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Report on Business Underwriters stuck with about a third of New Gold’s stock issue after ‘bought deal’ falters

New Gold Inc.’s $150-million stock issue has met with a frosty reception from investors as underwriters remain stuck with about a third of the shares despite bullion’s big run this year.

Late last week, Toronto-based New Gold said a syndicate of underwriters had purchased the issue from the company and was offering close to 94 million new shares at $1.60 apiece to investors, a discount of 7 per cent to the market close at the time.

In such “bought deal” transactions, underwriters attempt to resell shares to third-party investors, preferably in a matter of hours. For assuming the risk, brokers are paid a flat commission, in this case 4.5 per cent.

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But nearly a week after the underwriters purchased the shares about a third of deal remains on their books, according to sources, who were not authorized to speak publicly. Sources cited the relatively slim deal discount given New Gold’s risk profile, uneven interest in the sector and questions over the miner’s long-term prospects as factors.

New Gold, whose market value is about $890-million, is carrying about US$780-million in long-term debt, largely incurred by big cost overruns at its low grade Rainy River mine in Ontario. New Gold said it intends to use proceeds from the bought deal in part to pay down that debt. New Gold receives the proceeds from the issue, minus a commission to the dealers, regardless of whether it sells out to third-party investors.

New Gold’s shares have consistently traded below the $1.60 deal price since it was announced, meaning investors could buy stock in the open market at a cheaper price rather than buy from the syndicate. New Gold’s shares closed at $1.55 apiece Wednesday on the Toronto Stock Exchange.

BMO Nesbitt Burns Inc. led the deal and was allocated the biggest chunk of stock to sell – 35 per cent. RBC Dominion Securities Inc. and Scotia Capital Markets were allocated 15 per cent each.

Neither BMO nor New Gold responded to a request for comment.

Sixteen banks participated in the syndicate, including large Canadian bank-owned dealers CIBC World Markets Inc. and TD Securities Inc., U.S. dealers JPMorgan Securities and Merrill Lynch, as well as a number of boutiques, such as Canaccord Genuity Group Inc. and GMP Capital Inc.

Jon Case, precious metals portfolio manager with Sentry Investments Inc., said he was offered a piece of the New Gold deal, but turned it down. He said the weak reception for New Gold points to a lack of interest from generalist investors, in sharp contrast to a couple of years ago.

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In 2016, the last time gold bullion had a similar move upward in a short period of time, the appetite from investors for gold equity issues was much stronger.

“There was a New Gold-style deal every week,” Mr. Case said.

“They were all oversubscribed, they all traded up because there was this absolute tsunami of money pouring into gold equities. The fact that the New Gold deal hasn’t gone well tells you that despite the pretty spectacular performance in the equities, you still haven’t really got that generalist capital.”

Over the past decade, interest from both specialist mining funds and generalist investors has fallen, in large part because of disappointing performance at many of the big gold companies, including badly timed acquisitions and technical problems at mine sites. The rise of gold exchange traded funds and the popularity of alternative investments that appeal to the risk-orientated investors, such as cannabis stocks, has also dampened the appeal of gold for generalist investors.

Historically sought out as a safe-haven investment, gold has run up 18 per cent this year, driven by escalating international trade-war tensions, a slowdown in global growth and falling interest rates. On Wednesday, gold futures traded north of US$1,520 an ounce, the highest level since early 2013.

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