The strong performance of gold prices in early 2016 is welcome news for the industry. If the trend continues, investors will be pleased to see 2015’s weak metal prices behind us. But in a sense, it’s what companies do in the tough times that positions them to prosper when times are better. At New Gold, we responded to the challenges of 2015 and, more importantly, focused on the opportunities that lie before us.

By way of an overview, New Gold emerged from 2015 with record gold production at low costs, increased our financial flexibility and maintained our strong balance sheet – all with the exciting potential of our Rainy River project drawing closer.

What We Achieved

We had three key achievements in 2015:

  1. We exceeded production guidance with record gold production at low costs. We were well-positioned with low-cost operations that continued to deliver healthy margins and robust cash flows. Together, our four operating mines increased gold production by 15 percent over the previous year. Our costs remain among the lowest of our peers, despite the impact of lower copper by-product revenues resulting from lower prices.
  2. At our New Afton Mine, we completed the mill expansion ahead of schedule and under budget. We also completed a feasibility study for the exciting C-zone on the property, which presents an opportunity to extend the mine life of what is currently New Gold’s most significant cash flow generator.
  3. We further strengthened our financial flexibility through two transactions: in July, we completed the sale of a $175 million Rainy River stream to Royal Gold, with $100 million paid on signing and the remaining $75 million to be paid when 60 percent of the project is complete. In November, we completed the sale of our 30 percent interest in the El Morro project to a subsidiary of Goldcorp in exchange for $62 million in net cash, a 4 percent stream on gold production from the property and the cancellation of New Gold’s $94 million carried funding loan.

These two transactions collectively increased our liquidity position by approximately $235 million and eliminated
$94 million in debt. They achieved an improvement of approximately $330 million in our financial position without issuing equity.

Throughout the year, while implementing cost-containment and continuous improvement measures, we remained focused on our growth strategy. We are investing in longer-lived, larger-scale, lower-cost assets.

Creating Value at Rainy River

First up is the Rainy River project, which has the potential to increase New Gold’s current production substantially at lower all-in sustaining costs. The project is proceeding on schedule, with overall construction now 30 percent complete and initial equipment commissioned.

As construction is advanced, we see potential for continued value creation at Rainy River. Our experience at New Afton, for example, shows that significant value creation was realized during the 12 to 18 months prior to start-up as the mine moved closer to production and generating cash flow. Importantly, this trend of value creation has continued. At New Afton, we have now recouped well over half the initial development capital investment of
$790 million and the mine continues to have a street consensus net asset value of $1.1 billion.

Next, we can assess the timing of development of our Blackwater project with a view to adding another large-scale, long-lived, low-cost producer to our portfolio. The Blackwater project has the potential to increase New Gold’s current production by over 450,000 ounces at lower all-in sustaining costs.

For 2016, we should continue to benefit from our low-cost profile and value-creating exploration programs. Production is scheduled to decrease as our Cerro San Pedro Mine transitions to residual leaching. Our total cash costs are expected to remain consistent despite lower by-product metal prices. After exploration successes at the Peak Mines last year, our 2016 program will focus on the delineation of new discoveries at Peak Mines, extension of the C-zone at New Afton and district reconnaissance at Rainy River. Throughout the year, we plan to move our exciting Rainy River project steadily forward to production.

Gold Price Resilience

Of course, the price of gold is a key driver of our planning and performance. Several factors are worth considering when reflecting on the path of the price of gold. As slow growth persists in Western economies and interest rates remain relatively low, with some now moving into negative territory, the fundamentals that support gold remain in place. Gold’s strong start to 2016 demonstrates the resilience of the commodity markets.

On the supply side, new discoveries have plummeted in recent years, as have exploration budgets. On the demand side, central bank buying has increased over the past decade and remains strong. While many investors remain focused on U.S. interest rates and the dollar, gold demand in the growing economies of China and India must be taken into consideration as well. The two countries now account for over 50 percent of the world gold market compared to about 6 percent for North America. In 2013, China became the world’s number one market for gold, reflecting 10 years of rapid growth and rising middle class affluence. For its part, India holds 15 percent of the world’s gold stock and accounts for 25 percent of annual global demand. In both these countries, there is a traditional affinity for gold as jewellery and as an investment. Continued economic growth in China and India holds potential upside for gold demand.

Whatever the path of the gold price, we believe New Gold, as a low-cost producer, is in a strong position to operate in a low gold price environment and well poised to benefit from rising gold prices through our existing operations and growth projects.

Gearing up for the Future

As we gear up for the future, we have made some important management changes. Robert Gallagher, our President and CEO, is retiring in June of this year. Bob has been a remarkable leader over the past eight years in the position. He has combined dynamism with a personal touch that has motivated employees and gained the trust of the First Nations groups near our sites, paving the way for respectful relationships. We will miss Bob, but are pleased that he will remain on our Board, offering his sage advice.

With Bob’s imminent departure we have drawn on our deep talent pool to put a new reporting structure in place. As Executive Chairman, I now have three direct reports: Brian Penny, Executive Vice President and Chief Financial Officer; Hannes Portmann, Executive Vice President, Business Development; and David Schummer, Executive Vice President and Chief Operating Officer.

We will also continue to be guided by an engaged Board of Directors. New Gold is fortunate to have an exceptionally talented Board, whose depth and breadth of experience and knowledge of the business we think is unmatched in the industry. For 2016, we are very pleased to welcome Ian Pearce, a new independent director. Mr. Pearce has over 25 years of experience in the mining industry, and his operational and management experience will further strengthen our team. One of our long-serving directors, Pierre Lassonde, decided not to stand for re-election to the Board. We owe a debt of gratitude to Pierre for the tremendous knowledge and insights he has provided. We are delighted that Pierre will remain a friend of New Gold and continue to be a shareholder of our company.

Our plans for profitable growth can only come to fruition with dedicated employees. They get full credit for our strong record of production, environmental protection and a safety record that is among the best in the industry.

New Gold is positioned with assets in politically stable regions, an experienced executive team who are shareholders themselves, low costs relative to our peers, strong cash flows and what we believe is the leading growth pipeline in the industry.

As our record shows, we have a history of value creation for the benefit of shareholders through ups and downs in the market. And I think that we are just getting started.

I thank our shareholders for their continued support.

Yours truly,

Randall Oliphant Signature

Randall Oliphant