mdaq210.htm

Second Quarter End

2010

Management’s Discussion and Analysis

June 30, 2010

Table of Contents

SECOND QUARTER 2010 FINANCIAL AND OPERATIONAL HIGHLIGHTS		3
BACKGROUND		4
CORPORATE RESPONSIBILITY		4
CORPORATE DEVELOPMENTS		4
A.	El MORRO TRANSACTION	4
B.	AMAPARI MINE SALE AGREEMENT	5
C.	UPDATE ON CERRO SAN PEDRO MINE RECENT COURT DECISION	5
ECONOMIC TRENDS		6
SELECTED QUARTERLY FINANCIAL INFORMATION		6
OVERVIEW OF 2010 SECOND QUARTER FINANCIAL RESULTS		7
SIX MONTHS ENDED JUNE 30, 2010 COMPARED TO SIX MONTHS ENDED JUNE 30, 2009		7
OPERATIONS REVIEW		8
A.	MESQUITE MINE, CALIFORNIA, USA	8
B.	CERRO SAN PEDRO MINE, MEXICO	10
C.	PEAK MINE, NEW SOUTH WALES, AUSTRALIA	13
PROJECT DEVELOPMENT REVIEW		15
A.	CERRO SAN PEDRO MINE, SAN LUIS POTOSÍ, MEXICO	15
B.	PEAK MINE, NEW SOUTH WALES, AUSTRALIA	15
C.	NEW AFTON PROJECT, BRITISH COLUMBIA, CANADA	16
D.	EL MORRO JOINT VENTURE, ATACAMA REGION, CHILE	17
REVIEW OF FINANCIAL RESULTS		17
SECOND QUARTER 2010 COMPARED TO SECOND QUARTER 2009		17
QUARTERLY INFORMATION		21
BALANCE SHEET REVIEW		22
A.	ASSETS	22
B.	ASSET BACKED NOTES	22
C.	INVESTMENT IN BEADELL SHARES	22
D.	FUEL CONTRACTS	22
E.	GOLD HEDGE CONTRACTS	23
F.	LONG-TERM DEBT	24
G.	FUTURE INCOME AND MINING TAXES	25
NON-GAAP MEASURE – TOTAL CASH COST(1) PER GOLD OUNCE CALCULATION		25
LIQUIDITY AND CAPITAL RESOURCES		26

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LIQUIDITY AND CAPITAL RESOURCES OUTLOOK		26
OUTLOOK		27
COMMITMENTS		29
CONTINGENCIES		29
A.	NEW AFTON	30
B.	AMAPARI MINE	30
C.	EL MORRO TRANSACTION	30
D.	CERRO SAN PEDRO MINE	30
OFF-BALANCE SHEET ARRANGEMENTS		30
RELATED PARTY TRANSACTIONS		30
RISK FACTORS		31
FINANCIAL RISK MANAGEMENT		31
A.	CREDIT RISK	31
B.	LIQUIDITY RISK	33
C.	CURRENCY RISK	34
D.	INTEREST RATE RISK	35
E.	COMMODITY PRICE RISK	35
CONTRACTUAL OBLIGATIONS		37
OUTSTANDING SHARES		38
CRITICAL ACCOUNTING POLICIES AND ESTIMATES		38
A.	INVENTORIES	39
B.	MINERAL PROPERTIES	39
C.	RECLAMATION OBLIGATIONS	40
D.	FUTURE TAX ASSETS AND LIABILITIES	40
E.	REVENUE RECOGNITION	41
F.	STOCK-BASED COMPENSATION	41
CONTROLS AND PROCEDURES		44
A.	DISCLOSURE CONTROLS AND PROCEDURES	44
B.	MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING	44
C.	CHANGES IN INTERAL CONTROL OVER FINANCIAL REPORTING	45
ENDNOTES		45
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS		46

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NEW GOLD INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

FOR THE QUARTER ENDED JUNE 30, 2010

(IN UNITED STATES DOLLARS, EXCEPT WHERE NOTED)

The following Management’s Discussion and Analysis (“MD&A”) provides information that management believes is relevant to an assessment and understanding of the consolidated financial condition and results of operations of New Gold Inc. (“New Gold” or the “Company”) and its subsidiaries and including its predecessor entities. This MD&A should be read in conjunction with New Gold’s unaudited consolidated financial statements for the quarters ended June 30, 2010 and 2009, New Gold’s audited consolidated financial statements for the years ended December 31, 2009 and 2008 and related notes thereto which have been prepared in accordance with Canadian Generally Accepted Accounting Principles (“GAAP”). This Management’s Discussion and Analysis contains “forward-looking statements” that are subject to risk factors set out in a cautionary note contained herein. The reader is cautioned not to place undue reliance on forward-looking statements. All figures are in United States dollars and tabular amounts are in thousands, unless otherwise noted. This Management’s Discussion and Analysis has been prepared as of August 5, 2010. Additional information relating to the Company, including the Company’s Annual Information Form, is available on SEDAR at www.sedar.com.

SECOND QUARTER 2010 FINANCIAL AND OPERATIONAL HIGHLIGHTS

§	Second quarter gold production of 89,919 ounces, up 62% from 55,633 ounces in the same period in 2009.

§	Second quarter gold sales of 82,402 ounces, up 56% from 52,890 ounces in the same period in 2009.

§	Total cash cost(1) of $491 per ounce of gold sold in the second quarter 2010 compared to $468 per ounce in the same prior year period.

Net earnings from continuing operations during the second quarter of $17.4 million or $0.04 (basic and diluted) per share compared to a net loss of $199.3 million or $0.77 per share (basic and diluted) in the same period in 2009. The prior period included a goodwill write-off of $189.6 million related to the business combination with Western Goldfields Inc.

§	Second quarter earnings from mine operations of $35.9 million, up from $14.6 million in the same period in 2009.

§	Cash and cash equivalents held by continuing operations totaled $376.1 million at June 30, 2010, up 39% from $271.5 million (including restricted cash) at December 31, 2009.

§	During the quarter, the sale of the Amapari Mine to Beadell Resources Ltd. (“Beadell”) was completed for $55.6 million. New Gold has received gross proceeds of $37.0 million in cash and 115 million Beadell shares valued at $18.6 million. The transaction closed on April 13, 2010.

Subsequent to the end of the quarter, New Gold was informed of the decision by the Fifth Auxiliary District Court in Mexico City to deny the Company’s appeal against the prior ruling by the Federal Court of Fiscal and Administrative Justice to cancel the Company’s Environmental Impact Statement. The company has now submitted its appeal against the District Court’s recent decision to the Collegiate Appeals Court in Mexico City. The Cerro San Pedro Mine is currently fully operational and New Gold continues to pursue all available avenues to ensure the mine continues to operate.

§	During the second quarter, the Company received notification of its inclusion in the FTSE Gold Mines Index, effective June 21, 2010.

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BACKGROUND

New Gold Inc. is an intermediate gold producer with a portfolio of global assets in the United States, Mexico, Australia, Canada and Chile. The Company’s operating assets consist of the Mesquite gold mine (“Mesquite Mine”) in the United States, the Cerro San Pedro gold-silver mine (“Cerro San Pedro Mine”) in Mexico, and the Peak gold-copper mines (“Peak Mine”) in Australia. Significant development projects include the New Afton copper-gold project (“New Afton”) in Canada and a 30% interest in the El Morro copper-gold project (“El Morro”) in Chile. New Gold has an objective of continuing to grow, both organically and through acquisition, to become the leading intermediate gold producer. New Gold plans on achieving this vision through:

§	Delivering on operational targets (safety, cost, production, environmental and social responsibility);

§	Maintaining a strong financial position;

§	Internal growth through project development and the continuous improvement of existing operations; and,

§	External growth through additional value enhancing merger and acquisition opportunities.

New Gold is working towards maximizing shareholder value through diversified production, maintaining a reduced risk profile and enhancing growth potential.

CORPORATE RESPONSIBILITY

The Company’s commitment to disciplined growth is entrenched in the concept of growing responsibly. This underlies management’s belief that economic achievement, environmental performance and social contributions are indivisible components in the success of the Company.

The Company actively engages in meaningful dialogue with local community residents and organizations to identify economic, training, social and development priorities and contributes to the development of the communities surrounding its operations.

New Gold’s corporate responsibility objectives are to prevent pollution, minimize the impact the operations may cause to the environment and practice the progressive rehabilitation of areas impacted by its activities. The Company has a history of operating in a socially responsible and sustainable manner, and of meeting international standards in the three countries where it currently operates mines. The Company is a member of the Canadian Business for Social Responsibility and is a partner of the United Nations Global Compact.

CORPORATE DEVELOPMENTS

A.	El MORRO TRANSACTION

On January 7, 2010, New Gold provided notice to Xstrata, a wholly-owned subsidiary of Xstrata Plc, of the exercise of its right of first refusal to acquire 70% of the El Morro copper-gold project in Chile for $463.0 million. On February 16, 2010, the Company completed the acquisition of Xstrata’s 70% interest in the El

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Morro property. Goldcorp loaned $463.0 million to New Gold to fund the exercise of the right of first refusal. After acquisition of the 70% interest by a New Gold subsidiary, New Gold sold that subsidiary to Goldcorp.

Concurrent with the sale of the New Gold subsidiary to Goldcorp, the Company received a $50.0 million payment to New Gold and the parties amended the terms of the existing El Morro Shareholders Agreement ("the Agreement").

As a result of these transactions, New Gold will continue its participation as a 30% partner in the El Morro project under the amended Agreement.

Goldcorp has agreed to fund 100% of the Company’s share of the development and construction capital for the project, which was estimated in the El Morro feasibility study at approximately $2.5 billion. Under the former Xstrata carried funding arrangements, the Company would be required to fund approximately $225.0 million or 9% of the project capital prior to completion of the project, however under the new Goldcorp funding arrangement, New Gold will not need to fund any of project capital prior to completion of development and construction.

On January 13, 2010, New Gold received a Statement of Claim filed by Barrick Gold Corporation (“Barrick”) in the Ontario Superior Court of Justice, against New Gold, Goldcorp and affiliated subsidiaries. The claim relates to New Gold’s exercise of its right of first refusal on the El Morro copper-gold project. New Gold believes the claim is without merit and intends to defend this action using all available legal avenues.

B.	AMAPARI MINE SALE AGREEMENT

On January 27, 2010, the Company announced the signing of an agreement to sell its Brazilian subsidiary Mineracao Pedra Branca do Amapari Ltda. ("MPBA"), which holds the Amapari Mine and other related assets, to Beadell Resources Ltd. ("Beadell"). The transaction closed on April 13, 2010 and New Gold received gross proceeds of $37.0 million in cash and 115 million Beadell shares valued on the closing date of the transaction at $18.6 million. New Gold currently holds approximately 18.5% of Beadell shares outstanding. The Company has designated its investment in Beadell as an available for sale financial asset.

C.	UPDATE ON CERRO SAN PEDRO MINE RECENT COURT DECISION

The Company has a history of legal challenges to its Cerro San Pedro Mine. On July 7, 2010, the Fifth Auxiliary District Court in Mexico City denied the Company's appeal against the September 2009 ruling by the Federal Court of Fiscal and Administrative Justice that ordered SEMARNAT, the Mexican government's environmental regulatory agency, to cancel the Company's Environmental Impact Statement ("EIS") in November 2009.

New Gold is pursuing all avenues to ensure the continuous operation of the Cerro San Pedro Mine and has filed an appeal with a Collegiate Appeals Court in Mexico City to the July 2010 decision. In addition, the Company may file an application with the Mexican Supreme Court requesting it hear the case.

New Gold remains in continuous discussions with both SEMARNAT and PROFEPA, the Mexican government's environmental enforcement agency, to work towards the uninterrupted operation of the Cerro San Pedro Mine.

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ECONOMIC TRENDS

In the second quarter of 2010, gold has regained its 2009 highs and continues to sell at a high level averaging $1,196 per ounce. The U.S. dollar has historically been one of the key drivers of gold price; however, during the second quarter of 2010 there is evidence to indicate at least a partial de-coupling of gold and the U.S. dollar. Gold continues to be considered a safe haven in global markets as investors and governments have concerns about sovereign debt in Europe and other regions. Additionally, as market confidence has faltered during recent months and the economic outlook is less certain, economists and market observers continue to debate whether a second recession is possible and whether deflation or inflation is the more significant issue facing global economies. As a result, certain countries and market observers are striving for austerity measures while others are seeking further stimulus in order to avoid a second recession. These issues continue to generate uncertainty over the strength of the economic recovery and have the potential to increase volatility which is believed to positively benefit gold prices.

The price of gold is the largest single factor affecting New Gold’s profitability and operating cash flows. As such, the current and future financial performance of the Company will be closely correlated to the prevailing price of gold. During the second quarter of 2010, New Gold had an average realized gold price(2) of $1,147 per ounce (including monthly 5,500 ounces of gold hedged at the Mesquite Mine at $801 per ounce) which was 4% below an average market gold price of $1,196 per ounce.

SELECTED QUARTERLY FINANCIAL INFORMATION

(U.S. dollars in thousands, except ounces, per ounce and per pound amounts)

	Three Months Ended June 30,				Six Months Ended June 30,
	2010	2009			2010		2009
Operating Data (1)
Tonnes of ore mined (000's)	6,595		4,223			10,259		6,976
Tonnes of waste mined (000's)	13,666		7,359			24,667		11,854
Ratio of waste to ore	2.07		1.74			4.31		1.70
Gold (ounces):
Produced	89,919		55,633			167,134		110,571
Sold	82,402		52,890			162,421		108,287
Silver (ounces):
Produced	547,084		414,038			753,784		841,477
Sold	505,350		422,713			698,856		794,932
Copper (000's of pounds):
Produced	4,009		4,266			7,968		8,078
Sold	3,027		2,568			7,082		5,319
Realized prices(2):
Gold ($/ounce)	1,147		926			1,113		911
Silver ($/ounce)	18.38		13.84			18.02		13.23
Copper ($/lb)	3.09		2.07			3.26		2.15
Total cash cost per gold ounce sold(3)	490		468			481		519
Financial Data
Revenues	112,359		59,199			213,979		103,524
Earnings from mine operations	35, 888		14,637			72,511		26,710
Net earnings from continuing operations	17,418		(199,304	)		34,606		(187,235	)
Earnings per share – basic and diluted:
From continuing operations	0.04		(0.77	)		0.09		(0.79	)
From discontinued operations	0.11		(0.02	)		0.11		(0.02	)
Total	0.15		(0.79	)		0.20		(0.81	)
Operating cash flows from continuing operations	38,812		21,354			58,758		18,623

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(1)	The above table includes results for the Amapari Mine in the 2009 results which is presented as a discontinued operation for financial reporting purposes.

(2)	Realized price is a non-GAAP financial performance measure with no standard meaning under Canadian GAAP. See Endnote 2 at the end of this MD&A.

(3)

Total cash cost is a non-GAAP financial performance measure with no standard meaning under Canadian GAAP. See Endnote 1 at the end of this MD&A. The calculation of total cash cost per ounce of gold sold for the Peak Mine is net of by-product copper sales revenue. The calculation of total cash cost per ounce of gold for the Cerro San Pedro Mine is net of by-product silver sales revenue.

OVERVIEW OF 2010 SECOND QUARTER FINANCIAL RESULTS

In the second quarter of 2010, net earnings from continuing operations was $17.4 million, which increased from a net loss from continuing operations of $199.3 million in the prior year period. The prior period loss includes a goodwill impairment of $189.6 million related to the Western Goldfields’ business combination. Adjusted for the goodwill impairment, the prior year period net loss from continuing operations was $9.7 million. The increase in net earnings from operations is attributed to higher realized commodity prices, increased production and related sales, and a favourable exchange rate gain relative to a loss in the prior year period. Offsetting these relative benefits are $9.0 million of realized and unrealized gains related to derivative instruments recognized in the second quarter of 2009 compared to a loss of $4.7 million for the second quarter of 2010 which was recorded in revenue. The 2009 benefit relates to pre-hedge accounting gains on gold and fuel hedges. Additionally, the Company had realized and unrealized gains on investments related to the mark to market of Asset Backed Notes of $9.7 million in the second quarter of 2009 compared to $0.9 million for the same period in 2010.

The Company sold 82,402 ounces of gold during the second quarter of 2010, compared to 52,890 ounces in the same prior year period. In addition to increased ounces sold, the increase in average realized price(2) of gold sold from $926 to $1,147 per ounce contributed to a 90% increase in revenues to $112.4 million. Second quarter corporate administration costs were higher at $8.7 million, compared to $6.0 million in the second quarter of 2009. The increase is a result of a negative foreign exchange impact, higher stock compensation expense, additional legal fees incurred and an increased corporate salary base as the second quarter of 2009 only included one month of corporate overhead from Western Goldfields Inc.

During the second quarter of 2010, the Company sold the Brazilian subsidiary, MPBA, which holds the Amapari Mine and other related assets, to Beadell Resources Ltd. Proceeds, net of transaction costs, are reflected in earnings from discontinued operations and all assets and liabilities classified as operations held for sale have been removed from the balance sheet. Earnings from discontinued operations, including net proceeds from the Amapari transaction, for the second quarter of 2010 was $41.7 million compared to a loss from discontinued operations of $3.5 million in the second quarter of 2009.

SIX MONTHS ENDED JUNE 30, 2010 COMPARED TO SIX MONTHS ENDED JUNE 30, 2009

In the first six months of 2010, net earnings from continuing operations was $34.6 million compared to a net loss from continuing operations of $187.2 million in the prior year. Adjusted for the goodwill impairment, the prior period net earnings from continuing operations was $2.4 million. The increase in net earnings from operations is attributed to higher realized commodity prices, increased production and related sales, and a favourable exchange rate gain relative to a loss in the prior year period. Offsetting these relative benefits are

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$9.0 million of realized and unrealized gains related to derivative instruments recognized in the second quarter of 2009 compared to a loss of $$7.5 million for the first six months of 2010 which was recorded in revenue. The 2009 benefit relates to pre-hedge accounting gains on gold and fuel hedges. The Company also had realized and unrealized gains on investments related to the mark to market of Asset Backed Notes of $9.7 million in the second quarter of 2009 compared to $4.9 million for the same period in 2010. Additionally, a gain on redemption of long term debt of $14.2 million was realized in the first six months of 2009 compared to $nil for the same period in the current year.

The Company sold 162,421 ounces of gold during the first six months of 2010, compared to 108,287 ounces in the same prior year period. In addition to increased ounces sold, the increase in average realized price(2) of gold sold from $911 to $1,113 per ounce contributed to a 107% increase in revenues to $214.0 million. Corporate administration costs were higher at $16.7 million, compared to $10.1 million in the first six months of 2009, as a result of a negative foreign exchange impact, higher stock compensation expense, additional legal fees incurred and an increased corporate salary base as the first six months of 2009 only included one month of corporate overhead from Western Goldfields Inc.

OPERATIONS REVIEW

(tabular data in thousands of U.S. dollars unless otherwise stated)

A.	MESQUITE MINE, CALIFORNIA, USA

The Company’s Mesquite Mine is located in Imperial County, California, approximately 70 kilometres northwest of Yuma, Arizona and 230 kilometres east of San Diego, California. The Mesquite Mining District lies beneath alluvial pediment deposits at the base of the Chocolate Mountains. The mine was operated between 1985 – 2001 by Goldfields Mining Corporation, subsequently Santa Fe Minerals Corporation, and finally Newmont Mining Corporation with Western Goldfields Inc. acquiring the mine in 2003. New Gold acquired the Mesquite Mine as part of the acquisition of Western Goldfields Inc. on May 27, 2009. The mine resumed production in 2008. Over the last 23 years, the Mesquite Mine has been subject to significant exploration with over 6,000 reverse circulation drill holes having been completed during its life. Recent exploration has been focused on the areas surrounding the three existing pits: Rainbow, Big Chief and Vista.

The Mesquite operations are included in New Gold’s operating results for the second quarter of 2010. Prior quarter information, presented below, is for comparative purposes only as New Gold acquired the Mesquite operations on May 27, 2009.

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	Three Months Ended June 30		Six Months Ended June 30
	2010	2009	2010	2009
Operating Data
Tonnes of ore mined (000's)	3,109	2,216	5,482	4,805
Tonnes of waste removed (000's)	9,074	11,715	18,193	22,568
Ratio of waste to ore	2.92	5.29	3.32	4.70
Tonnes of ore to leach pad (000's)	3,109	2,216	5,482	4,805
Average gold grade (grams/tonne)	0.42	0.49	0.49	0.44
Gold (ounces):
Produced (1)	38,849	26,085	82,883	59,778
Sold	38,786	27,338	88,288	60,053
Realized prices: (2)
Gold ($/ ounce) (3)	1,083	854	1,063	861
Total cash cost per gold ounce sold (4)	634	647	588	607

Financial Data
Revenues	42,000	23,341	93,835	51,710
Earnings from mine operations	11,172	959	28,638	8,102

(1)	Tonnes of ore processed each quarter does not necessarily correspond to ounces produced during the quarter, as there is a time delay between placing tonnes on the leach pad and pouring ounces of gold.

(2)	Realized price is a non-GAAP financial performance measure with no standard meaning under Canadian GAAP. See Endnote 2 at the end of this MD&A.

(3)	Includes realized gains and losses from gold hedge settlements.

(4)	Total cash cost is a non-GAAP financial performance measure with no standard meaning under Canadian GAAP. See Endnote 1 at the end of this MD&A.

SECOND QUARTER OF 2010 COMPARED TO SECOND QUARTER OF 2009

Gold production for the quarter ended June 30, 2010 was 38,849 ounces compared to 26,085 ounces produced in the same period in 2009. Gold production was higher in the second quarter of 2010 compared to second quarter of 2009 due to higher volume of ore tonnes placed on the leach pad, partially offset by lower grade ore being placed on the leach pad in the second quarter of 2010, as planned. Period over period, the average head grade decreased to 0.42 g/t from 0.49 g/t.

Revenue for the quarter ended June 30, 2010 was $42.0 million compared to $23.3 million in the same period last year due largely to an increase in ounces sold to 38,786 ounces in 2010 from 27,338 ounces in 2009, an increase of 42%. The average realized gold price(2) during the second quarter of 2010 of $1,083 per ounce, including hedged gold ounce settlements at $801 per ounce, was lower than the average London Metals Exchange PM gold fix price of $1,196 per ounce. In the second quarter of 2009, the Mesquite Mine recognized an average realized gold price (2) of $854 per ounce of gold sold.

Total cash cost(1) per ounce of gold sold for the quarter ended June 30, 2010 was $634 per ounce compared to $647 per ounce in the same prior year period. The decrease in cash cost (1) was driven primarily by certain one-time maintenance costs incurred in the second quarter of 2009 that did not occur in 2010. This benefit was partially offset by a lower ore grade mined and higher consumable cost in the second quarter of 2010, primarily related to the increased prices and consumption of diesel, when compared to the same prior year period.

Cash flow relating to capital expenditures totaled $1.0 million and $0.2 million for the three month periods ended June 30, 2010 and 2009, respectively.

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FIRST SIX MONTHS OF 2010 COMPARED TO FIRST SIX MONTHS OF 2009

Gold production for the six months ended June 30, 2010 was 82,883 ounces compared to 59,778 ounces produced in the same period in 2009. Gold production was higher in the first six months of 2010 compared to same period of 2009 due to higher volume of ore tonnes and higher grade ore being placed on the leach pad in the first six months of 2010. Total ore tonnes placed on the leach pad in the first six months of 2010 increased by 14% to 5.5 million compared to 4.8 million in the same period last year. Period over period, the average head grade increased to 0.49 g/t from 0.44 g/t.

Revenue for the six months ended June 30, 2010 was $93.8 million compared to $51.7 million in the same period last year due to a significant increase in ounces sold to 88,288 ounces in 2010 from 60,053 ounces in 2009, an increase of 47%. The average realized gold price(2) during the first six months of 2010 of $1,063 per ounce, including hedged gold ounce settlements at $801 per ounce, was lower than the average London Metals Exchange PM gold fix price of $1,152 per ounce. In the first six months of 2009, the Mesquite Mine recognized an average realized gold price (2) of $861 per ounce of gold sold.

Total cash cost(1) per ounce of gold sold for the six months ended June 30, 2010 was $588 per ounce compared to $607 per ounce in the same prior year period. The decrease in cash cost (1) was driven primarily certain one-time maintenance costs incurred in the first six months of 2009 that did not occur in 2010. This benefit was partially offset by higher consumable cost in the first six months of 2010, primarily related to the increased prices and consumption of diesel, when compared to the same prior year period.

Cash flow relating to capital expenditures totaled $1.3 million and $0.2 million respectively for the six months ended June 30, 2010 and 2009.

B.	CERRO SAN PEDRO MINE, MEXICO

The Cerro San Pedro Mine is located in the state of San Luis Potosí in central Mexico, approximately 20 kilometres east of the city of San Luis Potosí. The project property consists of 52 mining and exploration concessions totaling 78 square kilometres in the historic Cerro San Pedro mining district. The mine was acquired pursuant to the Metallica Resources Inc. acquisition on June 30, 2008. The current focus of exploration is on the southern half of a two-plus kilometre San Pedro trend of gold-silver-zinc-lead mineralization that extends south from beneath the Company’s current open pit mine operation.

The Cerro San Pedro Mine achieved ISO 14001 certification of its environmental management system. New Gold’s Cerro San Pedro Mine has a record of compliance with Mexican and international environmental standards. Despite the Company’s enviable record with Mexican and international environmental standards, the Company has a history of legal challenges to its Cerro San Pedro Mine. In July 2010 the Fifth Auxiliary District Court in Mexico City denied the Company's appeal against the September 2009 ruling by the Federal Court of Fiscal and Administrative Justice that ordered SEMARNAT, the Mexican government's environmental regulatory agency, to cancel the Company's Environmental Impact Statement ("EIS") in November 2009.

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New Gold is pursuing all avenues to ensure the continuous operation of the Cerro San Pedro Mine and has filed an appeal with a Collegiate Appeals Court in Mexico City. In addition, the Company may file an application with the Mexican Supreme Court requesting it hear the case.


	Three Months Ended June 30,		Six Months Ended June 30,
	2010	2009	2010		2009
Operating Data
Tonnes of ore mined (000's)	3,286	3,074		4,388		5,614
Tonnes of waste mined (000's)	4,592	4,233		6,474		8,619
Ratio of waste to ore	1.40	1.38		1.48		1.54
Tonnes of ore processed (000's)	3,286	3,074		4,388		5,614
Average gold grade (grams/tonne)	0.65	0.46		0.61		0.48
Average silver grade (grams/tonne)	39.98	29.58		36.51		32.17
Gold (ounces):
Produced(1)	29,424	24,210		42,362		44,793
Sold	24,833	23,350		37,957		41,664
Silver (ounces):
Produced(1)	547,084	414,038		753,784		841,477
Sold	505,350	422,713		698,856		794,932
Realized prices(3):
Gold ($/ounce)	1,205	946		1,175		928
Silver ($/ounce)	18.38	13.84		18.02		13.23
Total cash cost per gold ounce sold(2)(4)	288	429		403		483

Financial Data
Revenues	39,218	27,934		57,195		49,185
Earnings from mine operations	14,555	6,880		17,718		9,448

(1)	Tonnes of ore processed each quarter do not necessarily correspond to ounces produced during the quarter, as there is a time delay between placing tonnes on the leach pad and pouring ounces of gold.

(2)

The calculation of total cash cost per ounce of gold is net of by-product silver revenue. If the silver revenues were treated as a co-product, average total cash cost at Cerro San Pedro Mine for the three months ended June 30, 2010, would be $505 per ounce of gold (2009 - $537) and $7.70 per ounce of silver (2009 - $7.86). For the six months ended June 30, 2010 the average total cash cost at Cerro San Pedro Mine would be $573 per ounce of gold (2009 - $578) and $8.78 per ounce of silver (2009 - $8.24).

(3)	Realized price is a non-GAAP financial performance measure with no standard meaning under Canadian GAAP. See Endnote 2 at the end of this MD&A.

(4)	Total cash cost is a non-GAAP financial performance measure with no standard meaning under Canadian GAAP. See Endnote 1 at the end of this MD&A.

SECOND QUARTER OF 2010 COMPARED TO SECOND QUARTER OF 2009

Gold production for the second quarter of 2010 increased by 22% to 29,424 ounces, compared to 24,210 ounces produced in the same prior year period. Silver production increased to 547,084 ounces compared to 414,038 ounces in the same prior year period. The increased production resulted from higher ore tonnes mined and favourable ore grades quarter on quarter. Revenue for the second quarter of 2010 was $39.2 million, which was a 41% or $27.9 million increase over the same prior year period. The main driver for this increase was higher gold sales of 1,483 ounces and an increase in the average realized price. The average realized gold price per ounce during the second quarter 2010 and 2009 was $1,205 and $946, respectively,

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which corresponds well to the average London Metals Exchange PM gold fix price of $1,196 and $922 per ounce, respectively. The average realized silver price per ounce during the second quarter 2010 and 2009 was $18.38 and $13.84, respectively, which also correlates to the average London Metals Exchange silver fix price of $18.32 and $13.73 per ounce, respectively.

Total cash cost(1) per ounce of gold sold in the second quarter of 2010 was $288 per ounce compared to $429 per ounce in the same prior year period, representing a decrease of 33%. The decrease in total cash cost(1) is due to optimized mine planning, coupled with the benefit of higher by-product revenues resulting from higher silver volumes and higher realized silver price during the second quarter of 2010 when compared to the same prior year period.

Cash flow relating to capital expenditures totaled $1.7 million and $0.2 million for the three month period ended June 30, 2010 and 2009, respectively. Capital expenditures in 2010 were primarily associated with a leach pad expansion.

FIRST SIX MONTHS OF 2010 COMPARED TO FIRST SIX MONTHS OF 2009

Gold production for the six months ended June 30, 2010 was 42,362 ounces compared to 44,793 ounces produced in the same period in 2009. Gold production was lower in the first six months of 2010 compared to same period of 2009 due to the shortfall generated in the first quarter of 2010 due to a delay in receiving the renewal of the explosive permit. After receiving the explosive permit in March 2010, the mining rate at Cerro San Pedro Mine was quickly accelerated allowing much of the first quarter production shortfall to be made up.

Revenue for the six months ended June 30, 2010 was $57.2 million compared to $49.2 million in the same prior year period. The average realized gold price(2) during the first six months of 2010 of $1,175 per ounce compares favourably to the average London Metals Exchange PM gold fix price of $1,152 per ounce. In the first six months of 2009, the Cerro San Pedro Mine recognized an average realized gold price (2) of $928 per ounce of gold sold. The average realized silver price per ounce during the first six months of 2010 and 2009 was $18.02 and $13.23, respectively, which also correlates to the average London Metals Exchange silver fix price of $17.62 and $13.17 per ounce, respectively.

Total cash cost(1) per ounce of gold sold for the six months ended June 30, 2010 was $403 per ounce compared to $483 per ounce in the same prior year period. The decrease in cash cost (1) was driven primarily by improved mine planning and higher by-product revenues in the first six months of 2010. The benefits were partially offset by the fixed operating costs being distributed over lower ore tonnes in the first quarter of 2010 as well as higher consumable costs in the first six months of 2010 when compared to the same prior year period.

Cash flow relating to capital expenditures totaled $5.5 million and $1.0 million respectively for the six months ended June 30, 2010 and 2009. Capital expenditures in 2010 were primarily associated with a leach pad expansion.

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IMPACT OF FOREIGN EXCHANGE ON OPERATIONS

The Cerro San Pedro Mine was significantly impacted by changes in the value of the Mexican peso against the U.S. dollar in the second quarter of 2010 relative to the second quarter of 2009. The value of the Mexican peso increased from an average of 13.30 to the U.S. dollar in the second quarter of 2009 to 12.55 to the U.S. dollar in the second quarter of 2010. This had a negative impact of approximately $38 per ounce of gold sold. This contributed to increased total cash costs(1) along with other factors described above.

The value of the Mexican peso increased from an average of 13.84 to the U.S. dollar in the first six months of 2009 to 12.68 to the U.S. dollar in the first six months of 2010. This had a negative impact of approximately $62 per ounce of gold sold. This contributed to increased total cash costs(1) along with other factors described above.

C.	PEAK MINE, NEW SOUTH WALES, AUSTRALIA

The Company’s 100% owned Peak Mine gold-copper mining operation is located in the Cobar Mineral Field near Cobar, New South Wales, Australia. Peak Mine consists of mining and exploration licenses totaling 845 square kilometres of prospective ground covering the mining operation and mineralized extensions.

	Three Months Ended June 30,		Six Months Ended June 30,
	2010	2009	2010		2009

Operating Data
Tonnes of ore processed (000’s)	198	200		371		399
Average gold grade (grams/tonne)	3.74	3.81		3.74		3.71
Average copper grade (%)	1.0%2	1.07%		1.07%		1.03%


Gold (ounces):
Produced	21,646	22,382		41,889		43,011
Sold	18,783	17,939		36,176		38,795
Copper (thousands of pounds):
Produced	4,009	4,266		7,968		8,078
Sold	3,027	2,568		7,082		5,319
Realized prices (1):
Gold ($/ ounce)	1,201	930		1,171		912
Copper ($/ pound)	3.09	2.07		3.26		2.15
Total cash cost per gold ounce sold (2)	459	364		303		349

Financial Data
Revenues	31,141	21,054		62,949		44,128
Earnings from mine operations	10,161	8,815		26,155		18,357

(1)	Realized price is a non-GAAP financial performance measure with no standard meaning under US GAAP. See Endnote 2 at the end of this MD&A.

(2)

Total cash cost is a non-GAAP financial performance measure with no standard meaning under Canadian GAAP. See Endnote 1 at the end of this MD&A. The calculation of total cash cost per ounce of gold is net of by-product copper revenue. If the copper revenue was treated as a co-product, average total cash cost at Peak Mine for the three month period ended June 30, 2010 would be $638 per ounce of gold and $1.81 per pound of copper, as compared to $473 per ounce of gold and $1.16 per pound of copper for the period ended June 30, 2009. For the six months ended June 30, 2010 the average cash cost at Peak Mine would be $554 per ounce of gold (2009 - $457) and $1.80 per pound of copper (2009 - $1.20)

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SECOND QUARTER OF 2010 COMPARED TO SECOND QUARTER OF 2009

Peak Mine produced 21,646 ounces of gold and 4.0 million pounds of copper during the second quarter of 2010 compared to 22,382 ounces of gold and 4.3 million pounds of copper in the same prior year period. Gold production remained relatively consistent as ore milled and recoveries were all comparable. Mill throughput was equal to second quarter 2009. Mill feed grade was 2% lower in gold grade and 5% lower in copper grade.

Revenue for the second quarter of 2010 was higher than in the same quarter 2009 mainly due to higher realized gold prices(2) of $1,201 per ounce compared to $930 per ounce and the higher realized copper prices of $3.09 per pound compared to $2.07 per pound in the same prior year period. This compares to the average London Metals Exchange PM gold fix price of $1,196 and $922 per ounce for the second quarter of 2010 and 2009, respectively.

Total cash cost(1) per ounce of gold sold, net of by-product sales, for the second quarter was $459 compared to $364 in the second quarter of 2009. The increase is attributable to the timing of concentrate shipments and related inventory charges, an increase in salary related costs and the appreciation of the Australian dollar in the second quarter of 2010 when compared to the same period in the prior year. These cost increases were partially offset by higher by-product revenues.

FIRST SIX MONTHS OF 2010 COMPARED TO FIRST SIX MONTHS OF 2009

Peak Mine produced 41,889 ounces of gold and 8.0 million pounds of copper during the first six months of 2010 compared to 43,011 ounces of gold and 8.1 million pounds of copper for the same prior year period. These variances are largely due to the decreased processed ore with a scheduled mill shutdown in March 2010, offset by commencement of Chesney ore body in the first six months of 2009. Mill throughput for the first six months of 2010 was 7% below the same period in 2009. Mill feed grade was 3% higher in gold grade and 4% higher in copper grade.

Revenue for the first six months of 2010 was higher than in the same six months 2009 mainly due to higher realized gold prices(2) of $1,171 per ounce compared to $912 per ounce and the higher realized copper prices of $3.26 per pound compared to $2.15 per pound in the same prior year period. This compares to the average London Metals Exchange PM gold fix price of $1,152 for the six months of 2010.

Total cash cost(1) per ounce of gold sold, net of by-product sales, for the first six months was $303 compared to $349 in the same period of 2009. The decrease in total cash cost(1) was mainly due to higher by-product revenue from higher copper sales volumes and higher realized copper prices in the first six months of 2010 compared to the same period in 2009. This benefit was partly offset by the effect of the appreciation in the Australian dollar and salary related costs during the first six months of 2010 compared to the same period in 2009.

IMPACT OF FOREIGN EXCHANGE ON OPERATIONS

Peak Mine’s operations continue to be impacted by fluctuations in the valuation of the Australian dollar against the U.S. dollar. The value of Australian dollar in the second quarter of 2010 averaged $1.13

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compared to $1.32 in the second quarter of 2009 resulting in a negative impact on cash costs(1) of approximately $128 per gold ounce sold.

The value of Australian dollar in the first six months of 2010 averaged $1.12 compared to $1.41 in the first six months of 2009 resulting in a negative impact on cash costs(1) of approximately $177 per gold ounce sold.

PROJECT DEVELOPMENT REVIEW

A.	MESQUITE MINE, CALIFORNIA, USA

During the second quarter of 2010, the Company continued its investigation of the economic viability of the sulphide mineral resource at the Mesquite gold mine. A program involving approximately 12,000 meters of exploration drilling to confirm continuity and test for extensions to the sulphide mineral resource, in combination with metallurgical testing to confirm recovery estimates from previous metallurgical testing for the sulphide mineralization commenced during June. The current sulphide mineral resource, inclusive of reserves, contains approximately 1.32 million ounces of gold in the measured and indicated categories and 234,000 ounces in the inferred category. Approximately 1.03 million ounces of the sulphide mineral resource is included in the current proven and probable mineral reserve.

B.	CERRO SAN PEDRO MINE, SAN LUIS POTOSÍ, MEXICO

During the second quarter of 2010, the Cerro San Pedro Sulphide exploration project continued with the commencement of a 10,000 meter core drilling program in combination with a deep penetrating geophysical survey. The objective of the current phase of work is to explore a zone of high grade manto-style sulphide mineralization as it extends from an area of historic underground mining south of the current open pit. Drilling during 2009 indicates the high grade sulphide mineralization remains open to the south and west of the area of historic mining.

C.	PEAK MINE, NEW SOUTH WALES, AUSTRALIA

During the second quarter of 2010, the Company’s ongoing mineral resource development program at Peak Mine’s operations resulted in the completion of 18,118 metres of exploration and delineation diamond drilling to replace mine depletion. This total includes 1,267 metres of underground drilling to delineate and explore for additional reserves in the Chesney deposit, 8,922 metres of underground drilling to delineate and explore for additional reserves in the Perseverance deposit, 1,018 metres of underground drilling to explore for extensions to the New Occidental deposit at depth, 792 metres of underground drilling to explore for new deposits at Comstock between the Peak and New Occidental mines, 3,252 metres of surface drilling to explore under the historic Great Cobar workings, 1,437 metres of surface drilling to explore the Jubilee deposit north of the Company’s New Cobar mine and 1,430 metres of surface drilling to explore the Fortitude prospect south of the Company’s Perseverance mine. The Company’s regional exploration initiative at Peak Mines likewise continues with geophysical surveys and geochemical sampling of targets identified within the Cobar mineral field.

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D.	NEW AFTON PROJECT, BRITISH COLUMBIA, CANADA

The Company’s New Afton copper-gold development project is located in Kamloops, British Columbia, Canada. The New Afton project’s property package consists of the nine square kilometre Afton mining lease which centers on the New Afton copper-gold mine currently under development as well as 111 square kilometres of exploration licenses covering multiple mineral prospects within the historic Iron Mask mining district.

Capital expenditure for the first six months of 2010 was $37.1 million including capitalized interest of $10.4 million compared to $38.7 million including capitalized interest of $9.2 million for the first six months of 2009.

Capital expenditure for the second quarter of 2010 was $21.2 million including capitalized interest of $5.2 million compared to $23.5 million including capitalized interest of $4.6 million for the second quarter of 2009.

Underground development advanced a total of 1,413 metres during the first six months of 2010 compared to an advance of 619 metres during the first six months of 2009. During the quarter, underground development advanced a total of 671 metres compared to an advance of 424 metres during the second quarter of 2009. Shotcrete support work during the period included the spraying of 1,570 cubic metres in the development headings compared to 678 cubic metres in the second quarter of 2009.

Excavation and ground support of the Conveyor Transfer Chamber (CTC 1), the first large bulk mining excavation at New Afton was completed and turned over to construction; construction of CTC 1 began as crews poured lean concrete in floors of the station. Mining of Conveyor Leg 3 was completed except for the bulk excavation in the conveyor transfer station. Access to Conveyor Leg 4 Decline was completed as well as access to Conveyor Leg 4 incline from bottom was completed. Conveyor Leg 4 will now be driven from both top and bottom. Excavation began in the Extraction Level Access drift which will lead to the first mining activity in the ore-body at the mining level horizon. The first seven conveyor tables were test-fitted in Conveyor Leg One.

Boring of the Pilot Hole for the first of three major internal underground ventilation raises that will bring fresh air to the production area of the mine was completed. Surface construction continued with installation of buried piping bringing that activity to approximately 40% complete.

The last major permit for New Afton was received during the quarter with the Ministry’s issuance of the Water License.

Limited construction activities were commenced on the surface in the second quarter with installation of buried services (utilities) throughout the site, and earthworks to establish proper grade on future work sites. Surface and maintenance projects in the second quarter included preparation, clean-up, and reorganization of materials storage areas, installation and commissioning of permanent underground electrical substations and related 13.8 kV distribution system, site road construction, maintenance, safety program improvements, dust control, and painting of out-buildings and temporary structures.

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Project engineering activity continued in support of the advancement of the surface construction, and design work related to the underground materials handling system.

E.	EL MORRO JOINT VENTURE, ATACAMA REGION, CHILE

The Company’s 30% owned El Morro copper-gold project is located in the Atacama Region, Chile, approximately 80 kilometres east of the city of Vallenar. El Morro was acquired by the Company as part of the business combination with Metallica Resources Inc. on June 30, 2008. The project is a development stage project initially managed under a shareholder agreement between Xstrata, the previous project operator and owner of a 70% interest.

During the second quarter of 2010, the El Morro project activities included the continued management of the EIS application review process, which commenced in November 2008, and detailed engineering and design work for the access road and related project infrastructure by Xstrata. New Gold's current 70% joint venture partner on the El Morro Project, Goldcorp Inc., continues to work through the permit review process for the project with a target to begin construction in the first half of 2011.

The Company’s share of total project expenditures from point of ownership to December 31, 2009 was $2.3 million, with no funding requirement in 2010.

On October 12, 2009, Barrick announced that it had entered into an agreement with Xstrata to acquire Xstrata’s 70% interest in El Morro. New Gold held a right of first refusal over Xstrata’s 70% interest which was triggered when the agreement with Barrick was announced. On January 7, 2010, the Company provided notice to Xstrata of the exercise of its right of first refusal to acquire 70% of the El Morro copper-gold project in Chile for $463.0 million. The Company completed this transaction on February 16, 2010. Goldcorp loaned the $463.0 million to the Company to fund the exercise of the right of first refusal. After acquisition of the 70% interest by a subsidiary of the Company, New Gold then completed a transaction with Goldcorp which resulted in a Goldcorp subsidiary now holding the 70% interest in El Morro. Through the subsequent transaction with Goldcorp, the Company received $50.0 million and the terms of the shareholder agreement were amended. The Company continues to hold a 30% interest in the El Morro copper-gold project.

On January 13, 2010, New Gold received a Statement of Claim filed by Barrick in the Ontario Superior Court of Justice, against New Gold, Goldcorp, and affiliated subsidiaries. The claim relates to New Gold's exercise of its right of first refusal on the El Morro copper-gold project in Chile. New Gold believes that the claim is without merit and intends to defend this action vigorously.

REVIEW OF FINANCIAL RESULTS

SECOND QUARTER 2010 COMPARED TO SECOND QUARTER 2009

Revenues increased by 90% or by $53.2 million when comparing the second quarter of 2010 to 2009. Although some of the increase was attributed to an increase in average realized gold prices(2) from $926 per ounce in the second quarter of 2009 to $1,147 per ounce in 2010, the variance was largely attributed to the acquisition of the Mesquite Mine on May 27, 2009. The Mesquite Mine sold 38,786 ounces of gold during

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the second quarter of 2010, compared to 11,601 ounces of gold sold during the prior year period which represented one month of gold sales post acquisition.

Operating expenses increased from $34.6 million in 2009 to $57.9 million in the second quarter of 2010. The addition of the Mesquite Mine to the Company’s operating mines accounts for $15.0 million of the increase to operating expenses. The remaining increase is attributed to the adverse impact of foreign exchange as the U.S. dollar has weakened to the Australian dollar and Mexican peso, higher consumable prices and increased production volume.

Depreciation and depletion was $18.6 million for the second quarter of 2010 compared to $10.0 million for the second quarter of 2009. This was primarily attributed to increased production and the addition of the Mesquite Mine as of May 27, 2009. For the second quarter of 2010, the Mesquite Mine incurred depreciation and depletion expense of $6.4 million compared to $1.8 million for the same prior year period which represents one month of activity.

For the three months ended June 30, 2010, New Gold had earnings from mine operations of $35.9 million compared with $14.6 million in the same prior year period.

Corporate administration costs of $8.7 million in the second quarter of 2010 compared to $6.0 million incurred in the same prior year period. Corporate administration was higher in the second quarter of 2010 primarily due to a negative foreign exchange impact, additional legal costs and an increased corporate salary base. Nearly all corporate costs are incurred in Canadian dollars, which has appreciated 13% to the U.S. dollar relative to the second quarter of 2009. This generates a negative foreign exchange impact of approximately $0.9 million. Stock-based compensation costs included within corporate administration were $2.3 million and $1.6 million in second quarters of 2010 and 2009, respectively. Business transaction costs of $5.9 million were incurred in the second quarter of 2009 related to the Western Goldfields Inc. business combination for which there are no comparative costs in the second quarter of 2010.

A goodwill impairment charge of $189.6 million related to the business combination with Western Goldfields Inc. was recorded in the second quarter of 2009. There is no comparative figure in 2010.

On July 1, 2009, the Company met the criteria for hedge accounting under the Canadian Institute of Chartered Accountants’ Handbook section 3865 – Hedges in accounting for its gold hedge and fuel contracts. Application of the accounting standards allows the Company to record realized gains and losses on gold hedge settlements within revenue. For settlements on the fuel hedges, the realized gains and losses are classified within operating expenses. Changes resulting from the mark-to-market of the gold hedge and fuel contracts are now recognized within other comprehensive income.

For the three month period ended June 30, 2010, the Company’s Mesquite Mine realized losses of $4.7 million within revenues for settlement of three months of gold hedge contracts totaling 16,500 ounces. The Mesquite Mine realized no gains or losses on the settlement of second quarter fuel hedge contracts totaling 756,000 gallons of diesel fuel. As a result of the increase in the spot price of gold from $1,116 per ounce to $1,244 per ounce between March 31, 2010 and June 30, 2010, the Mesquite Mine recognized $30.0 million

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of pre-tax unrealized losses in the mark-to-market of remaining contracts within other comprehensive income.

Following the acquisition of Mesquite Mine and prior to the Company meeting the criteria for hedge accounting, a gain of $9.0 million was recorded in the second quarter of 2009 for realized and unrealized gain on fuel and hedge contracts. The 2010 period has no comparative as realized losses of $4.7 million on hedge settlement are recorded in revenue and unrealized mark to market gains or loss are recorded in Other Comprehensive Income.

During the second quarter of 2010, the Company had realized and unrealized gains on investments related to the mark to market of remaining Asset Backed Notes of $0.9 million. This compares to a gain of $9.7 million for the same prior year period.

The Company recognized a foreign exchange gain of $5.5 million in the second quarter of 2010 compared to a loss of $30.6 million in the same prior year period. During the second quarter of 2010, the U.S. dollar strengthened against the foreign currencies that the Company operates in. The Canadian and Australian dollars weakened 2.8% and 7.4% respectively against the U.S. dollar since March 31, 2010, partly as a result of a flight to perceived safety in the U.S. dollar and weaker energy and commodity prices, as both countries are large net exporters of energy and commodities. The foreign exchange gain arose due to the revaluation of monetary assets and liabilities and future income tax liabilities recorded on the business combination between New Gold, Metallica, and Peak Gold. The sum of the monetary items represents a net liability position which decreased on a U.S. dollar basis as a result of the relative weakness of the Canadian and Australian dollars. The prior period loss of $30.6 million arose as the U.S. dollar significantly weakened to all foreign currencies that New Gold operates in during the second quarter of 2009.

Income and mining tax expense in the second quarter of 2010 was $12.2 million compared to $0.4 million in the same prior year period, reflecting an effective tax rate of 41% for the second quarter of 2010.

For the three months ended June 30, 2010, New Gold had net earnings from continuing operations of $17.4 million, or $0.04 per basic and diluted share. This compares with a net loss from continuing operations of $199.3 million, or ($0.77) per basic and diluted share in the same prior year period. In the second quarter of 2010, net earnings, including earnings from discontinued operations, was $59.1 million, or $0.15 per basic and diluted share. This compares with a net loss of $202.8 million, or ($0.79) per basic and diluted share in 2009. The earnings from discontinued operations includes the proceeds from the disposal of MPBA of $37.0 million in cash and $18.6 million fair value of Beadell shares received as part of the transaction.

SIX MONTHS ENDED JUNE 30, 2010 COMPARED TO SIX MONTHS ENDED JUNE 30, 2009

Revenues increased by 107% or by $110.5 million when compared to $103.5 million in the same prior year period. The increase is attributed to an increase in average realized gold prices(2) from $911 per ounce during the first six months of 2009 to $1,113 per ounce in 2010. Additionally, the first half of 2010 includes six months of gold sales for the Mesquite Mine compared to one month for 2009. The Mesquite Mine sold 88,288 ounces of gold in in the first six months of 2010 compared to 11,601 in the same prior year period.

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Operating expenses increased from $58.3 million in the first six months of 2009 to $110.1 million during the first six months of 2010. The addition of the Mesquite Mine to the Company’s operating mines contributed an incremental $42.5 million to operating expenses. Increased consumable costs and adverse foreign exchange movements further impacted operating cost year on year.

Depreciation and depletion for the six months ended June 30, 2010 was $31.4 million compared to $18.5 million for the same prior year period. This was primarily attributed to the addition of the Mesquite Mine to the Company’s operating mine portfolio on May 27, 2009. For the first six months of 2010, the Mesquite Mine incurred incremental depreciation and depletion expense of $11.5 million.

For the six months ended June 30, 2010, New Gold had earnings from mine operations of $72.5 million compared with $26.7 million in the same prior year period.

Corporate administration costs of $16.7 million in the first six months of 2010 were 65% higher than $10.1 million incurred in the same prior year period. Corporate administration was higher in the first six months of 2010 primarily due to a negative foreign exchange impact, additional legal costs and an increased corporate salary base following the business combination with Western Goldfields Inc. Nearly all corporate costs are incurred in Canadian dollars, which has appreciated 16% to the U.S. dollar relative to the first half of 2009. This generates a negative foreign exchange impact of approximately $2.2 million. Stock-based compensation costs included within corporate administration were $4.6 million and $2.9 million in first quarters of 2010 and 2009, respectively.

A goodwill impairment charge of $189.6 million related to the business combination with Western Goldfields Inc. was recorded in the second quarter of 2009. There is no comparative figure in 2010.

Exploration costs of $4.6 million in the first six months of 2010 were higher than $2.7 million for the same prior year period. The increase was driven by the Peak Mine where exploration activity has increased significantly relative to the first six months of 2009 which was primarily planning and evaluation.

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For the six month period ended June 30, 2010, the Company’s Mesquite Mine realized losses of $7.5 million within revenues for settlement of six months of gold hedge contracts totaling 33,000 ounces. The Mesquite Mine realized a gain of $0.1 million on the settlement of the six months fuel hedge contracts totaling 756,000 gallons of diesel fuel. As a result of the increase in the spot price of gold from $1,088 per ounce to $1,244 per ounce between December 31, 2009 and June 30, 2010, the Mesquite Mine recognized $33.1 million of pre-tax unrealized losses in the mark-to-market of remaining contracts within Other Comprehensive Income.

Following the acquisition of Mesquite Mine and prior to the Company meeting the criteria for hedge accounting, a gain of $9.0 million was recorded in the first six months of 2009 for realized and unrealized gain on fuel and hedge contracts. The 2010 period has no comparative as realized losses of $7.5 million on hedge settlement are recorded in revenue and unrealized mark to market gains or losses are recorded in Other Comprehensive Income.

During the first six months of 2010, the Company had realized and unrealized gains on investments related to the mark to market of remaining Asset Backed Notes of $4.9 million. This compares to a gain of $9.7 million for the same prior year period. Additionally, a gain on redemption of long term debt of $14.2 million was realized in the first six months of 2009 compared to $nil for the same period in the current year.

The Company recognized a foreign exchange gain of $0.7 million in the first six months of 2010 compared to a loss of $32.6 million in the same prior year period. During the first half of 2010, the U.S. dollar remained relatively unchanged compared to the foreign currencies that the Company operates in giving rise to a minimal gain. The foreign exchange gain or loss arises due to the revaluation of monetary assets and liabilities and future income tax liabilities recorded on the business combination between New Gold, Metallica, and Peak Gold. The sum of the monetary items represents a net liability position which decreased on a U.S. dollar basis as a result of the relative weakness of the Canadian and Australian dollars. The prior year period loss of $32.6 million arose as the U.S. dollar significantly weakened to all foreign currencies that New Gold operates in during the first half of 2009.

Income and mining tax expense in the first half of 2010 was $21.2 million compared to a $6.9 million in the same prior year period, reflecting an effective tax rate of 38% for the first half of 2010.

For the six months ended June 30, 2010, New Gold had net earnings from continuing operations of $34.6 million, or $0.09 per basic and diluted share. This compares with a net loss from continuing operations of $187.2 million, or ($0.79) per basic and diluted share in the same prior year period. In the first six months of 2010, net earnings, including earnings from discontinued operations, was $76.6 million, or $0.20 per basic share. This compares with a net loss of $190.8 million, or ($0.81) per basic and diluted share in 2009. The earnings from discontinued operations includes the proceeds from the disposal of MPBA of $37.0 million in cash and $18.6 million fair value of Beadell shares received as part of the transaction.

QUARTERLY INFORMATION

(tabular data in thousands of U.S. dollars, except per share amounts)

	2010	2010	2009	2009	2009	2009	2008	2008	2008	2008
	Q2	Q1	Q4	Q3	Q2	Q1	Q4	Q3	Q2	Q1

Gold sales (ounces)	82,402	80,020	106,475	77,645	68,627	88,112	78,194	67,156	40,540	51,700
Revenues	112,359	101,620	131,765	88,491	59,199	44,325	36,736	49,171	19,722	37,454
Net earnings (loss) from continuing operations	17,418	17,188	(2,295)	6,096	(199,304)	12,069	39,412	18,005	2,519	10,948
Earnings (loss) per share from continuing operations
Basic	0.04	0.04	(0.01)	0.02	(0.77)	0.06	0.18	0.08	0.03	0.14
Diluted	0.04	0.04	(0.01)	0.02	(0.77)	0.06	0.18	0.08	0.03	0.14

Net earnings (loss)	59,136	17,493	(7,650)	4,101	(202,846)	12,079	41,135	(148,853)	(4,751)	9,790
Earnings (loss) per share
Basic	0.15	0.04	(0.02)	0.01	(0.79)	0.06	0.19	(0.70)	(0.05)	0.13
Diluted	0.15	0.04	(0.02)	0.01	(0.79)	0.06	0.19	(0.68)	(0.05)	0.13

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BALANCE SHEET REVIEW

ASSETS

At June 30, 2010, New Gold held cash and cash equivalents of $376.1 million. This compares favourably with the $343.7 million held at March 31, 2010. The June 30, 2010 balance includes $37.0 million gross cash proceeds from the sale of Amapari in April 2010. Of the Company’s holdings, $142.7 million is held in Canadian federal and provincial treasury bills and $129.0 million in cash. The remainder is held in the following liquid forms: banker’s acceptances, term deposits, and guaranteed investment certificates.

B.	ASSET BACKED NOTES

At June 30, 2010, the Company owned long-term Asset Backed Notes (“AB Notes”) with a face value of $19.7 million (Cdn$20.9 million). These AB Notes were issued in replacement of asset backed commercial paper (“ABCP”) formerly held by the Company. When the ABCP matured but was not redeemed in 2007, it became the subject of a restructuring process that replaced the ABCP with long-term asset backed securities. The restructuring was completed and the AB Notes were issued on January 21, 2009.

The Company has estimated the fair value of the remaining AB Notes at June 30, 2010 based on market bid prices. As a result of this analysis, the Company has estimated the fair market value of its AB Notes investment to be $3.0 million as at June 30, 2010.

While the Company believes that it has utilized an appropriate methodology to estimate fair value, given the current state and ongoing volatility of global credit markets, there can be no assurance that management’s estimate of potential recovery as at June 30, 2010 is accurate. Subsequent adjustments, either materially higher or lower, may be required in future reporting periods. The Company will continue to manage the process to recover the maximum value from the original investments and interest due.

The secondary market for the Company’s remaining AB Notes is relatively illiquid, however management will continue to monitor developments in order to maximize value.

C.	INVESTMENT IN BEADELL SHARES

At June 30, 2010, the Company owned 115 million shares in Beadell that were acquired as consideration in the Amapari transaction. On the closing date of the transaction, April 13, 2010, the shares were valued at $18.6 million (Aud$20.1 million). The Company has designated its investment in Beadell as an available for sale financial asset with changes in fair value being included in other comprehensive income. At June 30, 2010, the shares were valued at $15.6 million (Aud$18.4 million) resulting in a debit of $3.0 million to Other Comprehensive Income.

D.	FUEL CONTRACTS

New Gold’s wholly-owned subsidiary, Western Mesquite Mines Inc. (“WMMI”), entered into fuel hedge contracts with financial institutions in December 2008 and January 2009. As at June 30, 2010, the hedging contracts represent a total commitment of 1.5 million gallons of diesel at a weighted average price of $1.94

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per gallon in 2010. New Gold assumed the liability upon acquisition of Western Goldfields on May 27, 2009. The Company is financially settling 252,000 gallons of diesel per month related to these contracts until December 31, 2010.

The Company’s fuel hedge contracts did not initially meet the criterion in Section 3865 - Hedges, and therefore were not designated as cash flow hedges. Accordingly, period-end mark to market adjustments related to these contracts were immediately reflected on the statement of operations of the Company as unrealized gains or losses on fuel hedging contracts and the cumulative effect was reflected as an asset or liability on the balance sheet.

On July 1, 2009, the Company’s fuel contracts met the requirements under Section 3865 - Hedges and were therefore designated as cash flow hedges against forecasted purchases of fuel for expected consumption at the Mesquite Mine. Prospective and retrospective hedge effectiveness is assessed using the hypothetical derivative method. The prospective test is based on regression analysis of the month-on-month change in fair value of both the actual derivative and a hypothetical derivative caused by actual historic changes in commodity prices over prior periods. The retrospective test involves comparing the effect of historic changes in fuel prices each period on the fair value of both the actual and hypothetical derivative using a hypothetical derivative method. The effective portion of changes in fair value of the commodity contracts is recorded in Other Comprehensive Income (“OCI”) until the forecasted transaction impacts earnings. Where applicable, the fair value of the derivative has been evaluated to account for the Company’s credit risk.

There were no realized gains or losses recognized for the three month period ended June 30, 2010. The remaining contracts were marked to market as at June 30, 2010, resulting in a pre-tax adjustment to OCI of $0.4 million. The cumulative fuel hedge asset as at June 30, 2010 was $0.2 million.

E.	GOLD HEDGE CONTRACTS

Under the terms of the term loan facility entered into by WMMI, as a condition precedent to drawdown the loan, WMMI entered into a gold hedging program required by the banking syndicate. As such, at the time of the agreement, the Company had executed gold forward sales contracts for 429,000 ounces of gold at a price of $801 per ounce. New Gold assumed the liability upon acquisition of Western Goldfields Inc. on May 27, 2009. As at June 30, 2010, the remaining gold contracts represent a commitment of 5,500 ounces per month for 54 months with the last commitment deliverable in December 2014 for a total of 297,000 ounces.

The Company’s gold hedge contracts did not initially meet the criterion in Section 3865 - Hedges, and therefore were not designated as cash flow hedges. Accordingly, the period-end mark to market adjustments related to these contracts were immediately reflected on the statement of operations of the Company as unrealized gains or losses on gold forward sales contracts and the cumulative effect was reflected as an asset or liability on the balance sheet.

On July 1, 2009, the Company’s gold hedging contracts met the requirements for cash flow hedges under Section 3865 - Hedges. Prospective hedge effectiveness is assessed on these hedges using the hypothetical derivative method. The hypothetical derivative assessment involves comparing the effect of theoretical shifts in forward gold prices on the fair value of both the actual hedging derivative and a hypothetical

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derivative. The retrospective assessment involves comparing the effect of historic changes in gold prices each period on the fair value of both the actual and hypothetical derivative. The effective portion of the gold contracts is recorded in OCI until the forecasted gold sale impacts earnings. Where applicable, the fair value of the derivative has been evaluated to account for the Company’s credit risk.

The remaining contracts were marked to market as at June 30, 2010, resulting in a cumulative unrealized pre-tax loss of $124.9 million that has been disclosed as a liability and a pre-tax adjustment of $33.1 million to OCI for the six month period ending June 30, 2010.

F.	LONG-TERM DEBT

The majority of the Company’s contractual obligations consist of long-term debt and interest payable. At June 30, 2010, the Company had $209.7 million in long-term debt.

Long-term debt obligations are comprised primarily of senior secured notes and subordinated convertible debentures. The senior secured notes (“Notes”), which were originally issued by New Gold pursuant to a note indenture dated June 28, 2007, mature and become payable on June 28, 2017 and bear interest at a rate of 10% per annum. At June 30, 2010 the face value of the Notes totalled $176.3 million (Cdn$187.0 million). Interest is payable in arrears in equal semi-annual installments on January 1 and July 1 each year. Once the New Afton project is in commercial production, the Company will be obligated to offer to repay a face value amount equal to 50% of excess cash flow each year, at the option of the note holders. The Company also has the option to prepay the Notes at a price ranging from 120% to 100% (decreasing rates based on the length of time the Notes are outstanding). At June 30, 2010 the redemption price was 110%, which is scheduled to decrease to 105% on June 28, 2011. These Notes are secured on the New Afton Project assets. Capitalized interest relating to the Notes was $4.4 million in the second quarter of 2010 compared to $4.6 million during the second quarter of 2009.

The Company has 55,000 subordinated convertible debentures (“Debentures”) that bear interest at a rate of 5% per annum and are convertible by the holders into common shares of the Company at any time up to June 28, 2014 at a conversion price of Cdn$9.35 per share. At June 30, 2010, the aggregate principal of the Debentures was $51.9 million (Cdn$55.0 million). The Debentures are accounted for as compound financial instruments comprised of a liability and an equity component. At June 30, 2010, the carrying amount of the liability of $38.5 million will be accreted to the face value of the Debentures over their term to maturity. Interest is payable in arrears in equal semi-annual installments on January 1 and July 1 each year. Capitalized interest relating to the Debentures was $0.7 million in the second quarter of 2010 compared to $0.6 million during the second quarter of 2009.

New Gold’s wholly-owned subsidiary Western Goldfields Inc., had a term loan facility with a syndicate of banks under which $86.3 million was borrowed in connection with the development of the Mesquite Mine. The facility was secured by all of the assets of WMMI and a pledge of the shares of WMMI owned by the Company. The loan was assumed upon completion of the Western Goldfields Inc. acquisition on May 27, 2009.

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The remaining loan balance of $27.2 million was fully repaid on February 26, 2010 which allows the Company the flexibility to monetize the remaining hedges outstanding at its discretion. The gold hedge extends to the end of 2014 and the related security and covenants remain in place until the hedge is monetized or delivered over this period at 5,500 ounces per month at $801 per ounce.

G.	FUTURE INCOME AND MINING TAXES

The net future income tax liability slightly decreased from $305.6 million on March 31, 2010 to $287.5 million on June 30, 2010. The change was primarily attributed to the following factors:

§	The Company recognized foreign exchange gains associated with future income tax balances of $6.6 million related to exchange movements in the U.S. dollar against other foreign currencies.

§	The recognition of future income tax assets in Canada, Mexico, and the United States associated with operations.

The current income tax liability decreased slightly from $15.1 million on March 31, 2010 to $14.9 million on June 30, 2010. The change in the current income tax liability is a primarily a function of profitability, tax installment payments, and the impact of foreign exchange.

NON-GAAP MEASURE – TOTAL CASH COST(1) PER GOLD OUNCE CALCULATION

New Gold reports total cash cost(1) on a sales basis. In the gold mining industry, this is a common performance measure but does not have any standardized meaning, and is a non-GAAP measure. The Company follows the recommendations of the Gold Institute Standard. The Company believes that, in addition to conventional measures prepared in accordance with GAAP, certain investors use this information to evaluate the Company’s performance and ability to generate cash flow. Accordingly, it is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. The following table provides a reconciliation of total cash cost (1) per ounce of gold sold to the financial statements:

	Three Months Ended June 30,		Six Months Ended June 30,
	2010	2009	2010	2009
Operating expenses from continuing operations	57,855	34,574	110,111	58,347
Operating expenses from discontinued operations	--	3,559	--	14,986
Treatment and refining charges on concentrate sales	1,308	1,324	3,632	3,273
By-product copper and silver sales	(19,175)	(11,555)	(36,813)	(22,545)
Non-cash adjustments	457	(3,148)	1,213	(888)
Total cash cost	40,445	24,754	78,143	53,173
Ounces of gold sold	82,402	52,890	162,421	108,287
Total cash cost(1) per ounce of gold sold	491	468	481	491

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LIQUIDITY AND CAPITAL RESOURCES

As at June 30, 2010, the Company had cash and cash equivalents held by continuing operations of $376.1 million compared to $343.7 million at March 31, 2010. These balances exclude $6.1 million and $9.0 million of reclamation deposits for the New Afton project and Mesquite Mine, respectively, which are included in Reclamation Deposits and Other on the balance sheet. The increase in cash in the three month period was attributed to the following key items:

§	Strong cash flows from gold sales at the Company’s Peak Mine, Cerro San Pedro Mine, and Mesquite operating mines which benefited from prevailing average market gold prices of $1,196 per ounce during the quarter;

§	Project spending at the New Afton project for the quarter ended June 30, 2010 of $24.9 million, including cash paid interest of $10.1 million; and

§	Receipt of $37 million gross proceeds from the Amapari transaction.

The Company’s cash and cash equivalents are invested in highly liquid, low risk, interest-bearing investments with maturities of 90 days or less from the original date of investment. The surplus corporate funds are only invested with approved government or bank counterparties. This does not include the AB Notes (refer to AB Notes section in Critical Accounting Policies and Estimates for further discussion).

As at June 30, 2010, the Company had working capital of $406.4 million. In the opinion of management, the working capital at June 30, 2010, together with cash flows from operations, are sufficient to support the Company’s normal operating requirements on an ongoing basis. However, taking into consideration volatile equity markets, global uncertainty in the capital markets and cost pressures, the Company is continually reviewing expenditures in order to ensure adequate liquidity and flexibility to support its growth strategy while maintaining or increasing production levels at its current operations. At current metal prices, it is expected that the Company’s existing assets coupled with the cash flow from current operations will be sufficient to fully fund the construction of the New Afton and El Morro projects.

During the quarter ended June 30, 2010, the Company had positive operating cash flows from continuing operations of $38.8 million and invested a total of $34.8 million in mining interests, including $1.0 million at the Mesquite Mine, $1.7 million at the Cerro San Pedro Mine, $7.1 million at the Peak Mine, $24.9 million at the New Afton project and $0.1 million at other projects.

LIQUIDITY AND CAPITAL RESOURCES OUTLOOK

The Company’s future profits and cash position are highly dependent on metal prices, including gold, silver and copper. Copper will become increasingly important when the New Afton and El Morro projects are completed, which is expected after 2011. In addition to these internal growth opportunities, the Company has other prospective properties which include, but are not limited to, Cerro San Pedro Mine Sulphide, Mesquite Sulphide, and Liberty Bell in Alaska. Internal growth will focus on the New Afton and El Morro projects; however there are other potential development properties that may become high priorities as

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further exploration and assessment is completed. In order to supplement this internal growth, the Company considers expansion opportunities through mergers and acquisitions.

Capital expenditures for 2010 are expected to be in line with previous guidance allowing for foreign exchange adjustments.

At the end of the second quarter of 2010 the Company has a significant cash balance of $376.1 million with more than three-quarters of the funds in Canadian dollars in order to fund the significant spending on New Afton during the period from 2010 to 2012. There is a general expectation from economists and market observers that the Canadian dollar will continue to remain strong compared to the U.S. dollar over the mid-term and during the construction phase at New Afton. Management believes the Company will not need external financing to complete its major development projects and will continue to seek opportunities to effectively utilize its cash funds. With the successful sale of Amapari and current and forecast metal prices, it is expected that the Company’s existing assets coupled with the cash flow from current operations will be sufficient to fully fund the construction of the New Afton and El Morro projects.

The Company expects it will not need external financing to repay its remaining debt in 2014 and 2017 and the El Morro carried funding loan with Goldcorp will be repaid directly out of the Company’s share of cash flows from El Morro. These statements are based on the current financial position of the Company and are subject to change if any acquisitions or external growth opportunities are realized.

OUTLOOK

Generally global growth and economic fundamentals have shown a return to more stable historical levels in early 2010 after a challenging period in the early part of 2009; however, there has been a return to risk aversion due to recent sovereign debt concerns in Europe and elsewhere. Despite market commentators first quarter of 2010 expectations of the stabilization of economic and credit conditions and a forecast of strong GDP growth in Canada, the U.S. and many parts of the developed and developing world, the second quarter has seen increasing uncertainty as to whether the global economy may slow. Many economists seem to disagree as to whether deflation or inflation will be the most significant challenge in the near term in many Western economies in Europe and North America. The Company believes the next one to two years will show a return to a more coordinated global growth phase with moderate inflation, or even moderate deflation, however there may be increased risks related to high government debt levels and geopolitical issues. These risks are already surfacing in Europe with the challenges being faced by highly indebted nations, such as Greece, Portugal, Spain, Ireland and the UK. These issues have continued to under-pin a “safe-haven” strengthening in the U.S. dollar versus many world currencies. However, economists believe this will reverse as the Eurozone gets through the near term issues and commodity linked currencies, such as the Canadian and Australian dollars, return to a period of strength during 2010 or 2011. In addition, U.S. dollar strength is unlikely to be sustained due to the size of the structural adjustments that the U.S. must undergo to rebalance its savings shortfall and its significant reliance on foreign capital inflows. Key risks to general global growth include fading government fiscal and monetary support, above average unemployment, increasing interest rates and geopolitical issues. If unprecedented government spending and low interest rates start to subside as expected in the second half of 2010, there is a risk of weaker

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economic recovery or even a relapse into recession with deflation. However, recently we have seen a strong performance of the gold price and a partial de-coupling of gold and the U.S. dollar. It is difficult to predict whether this de-coupling and the recent strength in gold prices will remain over the mid to long term, however sovereign debt issues and the specter of longer term inflation may support the gold price in the foreseeable future.

The recovery in the global economy and stock markets seen during 2009 and into the first quarter of 2010 has faltered somewhat in the second quarter of 2010 with copper prices decreasing from $3.55 per pound at the end of March 31, 2010 to $2.95 per pound at the end of June 30, 2010. Copper averaged $3.18 per pound during the quarter ended June 30, 2010 compared to $3.29 per pound in the first quarter of 2010. In addition, gold and silver prices have increased from the March 31, 2010 closing prices of $1,116 per ounce and $17.50 per ounce to $1,244 and $18.74, respectively, at the end of June 2010. The average gold and silver prices for the second quarter were $1,196 and $18.33 per ounce, respectively compared to the first quarter ended March 31, 2010 when prices averaged $1,109 per ounce and $16.94 per ounce. Key factors influencing the price of gold include currency rate fluctuations and the relative strength of the U.S. dollar, the supply of, and demand for, gold and macroeconomic factors such as the level of interest rates and inflation expectations. Economists believe monetary officials in many parts of emerging Asia are awaiting a signal from China of a change in its exchange rate policy stance (a marginally more flexible Chinese exchange rate policy was made public recently). In most of the region, currencies are biased towards appreciation to the U.S. dollar, prompting recurring official interventions attempting to prevent a loss of industrial competitiveness. However, these interventions come at the cost of a parallel increase in strains of managing excessive domestic liquidity. The U.S. government is taking a greater interest in foreign exchange policy coming out of China and any future changes in this policy could materially affect exchange rates and market prices for many commodities and other products. Global liquidity, slowly improving economic fundamentals and the related uncertainties and a weaker U.S dollar over the midterm should broadly support gold and silver prices. However, the Company believes there could be a short period of strength in the U.S. dollar attributed to its “safe-haven” status during periods of uncertainty while governments in Europe and elsewhere work through issues related to high sovereign debt levels. Forecasting metal prices and demand has been difficult, however, in light of recent signs of the strengthening of markets, management believes the long term environment and prospects for our business are favourable and many investors and interested parties are viewing gold as a store of value in a world with increasingly less confidence in fiat currencies that generally do not have an intrinsic value. The Company has not hedged foreign exchange rates and metal prices, except to meet the lenders’ requirements related to the Mesquite Mine’s term loan facility.

In addition to the above factors, the Company believes that the outlook for global gold (and copper) mine production continues to be one of declining supply due to limited global exploration success, a trend of lower grade production by producers, a lack of promising regions for gold exploration and production, and challenges in bringing projects to the production stage. The significant market interest in the El Morro copper-gold project is further evidence of the limited pure gold projects of significant size available to support demand and ambitious growth plans of any scale. The Company believes long term gold prices will benefit from these trends and copper will also be supported by potential under-investment in new capacity

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during the last cycle. Some industry observers believe new mine development will be needed by 2012, which coincides well with the expected timing of commercial production at the New Afton project in mid-2012.

In the current improving global economic environment, the Company intends to preserve capital and optimize cash balances while maintaining flexibility and a strong balance sheet. New Gold is committed to optimizing cash balances by increasing operating cash flow, containing costs and controlling expansion capital.

New Gold’s growth plan is focused on organic and acquisition-led growth, and the Company is seeking to be flexible in the current environment to be able to respond to opportunities as they arise, such as acquisitions, debt buybacks, gold hedge monetization and other transactions. At current metal prices and after the recent completion of the Amapari transaction, it is expected that the Company’s existing cash and assets coupled with the cash flow from current operations will be sufficient to fully fund the construction of the New Afton project. In addition, New Gold is not required to fund any of the development capital for the El Morro project, as Goldcorp has agreed to fund our 30% share and will be repaid (principal and interest) solely out of future cash generated from New Gold’s share of the El Morro project’s distributable cash flows.

New Gold’s 2010 guidance for gold production is 330,000 to 360,000 ounces at a total cash cost(1) of $445 to $465 per ounce of gold sold, net of by-product sales.

COMMITMENTS

The Company has entered into a number of contractual commitments related to purchases of equipment with long lead times or critical pieces of mining equipment related to the New Afton project. At June 30, 2010, these commitments totaled $26.5 million and are expected to be paid over the next 12 months.

In addition to the above, the Company has entered into a number of contractual commitments related to equipment orders to purchase long lead items or critical pieces of mining equipment at its operating mines. At June 30, 2010, these commitments totaled $20.1 million and are expected to be paid over the next 12 months.

CONTINGENCIES

In assessing the loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company and its legal counsel evaluate the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought. If the assessment of a contingency suggests that a loss is probable, and the amount can easily be estimated, then a loss is recorded. When a contingent loss is not probable but if reasonably possible, or is probable but the amount of the loss cannot be reliably estimated, then details of the contingent loss are disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the Company discloses the nature of the guarantees. Legal fees incurred in connection with pending legal proceedings are expensed as incurred.

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NEW AFTON

The Company terminated various employment, consulting and service agreements at the New Afton project in 2008. Certain of the affected parties have or may in the future make legal claims in response to such terminations. The Company cannot reasonably predict the likelihood or outcome of any such actions, but would vigorously defend against them.

B.	AMAPARI MINE

The company completed the sale of the Amapari Mine to Beadell on April 13, 2010. As part of the agreement selling the Amapari Mine, the Company provided general indemnity for one year in connection with the representations and obligations of the Company under the sale agreement. The indemnity is limited to claims in excess of an amount equal to $5.0 million and in no event shall the aggregate amount of all claims exceed $10.0 million.

C.	EL MORRO TRANSACTION

On January 13, 2010, the Company received a Statement of Claim filed by Barrick in the Ontario Superior Court of Justice, against New Gold, Goldcorp and affiliated subsidiaries. The claim relates to New Gold’s exercise of its right of first refusal on the El Morro copper‐gold project. New Gold intends to defend the action vigorously. No amounts have been accrued for any potential loss under this claim.

D.	CERRO SAN PEDRO MINE

The Company has a history of legal challenges to its Cerro San Pedro Mine. In July 2010 the Fifth Auxiliary District Court in Mexico City denied the Company's appeal against the September 2009 ruling by the Federal Court of Fiscal and Administrative Justice that ordered SEMARNAT, the Mexican government's environmental regulatory agency, to cancel the Company's Environmental Impact Statement ("EIS") in November 2009.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements.

RELATED PARTY TRANSACTIONS

Certain directors and officers of New Gold are also directors of a company to which the Company pays royalties in the normal course of business. Royalty payments were $0.7 million and $2.1 million for the three and six months ended June 30, 2010 (2009 - $0.8 million and $1.2 million). At June 30, 2010, the Company

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had $1.3 million included as accrued liabilities related to this company (December 31, 2009 - $1.3 million). These transactions were in the normal course of operations and were measured at the exchange amount, which is the amount of consideration established and agreed to by the related party.

A director of New Gold is also a director of the company that purchased from New Gold an interest in the El Morro project.

RISK FACTORS

Readers of this Management’s Discussion and Analysis should give careful consideration to the information included or incorporated by reference in this document and the Company’s audited consolidated financial statements and related notes. Significant risk factors for the Company are metal prices, government regulations, foreign operations, environmental compliance, asset backed commercial paper, the ability to obtain additional financing, risk relating to recent acquisitions, dependence on management, title to the Company’s mineral properties, and litigation. For details of risk factors, please refer to the 2009 year-end audited consolidated financial statements, Management Discussion and Analysis and Annual Information Form filed on SEDAR at www.sedar.com.

FINANCIAL RISK MANAGEMENT

A.	CREDIT RISK

Credit risk is the risk of an unexpected loss if a party to its financial instrument fails to meet its contractual obligations. The Company’s financial assets are primarily composed of cash and cash equivalents, investments and accounts receivable. Credit risk is primarily associated with trade receivables and investments; however, it also arises on cash and cash equivalents. To mitigate exposure to credit risk, the Company has established policies to limit the concentration of credit risk, to ensure counterparties demonstrate minimum acceptable credit worthiness, and to ensure liquidity of available funds.

The Company closely monitors its financial assets and does not have any significant concentration of credit risk. The Company sells its gold exclusively to large international organizations with strong credit ratings. The Company’s revenue is comprised of gold sales to primarily five customers.

The historical level of customer defaults is minimal and, as a result, the credit risk associated with gold and copper concentrate trade receivables at June 30, 2010 is not considered to be high. The Company’s maximum exposure to credit risk at June 30, 2010, is as follows:

(U.S. dollars in thousands)	June 30,		December 31,
	2010		2009
	$			$

Cash and cash equivalents		376,092		262,325
Restricted cash		-		9,201
Accounts receivable		5,276		10,345
Mark-to-market gain on fuel contracts		185		706
Investments		18,645		45,890
Reclamation deposits and other		18,158		17,646

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The aging of accounts receivable at June 30, 2010 was as follows:

(U.S. dollars in thousands)						June 30,	December 31,
	0-30	31-60	61-90	91-120	Over	2010	2010
	days	days	days	days	120 days	Total	Total
	$	$	$	$	$	$	$

Mesquite mine	134	-	15	-	-	149	170
Cerro San Pedro	1,958	75	20	-	55	2,108	273
Peak Mines	2,312	-	-	-	9	2,321	3,922
New Afton	423	-	7	-	2	432	632
Corporate	265	-	-	-	1	266	5,348
	5,092	75	42	-	67	5,276	10,345

A significant portion of the Company’s cash and cash equivalents are held in large Canadian financial institutions. Short-term investments (including those presented as part of cash and cash equivalents) are composed of financial instruments issued by Canadian banks with high investment-grade ratings and the governments of Canada and the U.S.

The Company has a bonding and insurance program, primarily with Chartis, formerly American International Specialty Lines Insurance Company (“AIG Insurance”) in respect of the operations and closure liabilities of the Mesquite Mine. At June 30, 2010, the Company had $9.0 million in the account. In September 2008, AIG Insurance’s parent company, American International Group, Inc. (“AIG”), suffered a liquidity crisis following the downgrade of its credit rating. The United States Federal Reserve loaned money to AIG in order for the company to meet its obligations to post additional collateral to trading partners. As a result of federal and state laws governing the operation of AIG Insurance and segregation of funds, it is not believed that the Company’s funds are at risk. During 2009, AIG has been working through its restructuring under the supervision of the Federal Reserve Bank of New York and the U.S. Department of the Treasury. The U.S. Department of the Treasury has a 78% stake in the equity of AIG. Chartis is advancing towards the goal of becoming an independent property-casualty and general insurance company in 2010.

The Company sells all of its copper concentrate production to a customer under an off-take contract. The loss of this customer or unexpected termination of the off-take contract could have a material adverse effect on the Company’s results of operations, financial condition and cash flows. However, there are alternative customers in the market.

The Company is not economically dependent on a limited number of customers for the sale of its gold because gold can be sold through numerous commodity market traders worldwide. The Company has five customers (2009, four customers) that account for approximately 94% (2009, 94%) of the concentrate and doré sales revenue.

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Metal sales	Three months ended June 30	Six months ended June 30
Customer	2010	2010
	$	$

1	30,079	70,139
2	39,218	57,195
3	15,906	37,596
4	15,235	25,216
5	5,763	11,467
Total	106,201	201,613
% of total metal sales	95%	94%

B.	LIQUIDITY RISK

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages liquidity risk through the management of its capital structure and financial leverage.

The following are the contractual maturities of debt commitments. The amounts presented represent the future undiscounted principal and interest cash flows and therefore do not equate to the carrying amounts on the consolidated balance sheet.

(U.S. dollars in thousands)					June 30	December 31,
	Less than			After	2010	2009
	1 year	1-3 years	4-5 years	5 years	Total	Total
	$	$	$	$	$	$
Accounts payable and
accrued liabilities	41,143	-	-	-	41,143	36,033
Long-term debt	-	-	51,860	176,322	228,182	258,467
Interest payable on	-
long-term debt	10,113	40,450	39,129	44,081	133,773	147,352
Gold contracts	28,602	55,227	41,108	-	124,937	95,986
	79,858	95,677	132,097	220,403	528,035	537,838

In the opinion of management, the working capital of $404.8 million at June 30, 2010, together with cash flows from operations, are sufficient to support the Company’s normal operating requirements through its current reporting period. However, taking into consideration the Company’s current cash position, volatile equity markets, global uncertainty in the capital markets and increasing cost pressures, the Company is continuing to review expenditures in order to ensure adequate liquidity and flexibility to support its growth strategy while maintaining production levels at its current operations.

The Company believes that external financing (which may include bank borrowings and future debt and equity offerings) will not be required to complete its major development projects. A period of continuous low copper prices may necessitate the deferral of capital expenditures which may impact production from mining operations. In addition, management believes it will not need external financing to repay its long-term debt in 2014 and 2017.

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C.	CURRENCY RISK

The Company operates in Canada, Australia, Mexico, Chile and the United States. As a result, the Company has foreign currency exposure with respect to items not denominated in U.S. dollars. The three main types of foreign exchange risk for the Company can be categorized as follows:

i.	Transaction exposure

The Company’s operations sell commodities and incur costs in different currencies. This creates exposure at the operational level, which may affect the Company’s profitability as exchange rates fluctuate. The Company has not hedged its exposure to currency fluctuations.

ii.	Exposure to currency risk

The Company is exposed to currency risk through the following assets and liabilities denominated in currencies other than the U.S. dollar: cash and cash equivalents, investments, accounts receivable, reclamation deposits, accounts payable and accruals, reclamation and closure cost obligations and long-term debt. The significant cash and cash equivalents held in Canadian dollars provides a natural hedge for the project spend for New Afton (the vast majority of which will be in Canadian dollars) during the period from 2010 to 2012. The currencies of the Company’s financial instruments and other foreign currency denominated liabilities, based on notional amounts, were as follows:

				June 30, 2010
(in thousands)	Canadian	Australian	Mexican	Chilean
	dollar	dollar	peso	peso

Cash and cash equivalents	286,854	28,995	1,015	111
Investments	3,005	15,640	-	-
Accounts receivable	384	2,321	3,043	-
Reclamation deposit	6,129	-	-	-
Prepayment option	652	-	-	-
Accounts payable and accruals	(7,873)	(10,970)	(11,499)	(171)
Reclamation and closure cost obligations	(1,890)	(8,092)	(4,942)	-
Share award units	(2,703)	-	-	-
Long-term debt	(205,943)	-	-	-
Gross balance sheet exposure	78,615	27,894	(12,383)	(60)

				December 31,2009
	Canadian	Australian	Mexican	Chilean
	dollar	dollar	peso	peso

Cash and cash equivalents	165,147	32,008	2,670	18
Investments	45,890	-	-	-
Accounts receivable	549	3,922	5,674	-
Reclamation deposit	6,211	-	-	-
Prepayment option	-	-	-	-
Accounts payable and accruals	(6,529)	(11,566)	(8,806)	(94)
Reclamation and closure cost obligations	(1,846)	(8,330)	(4,314)	-
Share award units		-	-	-
Long-term debt	(206,653)	-	-	-
Gross balance sheet exposure	2,769	16,034	(4,776)	(76)

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iii.	Translation exposure

The Company’s functional and reporting currency is U.S. dollars. The Company’s operations translate their operating results from the host currency to U.S. dollars. Therefore, exchange rate movements in the Canadian dollar, Australian dollar, Mexican peso and Chilean peso can have a significant impact on the Company’s consolidated operating results. Some of the Company’s earnings translation exposure to financial instruments is offset by interest on foreign currency denominated loans and debt.

A 10% strengthening (weakening) of the U.S. dollar against the following currencies would have decreased (increased) the Company’s net loss from the financial instruments presented by the amounts shown below.

(in thousands)	2010	2009
	$	$

Canadian dollar	7,870	277
Australian dollar	2,789	1,603
Mexican peso	(1,238)	(478)
Chilean peso	(6)	-
	9,415	1,402

D.	INTEREST RATE RISK

Interest rate risk is the risk that the fair value or the future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

The Company is exposed to interest rate risk on its short-term investments. All of the Company’s debt obligations are fixed and therefore there is no exposure to changes in market interest rates. The Company is exposed to interest rate changes cash and short term investments which are included in cash and cash equivalents. The short term investment interest earned is based on prevailing one to 90 days money market interest rates which may fluctuate. A 1.0% change in the interest rate would result in an annual difference of approximately $3.8 million in interest earned by the Company on cash and short term investments. The Company has not entered into any derivative contracts to manage this risk.

Where possible and depending on market conditions, the Company follows the policy of issuing fixed interest rate debt to avoid future fluctuations in its debt service costs.

E.	COMMODITY PRICE RISK

The Company’s earnings and cash flows are subject to price risk due to fluctuations in the market price of gold, silver and copper. World gold prices have historically fluctuated widely and are affected by numerous factors beyond our control, including:

§	the strength of the U.S. economy and the economies of other industrialized and developing nations;

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§	global or regional political or economic crises;

§	the relative strength of the U.S. dollar and other currencies;

§	expectations with respect to the rate of inflation;

§	interest rates;

§	purchases and sales of gold by central banks and other holders;

§	demand for jewelry containing gold; and

§	investment activity, including speculation, in gold as a commodity.

As part of the Western Goldfields Inc. acquisition, the Company acquired gold contracts which mitigate the effects of price changes. The Company designated these contracts as an accounting cash flow hedge effective July 1, 2009. At June 30, 2010, the Company had remaining gold forward sales contracts for 297,000 ounces of gold at a price of $801 per ounce at a remaining commitment of 5,500 ounces per month for 54 months.

In the second quarter of 2010, the Company’s revenues and cash flows were somewhat impacted by the variation in copper prices in the range of $2.76 and $3.61 per pound. There is a time lag between the time of shipment for copper and final pricing, and changes in copper pricing can significantly impact the Company’s revenue and working capital position. As of June 30, 2010, working capital includes copper concentrate receivables totaling 0.4 million pounds. A $0.10 change in the copper price would have an impact of $nil on the Company’s working capital position.

The Company is also subject to price risk for fluctuations in the cost of energy, principally electricity and purchased petroleum products. The Company’s production costs are also affected by the prices of commodities it consumes or uses in its operations, such as lime, reagents and explosives. The prices of such commodities are influenced by supply and demand trends affecting the mining industry in general and other factors outside the Company’s control. The Company has entered into fuel contracts to mitigate these price risks. At June 30, 2010, the Company had a remaining commitment to purchase 1.5 million gallons of diesel over the next six months.

The Company is also subject to price risk for changes in the Company’s common stock price per share. The Company has implemented, as part of its long-term incentive plan, a share award unit plan that the Company is required to satisfy in cash upon vesting. The amount of cash the Company will be required to expend is dependent upon the price per common share at the time of vesting. The Company considers this plan a financial liability and is required to fair value the outstanding liability with the resulting changes included in compensation expense each period.

A 10% change in commodity prices would impact the Company’s net earnings before taxes and other comprehensive income before taxes as follows:

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(U.S. dollars in thousands)		Three Months ended June 30,
	2010	2010	2009	2009
		Other		Other
	Net	Comprehensive	Net	Comprehensive
	Earnings	Income	Earnings	Income
	$	$	$	$

Gold price	9,259	32,030	4,898	-
Copper price	935	-	532	-
Silver price	929	-	585	-
Fuel price	911	364	463	-
Share Award Unit	270	-	-	-

CONTRACTUAL OBLIGATIONS

(U.S. dollars in thousands)		Payments due by period
Contractual obligations	Total	Less than 1 year	1 - 3 years	4 - 5 years	After 5 years
Long-term debt	$228,182	$--	$--	$--	$228,182
Interest payable on long-term debt	133,773	10,113	40,450	83,210	--
Commitments & permits	46,573	43,428	3,137	8	--
Asset retirement obligations	29,205	691	2,938	2,747	22,829
Total contractual obligations	$437,733	$54,232	$46,525	$85,965	$251,011

The majority of the Company’s contractual obligations consist of long-term debt and interest payable. Long-term debt obligations are comprised of senior secured notes and subordinated convertible debentures. The Notes, which were originally issued by New Gold pursuant to a note indenture dated June 28, 2007, mature and become payable on June 28, 2017 and bear interest at a rate of 10% per annum. At June 30, 2010, the face value of the Notes totaled $176.3 million (Cdn$187.0 million) with remaining interest payable totaling $123.4 million (Cdn$130.9 million). Interest is payable in arrears in equal semi-annual installments on January 1 and July 1 each year. Once the New Afton project is in commercial production, the Company is obligated to offer to repay a face value amount equal to 50% of excess cash flow each year, at the option of the noteholders. The Company also has the option to prepay the Notes at a premium ranging from 110% to 101% (decreasing rates based on the length of time the Notes are outstanding). These Notes are secured on the New Afton project assets and do not have recourse to other assets of New Gold.

The Company has 55,000 subordinated convertible debentures that bear interest at a rate of 5% per annum and are convertible by the holders into common shares of the Company at any time up to June 28, 2014. At June 30, 2010, the aggregate principal of the subordinated convertible debentures was $51.9 million (Cdn$55.0 million) with remaining interest payable totaling $10.3 million (Cdn$11.0 million). Interest is payable in arrears in equal semi-annual installments on January 1 and July 1 each year.

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OUTSTANDING SHARES

As at August 5, 2010, there were 391,667,000 common shares of the Company outstanding. The Company had 13,414,804 stock options outstanding under its share option plan, exercisable for 13,414,804 common shares. In addition, the Company had 325,268,000 common share purchase warrants outstanding exercisable for 63,042,000 common shares.

ACCOUNTING POLICIES TO BE IMPLEMENTED SUBSEQUENT TO JUNE 30, 2010

i.	Multiple Deliverable Revenue Arrangements

In December 2009, the CICA issued EIC 175 – Multiple Deliverable Revenue Arrangements, replacing EIC 142 – Revenue Arrangements with Multiple Deliverables. This abstract was amended to: (1) provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and the consideration allocated; (2) require, in situations where a vendor does not have vendor-specific objective evidence (“VSOE”) or third-party evidence of selling price, that the entity allocate revenue in an arrangement using estimated selling prices of deliverables; (3) eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method; and (4) require expanded qualitative and quantitative disclosures regarding significant judgments made in applying this guidance. The accounting changes summarized in EIC 175 are effective for fiscal years beginning on or after January 1, 2011, with early adoption permitted. Adoption may either be on a prospective basis or by retrospective application. If the abstract is adopted early, in a reporting period that is not the first reporting period in the entity’s fiscal year, it must be applied retroactively from the beginning of the Company’s fiscal period of adoption. As the Company has not adopted EIC 175, which is not mandatory until the year beginning January 1, 2011, the amendments are not applicable to the Company in the interim and there is no impact to the financial statements for the quarter ended June 30, 2010.

ii.	International Financial Reporting Standards

In February 2008, the Canadian Accounting Standards Board confirmed January 1, 2011 as the date IFRS will replace current Canadian GAAP for publicly accountable enterprises. This will result in the Company reporting under IFRS starting with the interim period ending March 31, 2011, with restatement for comparative purposes of amounts reported under Canadian GAAP. The Company expects the transition to IFRS to impact accounting policies, financing reporting, IT systems and processes, as well as certain business activities.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Based on historical experience, current market conditions and expert advice, management makes assumptions that are believed to be reasonable under the circumstances. These estimates and assumptions form the basis for judgments about the carrying value of assets and liabilities and

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reported amounts for revenues and expenses. The following have been identified as critical accounting policies and estimates and a change in these policies or estimates could materially impact the consolidated financial statements. The Company’s complete accounting policies are described in Note 2 to the consolidated annual financial statements for the year ended December 31, 2009.

A.	INVENTORIES

Heap leach ore, work-in-process, finished goods, and stockpile ore are valued at the lower of average production costs or net realizable value.

Costs are added to ore on leach pad based on current mining costs, including applicable amortization and depletion relating to mining operations. Costs are removed from ore on leach pad as ounces are recovered based on the average cost per estimated recoverable ounce of gold on the leach pad. The estimates of recoverable gold on the leach pad are calculated from the quantities of ore placed on the leach pad (based on measured tonnage), the grade of ore placed on the leach pad (based on assay results), and a recovery percentage (based on ore type).

Under the heap leaching process, ore on leach pad is treated with a chemical solution which dissolves the gold contained in the ore. The solution is further processed in a plant where the gold is recovered. Metal-in-process inventories represent metal in solution or in subsequent stages of the refining process. In-process inventories are measured based on assays of the solution and projected recoveries from the refining circuit and are valued at average production cost or net realizable value. Average production cost is based on the average cost of material fed into the process from the leach pad plus the in-process conversion costs, including applicable amortization relating to the process facilities. Metal-in-process inventories are valued at the lower of average cost or net realizable value and any adjustment to net realizable value is reflected in the statement of operations as a component of mine operating costs.

Although the amount of recoverable gold ounces placed on the leach pad, based on tonnage and grade of ore, is reconciled to the gold ounces actually recovered, the nature of the leaching process inherently limits the ability to precisely monitor inventory levels. As a result, the metallurgical balancing process is constantly monitored and estimates are refined based on actual results over time. The determination of both the ultimate recovery percentage and the quantity of metal expected over time requires the use of estimates, which are subject to revision since they are based upon metallurgical test work. The Company expects to continue to process and recover metal from leach pads until no longer considered economically feasible.

Bullion (metal refined to industry purity standards) inventory, which includes metal held on our behalf by third parties, is valued at the lower of average production cost or net realizable value.

B.	MINERAL PROPERTIES

The Company records mineral property acquisition expenditures and mine development expenditures at cost. The Company capitalizes pre-production expenditures net of revenues received until the commencement of commercial production in accordance with GAAP.

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A significant portion of the Company’s mineral property, plant and equipment is depreciated and amortized on a unit-of-production basis. Under the unit-of-production method, the calculation of depreciation, depletion and amortization of mineral property, plant and equipment is based on the amount of reserves expected to be recovered from each location. If these estimates of reserve prices turn out to be inaccurate, or if the Company revises its mining plan for a location due to reductions in the price of gold or otherwise to reduce the amount of reserves expected to be recovered, the Company could be required to write-down the recorded value of the mineral property, plant and equipment or to increase the amount of future depreciation, depletion and amortization expense, both of which would reduce the Company’s earnings and net assets.

In addition, GAAP requires the Company to consider at the end of each accounting period whether or not there has been an impairment of capitalized mineral property, plant and equipment. For producing properties, this assessment is based on whether factors are present that may indicate a need for a write-down. If the Company determines there has been an impairment because its prior estimates of future cash flows have proven to be inaccurate, due to reductions in the price of gold, increases in the costs of production, reductions in the amount of reserves expected to be received or otherwise, or because the Company has determined that the deferred costs of non-producing properties may not be recovered based on current economics or permitting considerations, the Company would be required to write down the recorded value of its mineral property, plant and equipment, which would reduce the Company’s earnings and net assets. Volatility in equity and commodity markets could have a significant impact on the valuation of our mineral properties.

C.	RECLAMATION OBLIGATIONS

The Company has an obligation to reclaim its properties after the minerals have been mined from the site and has estimated the costs necessary to comply with existing reclamation standards. Generally accepted accounting principles require the Company to recognize the fair value of a liability for an asset retirement obligation, such as site closure and reclamation costs, in the period in which it is incurred if a reasonable estimate of fair value can be made. The Company records the estimated present value of future cash flows associated with site closure and reclamation as a liability when the liability is incurred and increases the carrying value of the related assets by the same amount. Subsequently, these asset retirement costs are amortized to expense over the life of the related assets using the units-of-production method. At the end of each period the liability is increased to reflect the passage of time (accretion expense) and changes in the estimated future cash flows underlying any initial fair value measurements (additional asset retirement costs). If these estimates of costs or recoverable mineral resources prove to be inaccurate, the Company could be required to write down the recorded value of its mineral property or increase the amount of future depreciation and accretion expense, or both, all of which would reduce the Company’s earnings and net assets.

D.	FUTURE TAX ASSETS AND LIABILITIES

The Company recognizes the future tax benefit related to future income tax assets and sets up a valuation allowance against any portion of those assets that it believes will, more likely than not, fail to be realized.

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Assessing the recoverability of future income tax assets requires management to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecast cash flows from operations and the application of existing tax laws in each jurisdiction. The Company has reviewed its tax assets at December 31, 2009 and based on management’s current view of future metal prices and exchange rates have determined that the tax assets are still recoverable.

In circumstances where the applicable tax laws and regulations are either unclear or subject to ongoing varying interpretations, it is reasonably possible that the changes in these estimates could occur and materially affect the amount of future income tax liabilities recorded at the balance sheet date.

E.	REVENUE RECOGNITION

Revenue from the sale of metals is recognized in the accounts when persuasive evidence of an arrangement exists, title and risk passes to buyer, collection is reasonably assured and the price is reasonably determinable. Revenue from the sale of metals in concentrate may be subject to adjustment upon final settlement of estimated metal prices, weights and assays. Adjustments to revenue for metal prices are recorded monthly and other adjustments are recorded on final settlement. These types of adjustments can have a material impact on revenues.

F.	STOCK-BASED COMPENSATION

CICA Handbook, Section 3870, Stock-Based Compensation and Other Stock-Based Payments establishes standards for the recognition, measurement and disclosure of stock-based compensation and other stock-based payments made in exchange for goods and services. Compensation expense is determined using the Black-Scholes option pricing model based on estimated fair values of all stock-based awards at the date of grant and is expensed to operations over each award’s vesting period. The Black-Scholes option pricing model utilizes subjective assumptions such as expected price volatility and expected life of the option. Changes in these input assumptions can significantly affect the fair value estimate.

INTERNATIONAL FINANCIAL REPORTING STANDARDS

In February 2008, the Canadian Accounting Standards Board (“AcSB”) confirmed January 1, 2011 as the date International Financial Reporting Standards (“IFRS”) will replace current Canadian generally accepted accounting principles (“GAAP”) for publicly accountable enterprises. This will result in the Company reporting under IFRS starting with the interim period ending March 31, 2011, with restatement for comparative purposes of amounts reported under Canadian GAAP.

New Gold’s IFRS conversion project consists of three phases: Scoping and Diagnostic, Detailed Evaluation, and Implementation and Review. The Scoping and Diagnostic and Detailed Evaluation phases have been completed. The Implementation and Review phase is in progress and the status of its key activities is as follows:

·	Finalization and approval of accounting policies and IFRS 1 exemptions are underway

·	Quantification of the opening IFRS balance sheet is in progress

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·	Changes to reporting processes required to support the preparation of IFRS financial statements are being implemented

·	Impacts on the Company’s internal control environment and disclosure controls and procedures are being assessed

·	Training for key finance personnel has commenced and will continue throughout 2010

·	Monitoring of actual and anticipated changes to IFRSs is taking place, as well as the assessment of the impacts of the changes on conversion efforts

The Company is in the process of quantifying the financial statement impacts of differences between Canadian GAAP accounting policies and the accounting policies expected to be applied under IFRS. The key differences have been disclosed previously; however one additional item has been identified as follows:

Income taxes

Under IFRS, deferred income taxes for temporary differences that arise from differences between the fair values and tax bases of assets acquired in transactions other than a business combination are not recognized. Under Canadian GAAP, future income taxes are recognized on these differences as an increase or decrease in carrying value of the related asset. This difference may result in adjustments to mining interests and deferred income tax balances.

IFRS 1 “FIRST-TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS”

IFRS 1 - First-Time Adoption of International Financial Reporting Standards provides entities adopting IFRS for the first time with a number of optional exemptions and mandatory exceptions to the general requirement for full retrospective application of IFRS. The Company expects to apply the following exemptions to its opening IFRS balance sheet dated January 1, 2010:

Business combinations

Under IFRS 1, the Company can elect to not restate all business combinations that occurred prior to the transition date or to only restate all business combinations that occurred after a designated date prior to the transition date. The Company expects to apply this exemption to all business combinations that occurred prior to January 1, 2010.

Fair value of revaluation as deemed cost

IFRS 1 allows an entity to initially measure an item of property, plant and equipment upon transition to IFRS at fair value on the transition date or at an event-driven fair value (i.e. a fair value determined through a business combination or initial public offering). This elective exemption can be applied on an individual asset basis. The Company expects to apply this exemption for certain items of property, plant and equipment.

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Cumulative translation differences

IFRS 1 allows cumulative translation differences for all foreign operations to be deemed zero at the date of transition to IFRS, with future gains or losses on subsequent disposal of any foreign operations to exclude translation differences arising from prior to the date of transition to IFRS. The Company expects to reset all cumulative translation differences to zero on transition to IFRS.

Decommissioning liabilities (Reclamation and closure cost obligations)

Under IFRS 1, an entity can elect to not apply the provisions of IFRIC 1 - Changes in Existing Decommission, Restoration and Similar Liabilities, as they relate to changes in such liabilities before the date of transition to IFRS.

When applying this exemption, an entity would determine its decommissioning liabilities at the transition date, discount the liabilities back to the dates when they first arose using management’s best estimate of the historical risk-adjusted discount rates, and depreciate these amounts forward to the transition date to determine the amount to be included in the depreciated cost of the assets. The Company anticipates electing this exemption and in doing so, will be required to apply it to all its decommissioning liabilities.

Share-based payments

IFRS 1 encourages, but does not require a first time adopter to apply IFRS 2 to equity instruments that were granted on or before November 7, 2002, or were granted after November 7, 2002 but vested before the Company’s IFRS transition date. Accordingly, an entity may elect not to retrospectively apply IFRS 2 to these equity instruments. The Company plans to elect this exemption and as a result, will apply IFRS 2 retrospectively only for share-based payments that were granted after November 7, 2002, that had not vested at the date of transition.

Assets and liabilities of subsidiaries, associates, and joint ventures

IFRS 1 requires that when a parent company becomes a first-time adopter later than its subsidiary the parent shall, in its consolidated financial statements, measure the assets and liabilities of the subsidiary at the same carrying amounts as in the financial statements of the subsidiary, after adjusting for consolidation adjustments and for the effects of the business combination in which the parent acquired the subsidiary. The Company will apply this exemption to its Australian subsidiaries, as they are already reporting under IFRS.

Borrowing costs

IFRS 1 permits an entity to apply the transitional provisions of IAS 23 - Borrowing Costs as an alternative to full retrospective application. Under these provisions, the Company may elect to only apply IAS 23 to qualifying assets for which the commencement date for capitalization is on or after the date of transition (or an elected earlier date).

The Company plans to elect this exemption from its transition date of January 1, 2010, and as a result, will apply IAS 23 from this date onwards.

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IFRS 1 allows for certain other optional exemptions; however, the Company does not expect such exemptions to be significant to the Company’s adoption of IFRS.

CONTROLS AND PROCEDURES

A.	DISCLOSURE CONTROLS AND PROCEDURES

The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by the Company in reports it files is recorded, processed, summarized and reported, within the appropriate time periods.

B.	MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company's management, including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting (“IFCR”) is a process designed by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the Company's Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that:

§	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

§	Provide reasonable assurance regarding prevention or timely detections of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, believe that any internal controls and procedures for financial reporting, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented and or detected. These inherent limitations include the realities that judgments in decision-making can be faulty and breakdowns can occur because of simple error or

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mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.

The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2009. In making this assessment, it used the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, management has concluded that, as of December 31, 2009, the Company's internal control over financial reporting is effective based on those criteria.

The Company’s internal control over financial reporting as of December 31, 2009 has been audited by Deloitte & Touche LLP, Independent Registered Chartered Accountants who also audited the Company’s Consolidated Financial Statements for the year ended December 31, 2009. Deloitte & Touche LLP as stated in their report, that immediately precedes the Company's audited consolidated financial statements for the year ended December 31, 2009, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

C.	CHANGES IN INTERAL CONTROL OVER FINANCIAL REPORTING

There has been no change in the Company’s design of internal controls and procedures over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting during the period covered by this Management’s Discussion and Analysis.

ENDNOTES

“Total cash cost” figures are calculated in accordance with a standard developed by The Gold Institute, which was a worldwide association of suppliers of gold and gold products and included leading North American gold producers. The Gold Institute ceased operations in 2002, but the standard is the accepted standard of reporting cash cost of production in North America. Adoption of the standard is voluntary and the cost measures presented may not be comparable to other similarly titled measures of other companies. The Company reports total cash cost on a sales basis. Total cash cost includes mine site operating costs such as mining, processing, administration, royalties and production taxes, realized gains and losses on fuel contracts, but is exclusive of amortization, reclamation, capital and exploration costs and net of by-product sales. Total cash cost is then divided by gold ounces sold to arrive at the total cash cost per ounce sold. The measure, along with sales, is considered to be a key indicator of a company’s ability to generate operating earnings and cash flow from its mining operations. This data is furnished to provide additional information and is a non-GAAP measure. It should not be considered in isolation as a substitute for measures of performance prepared in accordance with GAAP and is not necessarily indicative of operating costs presented under GAAP.

2.	Average realized price per ounce of gold sold is a non-GAAP financial measure which:

§	excludes from revenues unrealized gains and losses on non-hedge derivative contracts; and,

§	includes revenues from the Amapari Mine which has been presented as a discontinued operation.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain information contained in this news release, including any information relating to New Gold's future financial or operating performance may be deemed "forward looking". All statements in this news release, other than statements of historical fact, that address events or developments that New Gold expects to occur, are "forward-looking statements". Forward-looking statements are statements that are not historical facts and are generally, but not always, identified by the words "expects", "does not expect", "plans", "anticipates", "does not anticipate", "believes", "intends", "estimates", "projects", "potential", "scheduled", "forecast", "budget" and similar expressions, or that events or conditions "will", "would", "may", "could", "should" or "might" occur. All such forward-looking statements are based on the opinions and estimates of management as of the date such statements are made and are subject to important risk factors and uncertainties, many of which are beyond New Gold's ability to control or predict. Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to known and unknown risks, uncertainties and other factors that may cause New Gold's actual results, level of activity, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Such factors include, without limitation: significant capital requirements; fluctuations in the international currency markets and in the rates of exchange of the currencies of Canada, the United States, Australia, Brazil, Mexico and Chile; price volatility in the spot and forward markets for commodities; impact of any hedging activities, including margin limits and margin calls; discrepancies between actual and estimated production, between actual and estimated reserves and resources and between actual and estimated metallurgical recoveries; changes in national and local government legislation in Canada, the United States, Australia, Brazil, Mexico and Chile or any other country in which New Gold currently or may in the future carry on business; taxation; controls, regulations and political or economic developments in the countries in which New Gold does or may carry on business; the speculative nature of mineral exploration and development, including the risks of obtaining and maintaining the validity and enforceability of the necessary licenses and permits and complying with the permitting requirements of each jurisdiction that New Gold operates, including, but not limited to, Mexico, where New Gold is involved with ongoing challenges relating to its environmental impact statement for the Cerro San Pedro Mine; the lack of certainty with respect to the Mexican and other foreign legal systems, which may not be immune from the influence of political pressure, corruption or other factors that are inconsistent with the rule of law; the uncertainties inherent to current and future legal challenges the company is or may become a party to, including the third party claim related to the El Morro transaction with respect to New Gold's exercise of its right of first refusal on the El Morro copper-gold project in Chile and its partnership with Goldcorp Inc., which transaction and third party claim were announced by New Gold in January 2010; diminishing quantities or grades of reserves; competition; loss of key employees; additional funding requirements; actual results of current exploration or reclamation activities; changes in project parameters as plans continue to be refined; accidents; labour disputes; defective title to mineral claims or property or contests over claims to mineral properties. In addition, there are risks and hazards associated with the business of mineral exploration, development and mining, including environmental hazards, industrial accidents, unusual or unexpected formations, pressures, cave-ins, flooding and gold bullion losses (and the risk of inadequate insurance or inability to obtain insurance to cover these risks) as well as "Risks Factors" included in New Gold's Annual Information Form filed on March 26, 2010 and Management's Discussion and Analysis for the year ended December 31, 2009, both available at www.sedar.com. Forward-looking statements are not guarantees of future performance, and actual results and future events could materially differ from those anticipated in such statements. All of the forward-looking statements contained in this news release are qualified by these cautionary statements. New Gold expressly disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, events or otherwise, except in accordance with applicable securities laws.

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