that overall that it averages 3.1? Or is that some of that stuff pushed out into 2020?

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Renaud Adams, New Gold Inc. - President, CEO & Director [13]

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Thanks, Anita for -- to ask this question, and allow me to clarify. I've mentioned actually in the last quarter. So to be precise, no, we would not have reached 3.1. So our short-term objective at Rainy is definitely to better position the asset. So as we continue to target to meet our cost and production guidance, any additional capacity, to be frank, will be and continue to be focused on waste stripping because this is really what will better position the asset. We understand the extra cost in the short term. But again, I'm very pleased to see that so far after 3 quarters, we have been managing to increase our waste stripping, accelerating the positioning, if you will, ore mining for 2020. So we will continue to focus on waste stripping in the fourth quarter.

Should we see any drop in the grade, we have always the ability to maybe focus a bit on our ore, but don't expect a 3.1. As much as we would like to be unreduced, we believe that it would benefit us in the future. With regards to overall rate that's been systematically below the 128,000, yes, you're absolutely right. In the short term, we have not met our objective. But when you add the significant amount of rock that we have mined outside of the pit, and you combine those on a global basis, we have achieved quite a good mining rate in a global. But as you know, can't let go the effort on the tailings in 2019. It was also a priority. So -- and as I mentioned in my -- I'm very confident down the road that you would see a significant improvement on the mine, the expert mine, to be frank. As we walked away from the need of material for the tailings, I'm really expecting in the use of the consultant of optimization. I'm very confident we're going to see a significant improvement.

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Anita Soni, CIBC Capital Markets, Research Division - Analyst [14]

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Okay. And then -- so that leads me to my next question. So if you're doing the waste stripping, and you're focusing on that this year. So can we think about the tonnes that perhaps should have been mined in next year and the year after as being already done, and we shouldn't be worrying about those for next year? And then the mining rate, are you going to be backing off of doing any of the tailings? Or is that similar kind of x pit tonnes are happening next year?

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Renaud Adams, New Gold Inc. - President, CEO & Director [15]

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Yes. First, well, the thing, too, is when we initiated 2019, we initiated using the current plan. So the current plan was to shoot for a much higher mining rate down the road because it was based on the fully expanded pit shell scenario. We are now moving towards a reduced pit shell, reduced total mining requirements. So in the short term, even though we've been mining below the 128,000, we absolutely do not see any impact whatsoever on our short, midterm plans because the new plans will be at the reduced need.

With regards to the rock. This year, we've done a significant amount. The stage 2 requirement will be completed next year, not too late. I believe that our total requirement for 2020 with regards to material out-pit will be less -- for the material for the tailings will be less than 1 million tonnes and will be internally managed from the pit, per se, and pretty much potential to no need to go outside of the pit in 2020.

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Operator [16]

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And there are no further questions at this time. I'd like to turn the call back over to Ms. Day.

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Anne L. Day, New Gold Inc. - VP of IR [17]

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Thank you, operator. Thanks, everyone, for joining us today. Should you have any additional questions, please feel free to reach out to us. But with that, we will close the call. Thank you.

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Operator [18]

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This concludes today's conference call. Thank you for your participation. You may now disconnect.