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Asset Allocation

Ontario Teachers’ Strikes Gold in Flexible Natural Resources Deal

OTPP and New Gold Inc. trade instant capital for free cash flows from a gold mine, with the option to convert to ownership.   
By Steffan Navedo-Perez

The Ontario Teachers’ Pension Plan (OTPP) has inked a deal with a Canadian-focused intermediate gold mining company called New Gold Inc., which will see the pension inject the company with capital in exchange for cash flows.

In the deal, OTPP will acquire a 46% free cash flow from the British Columbia-based New Afton mine for $300 million. Four years after the transaction date closes, the pension will have the option to convert the interest into a 46% joint venture interest, with New Gold retaining the remaining 54%, or to continue to receive cash flows from the mine at a reduced rate of 42.5%.

New Gold will have an overriding buyback option to reacquire 100% of the gold mine in the future.

“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. Ontario Teachers’ Natural Resources group has a global mandate to pursue investments that provide attractive returns and inflation protection through exposure to a basket of key commodities,” said Dale Burgess, senior managing director, infrastructure and natural resources of Ontario Teachers’.

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In the event that revenues fail to hit projected numbers, New Gold Inc. will supply OTPP with half of the amount of capital it is expecting to generate from the mine.

New Gold said the $300 million cash injection would “materially” reduce its indebtedness and increase its financial flexibility. The transaction is expected to close on March 31.

“Based on the projected free cash flow (FCF) for New Afton, the mine is expected to generate more meaningful FCF beyond 2023, so the partnership with OTPP effectively allows NGD to bring that cash flow forward by receiving an upfront payment for future FCF,” Credit Suisse said in its analysis of the deal, according to media publication Kitco. “New Afton is expected to generate ~US$1B FCF through 2030. This deal provides needed financial relief.”

OTPP’s natural resources mining portfolio also includes BaseCore Metals, an organization that focuses on investment opportunities in mining base metals streams and collecting royalties. BaseCore is a 50:50 partnership between OTPP and Glencore Canada Corp. and operates as an independent entity.

The pension’s natural resources portfolio, which also includes investments in energy, food, and timberland opportunities, makes up approximately 4% of its roughly $200 billion portfolio, with a net fair value of about $8 billion.

New Gold’s stock rose more than 8% on the news on the New York Stock Exchange.

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Home > News > Market Moves > As Virus Punishes Stocks, El-Erian Warns: Don’t Buy the Dips
Market Moves

As Virus Punishes Stocks, El-Erian Warns: Don’t Buy the Dips

Pummeled shares will take a lot longer to recover than normal, Allianz economist says.

By Larry Light

Buy the dip has been the oft-repeated advice during the 10-year-long bull market. But as exchanges worldwide reel from the baleful economic effects of the coronavirus, economist Mohamed El-Erian warned investors to back off the practice.

While scooping up declining shares cheaply worked in the past, because they promptly sprung back, he told CNBC, “I would continue to resist, as hard as it is, to simply buy the dip.” And that’s especially true for the stocks that have been the worst hammered amid the current rout, added El-Erian, the chief economic adviser at financial powerhouse Allianz.

The scourge of COVID-9, as the disease is also known, will be so thorough that recovery “will take time,” he said. “Economic sudden stops are hard to restart.” Previously, he had predicted that the virus would “paralyze China” and the results would “cascade throughout the world.”

As fears mounted about the spreading contagion, the S&P 500 on Tuesday plunged slightly more than 3% for the second day in a row. Airline, cruise ship, technology, and financial services stocks have suffered. Those with ties to China such as Apple (which uses Chinese factories to assemble iPhones) and Starbucks (whose coffee shops do big business in the world’s second largest economy) were slammed. Over the past two days, Apple is down 8% and Starbucks fell 5.7%.

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Other economists are echoing El-Erian’s pessimism. Oxford Economics says that a global health crisis could erase $1 trillion from the global economy, estimated to be $86.6 trillion in 2019. Reasons for such a major loss include higher workplace absenteeism, lower productivity, reduced travel, disrupted supply chains, less international trade, and muted investing.

To David Levy, chairman of the Jerome Levy Forecasting Center, “at best, the economic effects of the COVID-19 outbreak are likely to be much worse than widely anticipated.”

Earnings forecasts are trending lower, at least partly as a result. The US consensus estimate for first-quarter domestic growth has dipped to 1.5%, down from 1.7% at year-end 2019, FactSet Research announced. Goldman Sachs recently warned that shrinking, virus-related earnings could lead to a market correction, which is a 10% slide from its peak.

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