Ontario Teachers' has an option to convert its interest into a 46% joint venture interest in four years or have its interest remain as a free cash flow interest at a reduced rate of 42.5%,
New Gold will use the proceeds to improve its financial flexibility and reduce its indebtedness.
New Gold has experienced several tough years due to difficulties getting its Rainy River mine development in Ontario up and running. The company recently revealed a new mining plan which reduced the reserve base and mine life of the operation in an attempt to bring its production costs down to a manageable and profitable level.
The deal allow New Gold to retain operating control and reduce its debt with an overriding buyback option which allows it to potentially re-acquire full ownership interest of New Afton in the future.
"This transformational transaction that provides us with up-front cash allowing us to restructure our balance sheet and lower our level of net indebtedness via a true shared risk and upside partnership focused on free cash flow. This transaction provides New Gold with an attractive cost of capital, further strengthens our financial position, allows us to benefit from the full exploration potential elsewhere on the New Afton land package and provides the opportunity to re-acquire 100% of New Afton," said president and CEO Renaud Adams in a statement.
"We gain access to a free cash flow interest from a top quality asset in a stable and well-established mining area, with the ability to convert to a JV interest in four years," said senior MD of infrastructure and natural resources at Ontario Teachers Dale Burgess.
New Afton produced 229,091 ounces of gold and 79.4 million pounds of copper in 2019 at an all-in sustaining cost of $829/oz.
Rainy River has proved to be a problem child for New Gold with its start-up beset by cost overruns and technical issues. Remediation work has required a $185 million capex injection to get back on track.
Its reserves were reduced from 4.2Moz at the end of 2018 to 2.6Moz at the end of 2019, with 800,000oz going from the openpit and almost 500,000oz from the underground mine. The mine life is now reduced to 2028 from 2031.
Under the new mining plan, Rainy River will produce an average of 289,000oz/y at an AISC of $967/oz gold-equivalent.
Shares in New Gold opened up 15% at C$1.37, valuing the company at $804 million.