Midtier gold miner New Gold earlier this month entered into gold price option contracts valued at $2-million and covering 270 000 oz of the remaining 2016 production.

This was done to increase cash flow certainty as the company continued to invest in the ongoing construction of its Rainy River project, in Canada, which is expected to begin production in mid-2017.

New Gold bought put options with a strike price of $1 200/oz covering 270 000 oz of gold while selling call options with a strike price of $1 400/oz covering an equivalent 270 000 oz. The contracts will cover 30 000 oz/m of gold for nine months starting next month.

“We continue to have a positive view on the gold market. Given the meaningful increase in the gold price, we are taking a prudent step to establish a floor price for our revenues [for the remainder of] of 2016 while maintaining significant exposure to higher prices,” states New Gold executive VP and CFO Brian Penny.

“Our unique decision to enter into the option contracts is solely [because] . . . 2016 is our most significant year of investment at . . . Rainy River . . . We do not have any plans to enter into any similar contracts beyond this brief nine-month period.”

The option contracts provide the company with a guaranteed floor price of $1 200/oz and exposure to further increases in the gold price up to $1 400/oz.

New Gold’s 2016 gold production guidance is 360 000 oz to 400 000 oz at an all-in sustaining cost of $825/oz to $865/oz. Based on the midpoint of New Gold’s 2016 all-in sustaining cost of $845/oz, the gold option contracts should enable the company to generate an all-in sustaining cost margin ranging from about $355/oz to $555/oz for the 270 000 oz covered by the contracts.

The expected low costs and increased gold price certainty provide New Gold with further assurance of free cash flow from its four operations for the remainder of this year.

The company plans to fund the remaining development capital expenditure of the project from current cash, $75-million cash receivable from precious metals company Royal Gold that pertains to the previously announced Rainy River streaming transaction and free cash flow.

The company also has further financial flexibility through its revolving credit facility and expects to spend about $500-million at Rainy River in 2016, with the balance of the development capital of about $90-million to be spent in the first half of next year.

The project enhances New Gold’s growth pipeline through its manageable capital costs, significant production scale at below current industry-average costs and longer-term exploration potential in a great mining jurisdiction.

Rainy River is expected to generate significant gold production growth for New Gold at costs below the company’s 2016 guidance for all-in sustaining costs. Relative to the company’s consolidated 2016 gold production guidance of 360 000 oz to 400 000 oz, the project is expected to produce an average of 325 000 oz/y of gold for the first nine years of its life at an estimated all-in sustaining cost of about $670/oz.