Exhibit 99.3

NEW GOLD INC.Managements Discussion and
AnalysisYear Ended December 31, 2008 (in United States
dollars, except where noted)

This Managements Discussion and Analysis should be read in
conjunction with New Gold Inc.s audited consolidated financial statements for
the year ended December 31, 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, tabular
amounts are in thousands, unless otherwise noted. This Managements Discussion
and Analysis has been prepared as of March 13, 2009. Additional information
relating to the Company is available on SEDAR at
www.sedar.com.

Further to the recent business combination of New Gold Inc.
(NGI), Metallica Resources Inc. (Metallica) and Peak Gold Ltd. (Peak Gold)
on June 30, 2008, audited consolidated financial statements of the newly formed
company (New Gold or the Company) for the year ended December 31, 2008 are
presented on the basis that Peak Gold is the acquirer for accounting purposes.
Following completion of the transaction, Peak Gold is now known as New Gold Inc.

2008 Financial / Operation Highlights

- On June 30, 2008, the business combination between New Gold, Metallica and
  Peak Gold closed
- Gold production of 233,103 ounces
- Gold sales of 237,589 ounces
- Total cash cost of $569 per ounce (net of by-product sales)
  (1)
- Net Loss of $102.7 million
- The Company has written down its investment in Amapari by $156.9 million,
  net of tax recoveries, to $10.6 million
- Decision to slow development of the New Afton Project
- Completion of El Morro Feasibility study and permitting process started
- Successful ramp-up of Cerro San Pedro in its first full year of production

(1) 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, but is exclusive of
amortization, reclamation, capital and exploration costs and net of by-product
sales. Total cash cost is then divided by ounces sold to arrive at the total
cash cost. 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.

1

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Background

New Gold is an intermediate gold producer with a portfolio of
global assets in Mexico, Canada, Australia, Brazil, Chile and the United States
(Alaska). The Companys operating assets consist of the Cerro San Pedro (CSP)
gold-silver mine in Mexico (the CSP Mine), the Peak gold-copper mine (Peak
Mines) in Australia and the Amapari gold mine in Brazil (the Amapari Mine).
Significant development projects include the New Afton copper-gold project in
Canada (the New Afton Project) and a 30% interest in the El Morro copper-gold
project in Chile (the El Morro Project). New Gold has a clear vision of
becoming a million ounce gold producer, with a lower than industry average cash
cost per ounce by 2012. New Gold will achieve this vision through:

- Delivering on operational targets (safety, cost, production and,
  environment and social responsibility);
- Maintaining a strong financial position;
- Internal growth through project development and continuous improvement of
  our existing operations; and
- External growth through continued consolidation of junior gold producers.

New Gold is working towards maximizing shareholder value
through diversified production, maintaining a reduced risk profile and enhancing
growth potential. The board of directors, management and the employees of New
Gold are committed to achieving this in a socially responsible and sustainable
manner.

Corporate Developments

Business Combination

On June 30, 2008 NGI, Metallica and Peak Gold completed a
business combination and asset acquisition (the Transaction) to form New Gold.
In accordance with the provisions of the Canadian Institute of Chartered
Accountants (CICA) Handbook Section 1581, Business Combinations, Peak Gold has
been identified as the acquirer for accounting purposes. As such, this
Managements Discussion and Analysis is a continuation of the operations of Peak
Gold, with the comparative information being that of Peak Gold. References to
NGI are to the pre-transaction corporate entity whereas a reference to New Gold
refers to the post-transaction consolidated entity.

Under terms of the Transaction, shareholders of Peak Gold
received 0.1 shares of New Gold common shares and nominal cash consideration for
each common share of Peak Gold. The Transaction has been accounted for as a
purchase of assets and assumption of liabilities of NGI by Peak Gold.
Shareholders of Metallica received 0.9 shares of New Gold common shares and
nominal cash consideration for each common share of Metallica. For accounting
purposes the acquisition of Metallica has been accounted for as a purchase
transaction. Refer to Note 4 of the Companys audited consolidated financial
statements for the year ended December 31, 2008 for further information on the
Transaction.

The Transaction provides the Company with an improved
production profile through the diversification of producing assets and increased
reserves and resources, and it broadens growth potential with an inventory of
development and exploration stage assets.

2

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Investment in Amapari

In the third quarter of 2008, the Company reviewed the carrying
value of its investment in Amapari and concluded that it was impaired. Based on
results from the 2007/2008 drill program, it was determined that heap leachable
material will be exhausted in 2009. As a result of the limited mine life for the
oxides and unproven economic viability of the identified sulphide resources,
management wrote down its investment in Amapari by $156.9 million, net of tax
recoveries, to a value of $10.6 million.

Subsequent to year-end, the Company placed Amapari on temporary
care and maintenance. The Company determined that it would be more
cost-effective to process the remaining oxide ore with the underlying sulphide
resource in a new process facility. The leaching of stacked material is expected
to continue until it is no longer economic to do so. All environmental
monitoring and ongoing exploration remediation programs will continue during
this period and beyond, as will ongoing exploration programs on the Companys
concessions at Amapari. The Company is currently evaluating the results of a
Preliminary Economic Assessment (PEA) to exploit the resource with a
conventional crush/grind/carbon-in-leach (CIL) mill.

New Afton Project Development Schedule

On November 12, 2008, the Company announced that due to the
volatility and uncertainty of the markets, and the Companys cash position, and
the funding requirements for the fast track construction of the New Afton
Project, that the Company had decided to slow development of the project.

Under the revised development plan, surface construction will
be shut down while development of the underground workings will continue at a
reduced rate to gain access to the bottom of the ore body. The revised schedule
projects a cash requirement of approximately $78.5 million in 2009, as compared
to the previous fast track schedule which had a cash requirement of $286.0
million. Under the original fast track schedule operations were to commence in
late 2009, ramping up to achieve full production in the second quarter of 2011.
Under the revised plan, surface construction will resume at the end of 2010 with
full production achieved in the second half of 2012.

3

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Selected Quarterly Financial Information(US dollars in thousands, except per share amounts and per ounce
amounts)

|                                         |  | Three Months Ended(1) |   |  | Four       |   |  | Three Months Ended(1)
|---------------------------------------- |  | --------------------- | - |  | ---------- | - |  | ---------------------
|                                         |  |                       |   |  |            |   |  |                      
|                                         |  |                       |   |  |            |   |  |                      
|                                         |  |                       |   |  |            |   |  |                      
|                                         |  | Q1                    |   |  | Q2         |   |  | Q3                   
|                                         |  | 2008                  |   |  | 2008       |   |  | 2008                 
|Revenues                                 |  | $56,221               |   |  | $39,497    |   |  | $63,384              
|Gold produced (ounces)                   |  | 43,300                |   |  | 42,052     |   |  | 68,801               
|Gold sales (ounces)                      |  | 51,700                |   |  | 40,540     |   |  | 67,156               
|Average realized price ($/ounce)         |  | $933                  |   |  | $898       |   |  | $870                 
|                                         |  |                       |   |  |            |   |  |                      
|Depreciation and depletion               |  | ($6,404               | ) |  | ($7,657    | ) |  | ($9,666              
|                                         |  |                       |   |  |            |   |  |                      
|Corporate administration                 |  | $4,027                |   |  | $3,196     |   |  | $8,334               
|Earnings (loss) from operations          |  | $13,479               |   |  | ($5,895    | ) |  | ($167,588            
|Interest and other income                |  | $1,967                |   |  | $1,355     |   |  | $1,123               
|Net earnings (loss)                      |  | $9,790                |   |  | ($4,751    | ) |  | ($148,852            
|Earnings (loss) per share:               |  |                       |   |  |            |   |  |                      
|Basic                                    |  | $0.01                 |   |  | ($0.05     | ) |  | ($0.70               
|Diluted                                  |  | $0.01                 |   |  | ($0.05     | ) |  | ($0.70               
|Cash flow from (to) operating activities |  | $18,394               |   |  | ($2,987    | ) |  | ($10,459             
|Total cash costs (per gold ounce) (2)    |  | $427                  |   |  | $742       |   |  | $566                 
|Cash and cash equivalents                |  | $197,636              |   |  | $319,179   |   |  | $251,131             
|Short term investments                   |  | $nil                  |   |  | $nil       |   |  | $ nil                
|Investments                              |  | $nil                  |   |  | $91,193    |   |  | $87,645              
|Total assets                             |  | $590,691              |   |  | $2,166,962 |   |  | $1,979,246           

| | (1) | Results for CSP and New Afton are included from the
      period of June 30, 2008 to December 31, 2008.                                                                                                                                                                                                                                                                            
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                    
| | (2) | The calculation of total cash cost per ounce of gold for
      Peak Mines is net of by-product copper sales revenue. The calculation of
      total cash cost per ounce of gold for CSP is net of by-product silver
      sales revenue.                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                    
| | (3) | The Company changed its fiscal year end from November 30
      to December 31, commencing with the thirteen month period ending December
      31, 2007. As a result, the quarter ended March 31, 2007 is a four month
      period.                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                    
| | (4) | In the fourth quarter of 2007, the Company finalized the
      purchase price allocation of the assets and liabilities acquired in the
      acquisition of the Peak Mines and the Amapari Mine. The result of the
      fourth quarter includes adjustments made upon completion of the allocation
      of the purchase consideration of the Peak Mines and the Amapari
    Mine.
| |     |                                                                                                                                                                                                                                                                                                                                                                                    
| | (5) | In the fourth quarter of 2008, the Company finalized the
      purchase price allocation of the assets and liabilities acquired in the
      acquisition of NGI and Metallica. The result of the fourth quarter
      includes adjustments made upon completion of the allocation of the
      purchase consideration of NGI and Metallica.                                        

4

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Overview of the fourth quarter 2008 financial
results

Net earnings for the fourth quarter of 2008 were $41.1 million,
compared to net earnings of $14.8 million for the fourth quarter of 2007. The
increase is mainly attributed to a $54.9 million gain on foreign exchange in the
fourth quarter of 2008. Foreign exchange gains and losses arise mainly from
Canadian dollar denominated monetary items, revaluation of long-term debt and
foreign future income tax liabilities. Loss from operations was $21.3 million
for the fourth quarter of 2008 compared to earnings from operations of $13.1
million for the same period last year, which is mainly attributable to a 97.6%
increase in operating expenses at the mine sites related to increases in
consumables and maintenance and the inclusion of CSP operations in 2008. Total
cash cost was $576 per ounce for the fourth quarter of 2008 compared to $398 in
the fourth quarter of 2007. The increase can be attributed to higher operating
costs at the Amapari mine and lower copper concentrate sales (by-product
credits) at Peak Mines compared to the same period last year and the impact of
falling copper prices on revenues not yet received.

Overview of the third quarter 2008 financial
results

Net loss for the third quarter of 2008 was $148.9 million,
which included an impairment charge of $156.9 million (net of tax recovery of
$8.4 million) and $2.5 million in stock-based compensation. Net earnings were
$8.0 million (excluding the impairment charge of $156.9 million) compared to net
earnings of $1.2 million for the third quarter of 2007. The increase is mainly
attributable to a $15.5 million gain on foreign exchange in the third quarter of
2008 compared to $1.1 million foreign exchange loss in the third quarter of
2007. Foreign exchange gains arise mainly from Canadian dollar denominated
monetary items and revaluation of foreign future income tax liabilities. Loss
from operations was $167.6 million compared to earnings from operations of $2.6
million for the same period last year. Total cash cost was $566 per ounce for
the third quarter of 2008 compared to $303 in the third quarter of 2007. The
increase can be attributed to higher operating costs at the Amapari mine and
lower copper concentrate sales (by-product credits) at Peak Mines compared to
the same period last year and the impact of falling copper prices on copper
revenues not yet received.

Overview of the second quarter 2008 financial results

Net loss for the second quarter of 2008 was $4.8 million, which
includes $0.6 million related to stock-based compensation expense (a non-cash
charge). This was a $3.5 million increase in net loss compared to the second
quarter of 2007. Combinations of lower gold sales and lower than anticipated
grades were contributing factors to the increased loss for the second quarter of
2008. Total cash cost was $742 per ounce for the second quarter of 2008, which
was negatively impacted by the appreciation of the Australian and Brazilian
currencies against the US dollar, lower gold sales and a lower production as
compared to previous quarters.

Overview of the first quarter 2008 financial results

Prior to the acquisition of the Peak Mines and the Amapari
Mine, the Company did not generate revenues from operations and the Company had
minimal transactions. Due to the limited activity of the Company prior to the
acquisition of the mines, the Company has not presented a narrative comparative
analysis for results prior to this acquisition. Net earnings for the first
quarter of 2008 were $9.8 million, which includes $1.0 million foreign exchange
loss arising from the revaluation of future income tax liabilities and $2.6
million related to stock-based compensation (a non-cash charge). Total cash
costs were $427 per ounce for the first quarter of 2008, which were negatively
impacted by the appreciation of the Australian and Brazilian currencies against
the US dollar and lower gold sales as compared to previous quarters.

5

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Summarized Annual Financial Results(US
dollars in thousands, except per share amounts and per ounce amounts)

|                                           |  | 2008(5)    |   |  | 2007(1)(3)(6) | 
|------------------------------------------ |  | ---------- | - |  | ------------- | 
|Revenues                                   |  | $218,135   |   |  | $131,084      | 
|Gold produced (ounces)                     |  | 233,103    |   |  | 149,830       | 
|Gold sold (ounces)                         |  | 237,589    |   |  | 155,351       | 
|Average realized gold price (per ounce)    |  | $863       |   |  | $721          | 
|Depreciation and depletion                 |  | $32,961    |   |  | $18,973       | 
|Corporate administration (4)               |  | $23,029    |   |  | $13,295       | 
|Earnings (loss) from operations            |  | ($181,290  | ) |  | $14,110       | 
|Interest and other income                  |  | $5,368     |   |  | $4,113        | 
|Net earnings (loss)                        |  | ($102,679  | ) |  | $14,613       | 
|Earnings (loss) per share                  |  | ($0.69     | ) |  | $0.03         | 
|Cash flow from (used) operating activities |  | $24,685    |   |  | $26,620       | 
|Total cash costs (per gold ounce) (2)      |  | $569       |   |  | $349          | 
|Cash and cash equivalents                  |  | $185,668   |   |  | $149,924      | 
|Short term investments                     |  | -          |   |  | $32,440       | 
|Total assets                               |  | $1,957,701 |   |  | $572,398      | 

| | (1) | Includes the Peak Mines and the Amapari Mine operating
      results from April 3, 2007 and April 27, 2007 respectively, to December
      31, 2007.                                                                                    
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                         
| | (2) | The calculation of total cash cost per ounce of gold for
      Peak Mines is net of by-product copper sales revenue. The calculation of
      total cash cost per ounce of gold for CSP is net of by-product silver
      sales revenue.
| |     |                                                                                                                                                                                                                                         
| | (3) | The Company changed its fiscal year end from November 30
      to December 31, commencing with the thirteen month period ending December
      31, 2007. As a result, the quarter ended March 31, 2007 is a four month
      period.    
| |     |                                                                                                                                                                                                                                         
| | (4) | Includes stock based compensation.                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                         
| | (5) | Includes six months of operations for CSP.                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                         
| | (6) | In April 2006, the Company emerged from bankruptcy. The
      Company has not presented financial information for 2006 as transactions
      prior to 2007 are not deemed significant.                                                  

Overview of the financial results

Net loss for the year ended 2008 was $102.7 million compared to
net earnings of $14.6 million in 2007. Net loss in 2008 is attributed to the
$156.9 million (net of tax) write-down of Amapari which was partially offset by
foreign exchange gains, net of losses, arising from the weakening of the
Australian, Brazilian, Canadian and Mexican currencies against the US dollar.
Operating cash flows were $24.7 million in 2008 compared to $26.6 million in
2007. The decrease is primarily attributable to higher operating costs at the
Amapari mine and reduced revenue from the sale of copper concentrate at Peak
Mines.

Gold production for the year was 233,103 ounces compared to
149,830 in 2007 with the increase due to the acquisition of CSP. Cash costs were
$569 per ounce in 2008, compared to $349 per ounce in 2007. The increase in cash
costs compared to the prior year is the result of increased costs at Amapari
and lower copper concentrate sales (by-product credits) in 2008.

6

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Operation Review

Amapari, Brazil

The Companys Amapari gold mine is located in the state of
Amapá, Brazil approximately 130 kilometers northwest of the city of Macapá. The
project property consists of a mining lease and multiple exploration
concessions, covering approximately 2,450 square kilometers of prospective
ground centering on the Companys Amapari gold mining operation.

(US dollars in thousands, except ounce and per ounce amounts)

|                      |  | Three Months Ended |   |  |           |   |  | Three Months Ended |   |  |           | 
|--------------------- |  | ------------------ | - |  | --------- | - |  | ------------------ | - |  | --------- | 
|                      |  | Q1                 |   |  | Q2        |   |  | Q3                 |   |  | Q4        | 
|Operating Data        |  |                    |   |  |           |   |  |                    |   |  |           | 
|                      |  | 2008               |   |  | 2008      |   |  | 2008               |   |  | 2008      | 
|                      |  |                    |   |  |           |   |  |                    |   |  |           | 
|Tonnes of ore mined   |  | 448,752            |   |  | 353,813   |   |  | 493,285            |   |  | 705,623   | 
|Tonnes of low grade   |  |                    |   |  |           |   |  |                    |   |  |           | 
|mined                 |  | 177,081            |   |  | 251,042   |   |  | 260,670            |   |  | 94,916    | 
|Tonnes of waste       |  |                    |   |  |           |   |  |                    |   |  |           | 
|removed               |  | 1,198,743          |   |  | 1,491,231 |   |  | 2,708,792          |   |  | 2,353,250 | 
|                      |  |                    |   |  |           |   |  |                    |   |  |           | 
|Ratio of waste to ore |  | 3.1                |   |  | 4.9       |   |  | 6.0                |   |  | 3.5       | 
|Tonnes of ore         |  |                    |   |  |           |   |  |                    |   |  |           | 
|processed             |  | 384,000            |   |  | 388,000   |   |  | 517,239            |   |  | 588,669   | 
|Average mill head     |  |                    |   |  |           |   |  |                    |   |  |           | 
|grade (grams/tonne)   |  | 2.35               |   |  | 1.76      |   |  | 1.89               |   |  | 1.97      | 
|Average recovery rate |  |                    |   |  |           |   |  |                    |   |  |           | 
|(%) (1)               |  | 63.0%              |   |  | 60.0%     |   |  | 76.0%              |   |  | 71.5%     | 
|                      |  |                    |   |  |           |   |  |                    |   |  |           | 
|Gold (ounces)         |  |                    |   |  |           |   |  |                    |   |  |           | 
| Produced (2)        |  | 18,201             |   |  | 20,938    |   |  | 17,752             |   |  | 30,101    | 
| Sold                |  | 20,453             |   |  | 22,099    |   |  | 16,661             |   |  | 28,199    | 
|Average realized gold |  |                    |   |  |           |   |  |                    |   |  |           | 
|price (per ounce)     |  | $918               |   |  | $895      |   |  | $853               |   |  | $791      | 
|Total cash costs (per |  |                    |   |  |           |   |  |                    |   |  |           | 
|ounce)                |  | $650               |   |  | $968      |   |  | $882               |   |  | $568      | 
|                      |  |                    |   |  |           |   |  |                    |   |  |           | 
|Financial Data        |  |                    |   |  |           |   |  |                    |   |  |           | 
|Revenues              |  | $18,767            |   |  | $19,775   |   |  | $14,213            |   |  | $22,297   | 
|(Loss) earnings from  |  |                    |   |  |           |   |  |                    |   |  |           | 
|operations*           |  | ($327              | ) |  | ($7,668   | ) |  | ($170,660          | ) |  | $1,602    | 

| | (1) | Gold recovery is determined when the individual leach
      pads are reclaimed and production is reconciled.                                                                                                        
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                     
| | (2) | 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.
| |     |                                                                                                                                                                                                                     
| | (*) | Includes the impairment charge of $156.9 million (net of tax recoveries of
      $8.4 million) in the third quarter                                                                                                 

7

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Amapari produced 30,101 ounces of gold during the fourth
quarter of 2008, a record for the operation. Plant throughput was 588,669
tonnes, which was considerably higher than the 517,239 tonnes processed in the
third quarter. Higher throughput and gold production can be attributed to
improved equipment availability and dry weather. Cash costs of $568 per ounce
were the lowest of the year. Capital expenditures in the fourth quarter were
$1.0 million.

Hard transition ore, which cannot be economically mined or
processed at the existing facilities at Amapari, started to become increasingly
pervasive in the fourth quarter.

Amapari processed 1,877,251 tonnes of ore grading 1.98 grams
per tonne (gpt) to produce 86,992 ounces of gold during 2008. This compares with
processing 2,004,600 tonnes of ore, grading 2.47 gpt to produce 96,400 ounces of
gold in 2007. Lower plant throughput was a result of low equipment
availabilities, while lower gold production was a result of this low throughput
and lower gold grades in the mining areas. Gold recovery, at 68.5% was slightly
higher than the 67.0% recovery achieved in 2007.

Cash costs for 2008 averaged $748 per ounce compared to $515
per ounce for 2007. This increase is attributable to lower grade ore and higher
maintenance and consumables costs, particularly during the first half of 2008.
Capital expenditures for 2008 were $7.1 million (2007 -$3.1 million).

The limited mine life of the oxides and unproven economic
viability of the identified sulphide resources resulted in the Company writing
down the value of Amapari to $10.6 million in the third quarter, taking an
impairment charge of $156.9 million (net of tax recoveries of $8.4 million).

Subsequent to year-end, the Company placed Amapari on temporary
care and maintenance. The Company determined that it would be more
cost-effective to process the remaining oxide ore with the underlying sulphide
resource in a new process facility. The leaching of stacked material is expected
to continue until it is no longer economic to do so. All environmental
monitoring and ongoing exploration remediation programs will continue during
this period and beyond, as will ongoing exploration programs on the Companys
concessions at Amapari. The Company is currently evaluating the results of a PEA
to exploit the resource with a conventional crush/grind/carbon-in-leach (CIL)
mill.

8

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Operation Review

Peak Mines, Australia

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

(US dollars in thousands, except ounce and per ounce
amounts)

|                                         |  | Three Months Ended |  |  |         |  |  | Three Months Ended | 
|---------------------------------------- |  | ------------------ |  |  | ------- |  |  | ------------------ | 
|                                         |  | Q1                 |  |  | Q2      |  |  | Q3                 | 
|Operating Data                           |  | 2008               |  |  | 2008    |  |  | 2008               | 
|Tonnes of
      ore milled               |  | 179,087            |  |  | 186,326 |  |  | 196,633            | 
|Average
      mill head grade            |  |                    |  |  |         |  |  |                    | 
| Gold
      (grams/tonne)               |  | 4.96               |  |  | 4.18    |  |  | 4.95               | 
| Copper
      (%)                       |  | 0.70%              |  |  | 0.46%   |  |  | 0.67%              | 
|Average
      recovery rate              |  |                    |  |  |         |  |  |                    | 
| Gold (%)                               |  | 87.9%              |  |  | 84.2%   |  |  | 85.1%              | 
| Copper
      (%)                       |  | 78.9%              |  |  | 64.9%   |  |  | 81.1%              | 
|Produced                                 |  |                    |  |  |         |  |  |                    | 
| Gold
      (ounces)                    |  | 25,099             |  |  | 21,114  |  |  | 26,662             | 
| Copper
      (thousands of pounds)     |  | 2,172              |  |  | 1,237   |  |  | 2,365              | 
|Sold                                     |  |                    |  |  |         |  |  |                    | 
| Gold
      (ounces)                    |  | 31,247             |  |  | 18,441  |  |  | 24,425             | 
| Copper
      (thousands of pounds)     |  | 2,551              |  |  | 855     |  |  | 1,715              | 
|Average
      realized price             |  |                    |  |  |         |  |  |                    | 
| Gold
      (per ounce)                 |  | $943               |  |  | $902    |  |  | $878               | 
| Copper
      (per pound)               |  | $3.75              |  |  | $4.27   |  |  | $2.76              | 
|Total cash
      cost per gold ounce (1) |  | $281               |  |  | $472    |  |  | $560               | 
|                                         |  |                    |  |  |         |  |  |                    | 
|Financial Data                           |  |                    |  |  |         |  |  |                    | 
|Revenues                                 |  | $37,454            |  |  | $19,722 |  |  | $21,732            | 
|Earnings
      from operations           |  | $17,144            |  |  | $2,944  |  |  | $6,018             | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The calculation of total cash cost per ounce of gold is
      net of by-product sales revenue. If the copper sales were treated as a
      co-product, average total cash cost at Peak Mines for the three months
      ended December 31, 2008, would be $414 per ounce of gold and $0.693 per
      pound of copper compared to $390 per ounce of gold and $2.14 per pound of
      copper in the previous year.

9

---

Peak Mines produced 27,618 ounces of gold and 2,474,444 pounds
of copper during the fourth quarter of 2008. Mill throughput of 206,681 tonnes
for the fourth quarter is yet another operational record and reflects consistent
underground production and increased milling capacity. Total cash costs for the
quarter were $624 per ounce sold. The high cash costs for the quarter are
primarily the result of the impact of falling copper prices on the by-product
credit. The decrease in copper price increased cash costs by approximately $291
per ounce. Capital expenditures in the fourth quarter were $7.6 million.

Peak Mines produced 100,493 ounces of gold and 8,249,000 pounds
of copper for the year 2008 compared to 116,488 ounces of gold and 7,490,000
pounds of copper for the year 2007. This reflects mining in zones with lower
grade gold and higher grade copper in 2008. Mill throughput of 768,727 tonnes is
a new record for Peak, exceeding the previous record of 709,230 tonnes set in
2007. Recoveries for gold (87.0%) and copper (78.5%) were consistent with
recoveries for 2007 (gold 88.0% and copper 73.0%) .

Cash costs for the year 2008 averaged $477 per ounce versus
$243 per ounce for 2007. Most of this year over year increase was attributable
to lower copper prices and a high Australian dollar during the first half of the
year. In Australian dollars, unit operating costs per tonne milled for 2008 were
8.0% higher than 2007, largely due to higher consumable prices. Capital
expenditures in the year 2008 were $29.4 million (2007 - $12.5 million).

During 2008, the Peak Mines poured their millionth ounce of
gold, completed initial development of the Chesney orebody and advanced
development into the Perseverance D orebody; zones which will provide a
significant percentage of the mines mill feed over the coming few years.

10

---

Operation Review

Cerro San Pedro, Mexico

The CSP Mine is located in the state of San Luis Potosí in
central Mexico approximately 20 kilometers east of the city of San Luis Potosí.
The project property consists of 52 mining and exploration concessions totaling
78 square kilometers of mining and exploration concessions centering on the
historic CSP mining district. The current focus of exploration is on the
southern half of the CSP mining district along a trend of gold-silver-zinc-lead
mineralization that extends more than 2 kilometers south from the Companys
current open pit mine operation.

(US dollars in thousands, except ounce and per ounce
amounts)

|                                                        |  | Three Months Ended
      (1) |  |  |           |  |  |           | 
|------------------------------------------------------- |  | ---------------------------- |  |  | --------- |  |  | --------- | 
|                                                        |  | Q1                           |  |  | Q2        |  |  | Q3        | 
|                                                        |  |                              |  |  |           |  |  |           | 
|Operating Data                                          |  | 2008                         |  |  | 2008      |  |  | 2008      | 
|Tonnes of ore mined                                     |  | 2,276,533                    |  |  | 2,440,293 |  |  | 2,059,429 | 
|Tonnes of waste removed                                 |  | 3,051,869                    |  |  | 3,074,769 |  |  | 3,831,513 | 
|Ratio of waste to ore                                   |  | 1.34                         |  |  | 1.26      |  |  | 1.86      | 
|Tonnes of ore processed                                 |  | 2,276,533                    |  |  | 2,440,293 |  |  | 2,059,429 | 
|Average gold head grade (grams/tonne)                   |  | 0.61                         |  |  | 0.64      |  |  | 0.59      | 
|Average silver head grade (grams/tonne)                 |  | 20.82                        |  |  | 18.88     |  |  | 24.22     | 
|Average gold recovery rate (%)                          |  | 41.0%                        |  |  | 41.0%     |  |  | 65.0%     | 
|Average silver recovery rate (%)                        |  | 15.0%                        |  |  | 19.0%     |  |  | 18.0%     | 
|Gold (ounces)                                           |  |                              |  |  |           |  |  |           | 
| Produced (2)                                          |  | 18,290                       |  |  | 20,653    |  |  | 24,387    | 
| Sold                                                  |  | 15,922                       |  |  | 22,190    |  |  | 26,070    | 
|Silver (ounces)                                         |  |                              |  |  |           |  |  |           | 
| Produced (2)                                          |  | 228,623                      |  |  | 283,749   |  |  | 282,055   | 
| Sold                                                  |  | 203,973                      |  |  | 300,728   |  |  | 305,430   | 
|Average realized gold price (per ounce)                 |  | $933                         |  |  | $897      |  |  | $874      | 
|Total cash cost net silver credits (per
      ounce)(3) |  | $496                         |  |  | $375      |  |  | $369      | 
|Financial Data                                          |  |                              |  |  |           |  |  |           | 
|Revenues                                                |  | $18,477                      |  |  | $25,050   |  |  | $27,439   | 
|(Loss) Profit from operations(4)                        |  | $7,497                       |  |  | $10,523   |  |  | $5,618    | 

| | (1) | Commercial production at CSP commenced on May 1, 2007;
      however, the operation was still in its ramp up stage and production
      results are not comparable and therefore have not been presented. As such,
      the comparative analysis will be presented using Q4, 2007 data.                        
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                 
| | (2) | 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.                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                 
| | (3) | The calculation of total cash costs per ounce of gold is
      net of by-product sales revenue. If the silver sales were treated as a
      co-product, average total cash costs at CSP for the three months ended
      December 31, 2008, would be $563 per ounce of gold and $7.11 per ounce of
      silver.
| |     |                                                                                                                                                                                                                                                                                                                 
| | (4) | CSP operations are included in New Golds operating
      results for the period subsequent to June 30, 2008 only. Prior quarter
      information is presented for information purposes
only.                                                                                                                  

Gold production for the fourth quarter of 2008 decreased by
13.0% to 21,231 ounces compared to 24,387 ounces produced in the third quarter
of 2008. The decrease in production over the third quarter was due to a lower
recovery rate, which is a function of the type of material placed on the
leach pad. Silver production increased slightly during the quarter to 290,520
ounces from 282,055 ounces.

11

---

Cash costs quarter over quarter increased by $153 per ounce of
gold. This was due to a number of factors including lower gold production, a
higher strip ratio, lower by-product silver production, lower silver prices and
higher consumables costs. Increased cash costs were offset by depreciation in
the Mexican Peso versus the US dollar. Capital expenditures in the fourth
quarter were $2.9 million.

Revenue for the fourth quarter was $19.8 million which was a
28.0% decrease compared to the third quarter revenue of $27.4 million. The main
driver for this decrease was the reduced sales volume; gold volume was 4,890
ounces lower and silver volume was 15,649 ounces lower. Additionally, the
average realized price of gold fell quarter over quarter from $874 to $799 per
ounce and the average realized silver price dropped from $15.24 to $10.09 per
ounce.

The CSP mine did not operate a full year in 2007, but it is
noteworthy that in the fourth quarter of 2008, the mine produced significantly
higher quantities of gold (21,231 ounces in 2008 compared to 13,621 ounces in
2007) and silver (290,520 ounces compared to 194,539 ounces). Cash costs per
ounce were also significantly lower ($522 per ounce in 2008 compared to $759 per
ounce in 2007) demonstrating that in 2008 the mine achieved steady-state
production.

Capital expenditures for the full twelve months of 2008 were
$13.2 million. Capital expenditures for six months in 2008 were $5.1 million;
construction work on two leach pads and a pilot cell accounted for over $10.0
million of this expenditure.

During 2008, the mine attained certification in ISO 14001:
2004, which demonstrates that the operations are operating in accordance with
environmental regulations and international standards.

The mine earned two important accolades in 2008. The first was
winning the Casco de Plata award which is awarded to the safest open pit
mining operations with up to 500 employees in Mexico. This exemplifies the
commitment that the Company has with regards to safety. The second award was
received in recognition of explosives management which was issued by the Orica
Company.

12

---

Project Development Review

New Afton
Project

The New Afton Project commenced in 2008 with the transition
from feasibility study to construction phase in January 2008. At this time the
underground contractor started excavation of critical path underground
development for the conveyor decline access and the in pit portal on multiple
headings. Surface construction activities started in late February and
construction continued on a fast track schedule until the decision was announced
on November 12, 2008 to slow development activities in light of the Companys
cash position, volatile equity markets, global uncertainty in the capital
markets and increasing cost pressures.

Despite the decision to slow development, good progress was
made as underground heading advance during 2008 totaled 4,477 meters, including
significant work on the conveyor access and decline access drives. Two
ventilation raises were completely excavated and approximately half of a third
raise was back-reamed during 2008. Total raise excavation for the year was 911
meters.

Surface construction activity during 2008 consisted of three
main areas: earthworks, concrete and erection of the mill building. Concrete
pouring activities consisted of foundations and supporting structures for the
mill building, the SAG mill, the ball mill, the vertical mill and other major
components for the processing equipment and facilities. A total of 6,779 cubic
meters of concrete was placed during the year representing 52.0% of the total
required for the project. Mill building construction began in October and
continued throughout the year. The 632 tonnes of structural steel that had been
erected by year-end represents 53.0% of that required for the mill building
which is scheduled for completion in April 2009. Delivery of the long lead items
such as the SAG mill, ball mill and vertical mill will be completed by the end
of the second quarter of 2009, at which time project activities will be limited
to the underground development excavation. Overall, the New Afton Project ended
2008 on schedule at 30.0% complete.

The B.C. Ministry of Energy, Mines and Petroleum Resources
granted approval on September 25, 2008 for construction of the Pothook pit dam
following a review of the detailed engineering report. On November 21, 2008, the
Ministry also granted approval for construction of the tailings storage facility
dam.

Project costs for the six month period (July to December 2008)
were $72.8 million. The revised schedule projects total expenditure of
approximately $78.5 million in 2009, which includes approximately $19.3 million
of interest. Equipment purchases in 2009 are budgeted to be approximately $13.1
million.

El Morro Joint Venture

The Companys 30.0% owned El Morro copper-gold project is
located in Chile approximately 80 kilometers east of the city of Vallenar. It is
a development stage project managed under a shareholders agreement between
Xstrata Copper (Xstrata), owner of a 70.0% interest, and the Company.

13

---

In January 2008 the Company, through its subsidiary Metallica,
accepted delivery of a feasibility study for which details are provided in an
independent NI 43-101 Technical Report filed on SEDAR on May 29, 2008. The
project entered into the permitting stages during 2008.

In November 2008 the Company, through its subsidiary Datawave
Sciences Inc., signed a formal shareholders agreement (Shareholders Agreement)
with Xstrata, Inversiones El Morro Limitada and Sociedad Contracual Minera El
Morro (El Morro) which provides for the ongoing funding and management of El
Morro.

In December 2008 the Company provided an election notice to
Xstrata pursuant to the Shareholders Agreement, to have Xstrata fund 70.0% of
all program funding commitments of the Company until commercial production
commences. The Company estimates its funding commitment in 2009 to be $1.6
million.

Exploration Review

Amapari Mine

During 2008 the Company completed a total of 28,377 meters of
diamond drilling at the Amapari Mine. The majority of this work was conducted
around and beneath the areas of active mining, and has resulted in an updated
mineral resource and reserve estimate for the project. The updated resource
estimate includes a breakdown of oxide resources into the separate categories of
saprolite and transitional material. Saprolite material is generally softer and
more easily mined and crushed, while transitional material is harder and more
difficult to mine and crush using existing process facilities. Evaluation of the
drill results and an updated resource estimate indicates the 2008 program did
not significantly add to saprolite oxide resources that could be developed into
an economic ore reserve and mine plan for the existing heap leach circuit. As a
result, the project was placed on temporary care and maintenance during the
fourth quarter of 2008. A PEA is currently in progress to exploit the remaining
oxide and sulfide resources with a conventional crush/grind/Carbon-in-leach
(CIL) mill.

Exploration plans for 2009 will focus on assessing the
potential economic viability of remaining oxide and sulfide resources around the
area of active mining, and on assessing the mineral potential of other less
explored areas within the greater Amapari project property holdings.

Cerro San Pedro Mine

Exploration at Cerro San Pedro Deeps commenced in July 2008 and
by year-end had resulted in the completion of 1,050 meters of diamond drilling
in an area of previous underground mining. This area is reported to have
produced approximately 235,000 ounces of gold and 20 million ounces of silver
along with significant amounts of zinc, lead and copper between 1929 and 1949. A
minimum of 5,000 meters of exploration drilling is currently forecast for the
Cerro San Pedro Deeps project during 2009.

14

---

Peak Mines

During 2008 the Company completed 42,822 meters of diamond
drilling from both underground and on surface with three prime objectives:
increasing the level of confidence and resource classification for known
deposits for subsequent development into mineable reserves, testing for possible
extensions to known deposits to add to the existing mineral resource inventory
and to test the mineral potential of less explored areas.

Drilling at New Cobar and New Occidental totalled 10,030 and
7,714 meters respectively to replace depleted reserves in these areas. New Cobar
and New Occidental produced 57.0% of the ore feed during 2008. Drilling at
Chesney and Perseverance Zone D totalled 9,358 meters and 13,764 meters
respectively. Chesney and Perseverance Zone D are being developed in parallel to
provide future ore feed for the Peak mill.

Earlier stage exploration during 2008 included the completion
of 1,872 meters of drilling on new targets outside the immediate mine areas and
the commencement of a regional scale targeting initiative. The latter involves
an integrated approach that combines high resolution aeromagnetics and gravity
geophysical surveys with existing data to develop a regional scale three
dimensional model covering the entire 845 square kilometre Peak Mines property
and greater Cobar basin. Once completed in early 2009, this program is expected
to lead to the next generation of exploration targets in the Cobar Mineral
Field.

Exploration in 2009 will concentrate on extending the known
resources at Perseverance and Chesney, continuing near mine exploration of
satellite ore bodies around known deposits and evaluating regional targets
generated from the regional targeting initiative.

During 2008, the Peak Mines produced their 2 millionthounce of gold and maintain a resource base of over 1 million ounces, a
resource base that is greater than the original feasibility study resource that
led to the development of the Peak Mines in 1991.

Rio Figueroa Project

The Companys Rio Figueroa project is located in Region III of
northern Chile approximately 85 kilometers east of the city of Copiapó. The
project property position consists of approximately 77 square kilometers of
mining and exploration concessions covering multiple areas of prospective copper
and gold mineralization. The Company holds an option to purchase a 100% interest
in the Rio Figueroa property from SCM Potrillos SA, a private company controlled
by Chilean state mining company ENAMI. The remaining requirement for completing
the purchase of the property is a $1.85 million cash payment to ENAMI due
September 2, 2009. Upon completion of the purchase, SCM Potrillos/ENAMI will
retain a 1.5% Net Smelter Return (NSR) royalty interest against future mineral
production from the SCM Potrillos property and a 2.0% NSR interest from three
mineral concessions that are currently held by ENAMI.

15

---

In June 2008, the Company entered into an agreement with
Antofagasta Minerals S.A. (Antofagasta) which provides Antofagasta an option
to earn up to a 70.0% interest in the Rio Figueroa copper-gold exploration
project in Region III, Chile. The agreement has a three-tiered structure: 1)
Antofagasta will make a one-time cash payment of $50,000 (subsequently paid) due upon signing of the agreement and make
cash option payments to the underlying landowners totaling $2.6 million through
September 2009 (this amount includes a $750,000 payment made in September 2008)
to earn an initial 30.0% interest in the project; 2) Antofagasta will then have
the option to increase its interest in the project from 30.0% to 50.0% by making
qualified exploration expenditures totaling $7.0 million during the period from
June 2008 through June 2012. At least $4.6 million of this amount must be
directed toward exploration drilling on the Rio Figueroa property; 3)
Antofagasta can further increase its interest in the project from 50.0% to 70.0%
by making a onetime cash payment to the Company of $5.0 million and delivering a
feasibility study for the project by June 2015. Antofagasta also retains the
right to act as project operator during the respective earn-in phases of the
option agreement.

During the third and fourth quarters of 2008, Antofagasta
completed a comprehensive review of the Rio Figueroa project to assess the
resource potential of the Cerro Matta copper-gold porphyry target and to
identify new exploration targets within the project land holdings and greater
region. A drilling program in 2009 focusing on these objectives is envisioned.

Liberty Bell Project

The Companys 100.0% owned Liberty Bell gold project is located
approximately 110 kilometers (70 miles) southeast of Fairbanks, Alaska, USA. The
project property consists of 174 Alaska state mining claims covering
approximately 52 square kilometers (20 square miles) of prospective ground that
is held under three separate option and lease agreements with various underlying
claim owners.

During 2008 the Companys exploration program at Liberty Bell
involved the completion of a property-wide geophysical IP-Resistivity survey in
combination with surface mapping and geochemical sampling. This work, combined
with the results of work completed in 2007, has resulted in the delineation of
five separate areas of prospective gold mineralization that will be the focus of
more detailed exploration in 2009.

Alaska Peninsula Project

In October 2008 the Company terminated its option agreement
with Full Metal Minerals Ltd. (FMM) to earn an interest in FMMs Alaska
Peninsula Project in southwest Alaska.

16

---

Review of Financial Results

Three months ended December 31, 2008 compared to the
three months ended December 31, 2007

Net earnings amounted to $41.1 million for the three months
ended December 31, 2008, compared to net earnings of $14.8 million in the same
period last year. The increase in net earnings is mainly attributable to the
$54.9 million foreign exchange gain realized due to the appreciation in value of
the US dollar in comparison to the Australian dollar, Brazilian real, Canadian
dollar, Chilean peso and the Mexican peso and the inclusion of CSPs operating
results beginning in the third quarter of 2008.

In addition, net earnings for the three months ended December
31, 2008 were impacted by the following factors:

- Revenues for the fourth quarter of 2008 increased by 25.7% or $12.0
  million to $59.0 million compared to $47.0 million for the fourth quarter of
  2007 primarily as result addition of CSPs revenues in the fourth quarter of
  2008. Gold sales for the fourth quarter of 2008 increased by 49.4% to 78,194
  ounces compared to 52,351 ounces for the fourth quarter of 2007 which is
  mainly attributable to the addition of CSPs gold ounces sold in the fourth
  quarter of 2008.
- Operating expenses increased by 97.6% to $60.8 million compared to the
  same quarter of 2007 as a result of higher operating costs at the mines
  related to increases in consumables and maintenance and the inclusion of the
  operating results for CSP.
- Depreciation and depletion, which relates to mining activities, was $9.2
  million for the quarter compared to $3.8 million in the same quarter of 2007.
  Depreciation and depletion was $2.0 million for Amapari, $4.9 million for CSP
  and $2.3 million for Peak Mines.
- Overall, corporate activities have increased as a result of merged
  operations from the Transaction. Corporate administration, including stock
  based compensation, was $7.5 million in the fourth quarter of 2008 compared to
  $5.1 million in the same quarter of 2007. Stock-based compensation was $1.3
  million for fourth quarter of 2008 compared to $1.0 million in the same
  quarter of 2007.
- Exploration expense increased by $1.0 million in the fourth quarter of
  2008 as compared to the same period in 2007, as a result of continued
  exploration work at the Peak Mines and the Amapari Mine and other properties
  acquired in the Transaction.
- Total cash costs per ounce were $576 for the period as compared to $398 in
  the same period in 2007. The increase is due to lower production at the Peak
  Mines and the Amapari Mine, higher labour costs, rising cost of consumables
  and unplanned maintenance costs offset by the weakening of the Australian
  dollar, Brazilian real, Mexican peso and Canadian dollar.
- The Company recorded a $54.9 million foreign exchange gain during the
  period as a result of the strengthening US dollar compared to the Australian
  dollar, Brazilian real, Mexican peso and Canadian dollar. The majority of the
  gain arose due to the revaluation of monetary assets and liabilities and
  future income tax liabilities recorded on the acquisition of the Amapari
  Mines, the Peak Mines, Metallica and NGI.

17

---

Year ended December 31, 2008 compared to the year ended
December 31, 2007

In the prior year the Company changed its fiscal year end from
November 31 to December 31. As a result, the Companys operating results as at
December 31, 2007 reflect operations for a thirteen month period.

The net losses of $102.7 million for the twelve months ended
December 31, 2008 were impacted by the following factors:

- Revenues increased by 66.4% or $87.1 million in the twelve months ended
  December 31, 2008 as compared to the same period in 2007, primarily as result
  of a full twelve months of sales for the Peak Mines and the Amapari Mine
  compared to only nine months of sales for the same period in 2007 and the
  addition of CSPs revenues for six months in 2008. Average realized gold
  prices were $863 per ounce in 2008, compared to $721 per ounce in 2007, an
  increase of 20.0%. Total ounces of gold sold increased to 237,589 (2007 
  155,351).
- Operating expenses increased by 110.3% to $169.7 million (2007 - $80.7
  million), primarily due to a full year of production in 2008 for the Peak
  Mines and Amapari Mine and the inclusion of the CSP Mine for six months (July
  to December 2008). The thirteen months ended December 31, 2007 included
  operating results for the Peak Mines and the Amapari Mine from April 3, 2007
  and April 27, 2007, respectively to December 31, 2007. Operating expenses for
  2008 includes a full year of results for the Peak Mines and Amapari Mine.
- Depreciation and depletion increased by 73.7% to $33.0 million (2007 -
  $19.0 million) primarily due to a full twelve months of commercial production
  and inclusion of the CSP Mine for six months. In addition, the finalized
  purchase price allocations of assets and liabilities acquired in the
  acquisition of Peak Mines and Amapari were not completed until the fourth
  quarter of 2007. Accordingly, the twelve months ended December 31, 2008
  included depreciation based on finalized purchase price allocations while 2007
  did not.
- Corporate administration increased by 73.2% to $23.0 million (2007 - $13.3
  million) in part as a result of increased corporate activity and due to the
  business combination costs of approximately $2.5 million.
- Exploration expense increased by $4.5 million in the twelve months ended
  December 31, 2008 as compared to the same period in 2007, as a result of
  continued exploration work at the Peak Mines and the Amapari Mine and other
  properties acquired in the Transaction.
- Interest income, of which the majority was earned on funds received from a
  private placement in December 2007 and the cash acquired in the business
  combination which closed on June 30, 2008, increased by $1.3 million in the
  twelve months ended December 31, 2008, as compared to the prior year.
- Net losses amounted to $102.7 million for the twelve months ended December
  31, 2008, compared to net earnings of $14.6 million last year.
- Higher net losses are primarily a result of the 156.9 million (net of tax)
  write-down of the Amapari Mine , partially offset by a full twelve months of
  commercial operations at the Peak Mines and the Amapari Mine and six months of
  commercial operations at CSP and significant increases in realized gold prices
  ($863 per ounce compared to $721 per ounce in the same period last year);
- Total cash costs per ounce were $569 for the twelve months ended December
  31, 2008 as compared to $349 in the same period in 2007. The increase is due
  to lower production at the Peak Mines and the Amapari Mine, higher labour
  costs, rising cost of consumables and unplanned maintenance costs at Amapari,
  and lower metal by-product prices offset by the weakening of the Australian
  dollar, Brazilian real, Mexican peso and Canadian dollar.

18

---

Non-GAAP Measure  Total Cash Cost per Gold Ounce
Calculation

The Company reports total cash cost 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 per ounce to the financial
statements:

(In thousands of USD except for ounces
    Three months
    Three months
    Twelve Months
    Thirteen monthsof gold and cash cost per ounce)
    ended
    ended
    ended
    endedDecember 31,
    December 31,
    December 31,
    December 31,2008
    2007
    2008
    2007Operating expenses per financial statements
    $60,815
    $30,772
    $169,694
    $80,723Treatment and refining charges on concentrate sales
    1,599
    2,189
    5,085
    5,479By-product copper and silver sales
    1,289
    (7,681)
    (18,207)
    (16,877)Non-cash adjustments
    (18,662)
    (4,444)
    (21,384)
    (36,200)Total cash costs
    45,041
    20,836
    135,188
    33,125Ounces of gold sold
    78,194
    52,351
    237,589
    155,351Total cash cost per ounce of gold
    $576
    $398
    $569
    $349


19

---

Liquidity and Capital Resources

As of December 31, 2008, the Company held cash and cash
equivalents of $185.7 million (2007 - $149.9 million). The majority of the
increase is attributed to cash and cash equivalents of $137.7 million acquired
on closing of the Transaction, however this increase is partially offset by
development capital expenditure at the New Afton Project. On January 9, 2009,
the Company acquired Cdn$50.0 million face value of its senior secured notes for
Cdn$30.0 million from noteholders. The Company had approximately $7.0 million in
short-term borrowings at Amapari at the end of December 2008. However this has
been fully repaid subsequent to year end. The Company has no other short-term
borrowings outstanding.

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 acquisition. The counter-parties include banks,
governments and government agencies. This does not include the asset backed
commercial paper (ABCP) discussed below.

As part of the Transaction, the Company acquired Cdn$170.0
million in ABCP which was previously rated R1-high by Dominion Bond Rating
Service. In mid-August 2007, a number of non-bank sponsors of ABCP, including
those with which NGI had invested, announced that they could not place ABCP due
to unfavorable conditions in the Canadian capital markets. Accordingly, there
has been no active market for the ABCP held by the Company. However, on January
16th2009 the Ontario Superior Court approved the restructuring of
the Third Party Asset Backed Commercial Paper market which has been frozen since
August 2007. Under the agreement the Company received new notes with a par value
of Cdn$168.9 million, the majority of which will mature in 2017. On closing of
the restructuring, the Company received a payment of approximately Cdn$5.8
million representing its share of interest earned on its ABCP to August 2008 net
of restructuring costs. The Company classifies its holdings in ABCP as long-term
investments and has estimated the fair value of ABCP at approximately $77.0
million as at December 31, 2008. There can be no assurance that this estimated
value will be realized. Subsequent adjustments, which could be material, may be
required in future reporting periods (Refer to the Risks and Uncertainties
section for more information).

As of December 31, 2008, the Company had working capital of
$189.2 million (December 31, 2007 - $214.1 million). During the year, the
Companys working capital was negatively impacted by the decline in copper
prices during the third and fourth quarters of 2008. As of December 31, 2008,
working capital includes copper concentrate receivables at a value of $3.5
million, which has been revalued at December 31, 2008 at $1.32 per pound. The
Company received a $22.8 million partial pre-payment in the fourth quarter of
2008 at an average price of $1.79 per pound with final pricing and settlement
expected to occur before the end of the first quarter of 2009.

In the opinion of management, the working capital at December
31, 2008, together with cash flows from operations, are sufficient to support
the Companys normal operating requirements on an ongoing basis. 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 continually reviewing expenditures in order to ensure adequate
liquidity and flexibility to support its growth strategy while maintaining
production levels at its current operations.

The Company had expected to receive additional funds of
approximately Cdn$50.0 million from the exercise of 14,456,965 share purchase
warrants at Cdn$3.44 per share which expired on December 11, 2008. However, due
to the low share price and the difficult current market conditions at the expiry
date the Company did not receive material proceeds from investors.

20

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During the year ended December 31, 2008, the Company had
positive operating cash flows of $24.7 million and invested a total of $133.9
million in mining interests, including $7.1 million at Amapari, $29.4 million at
Peak Mines, $9.8 million at Metallica and $87.5 million at New Afton.

Liquidity and Capital Resources Outlook

New Gold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
post-2011. In addition to these internal growth opportunities, the Company has
other prospective properties which include, but are not limited to, Rio
Figueroa, Cerro San Pedro Deeps, Amapari sulphides, the Abacus joint venture at
New Afton and Liberty Bell in Alaska. Internal growth will focus on New Afton
and El Morro; however there are other potential development properties that may
become high priorities as further exploration and assessment is completed. In
order to supplement this internal growth, the Company will consider expansion
through mergers and acquisitions.

Capital expenditures for 2009 are expected to be approximately
$107.0 million with $78.5 million (including capitalized interest) allocated to
continued development of the New Afton Project and $24.5 million allocated to
Peak Mines. The New Afton Project capital expenditures include approximately
$13.1 million for cancellation and completion costs for equipment orders in
place at the time of the announcement of the slowdown in November 2008. These
cancellation and completion costs should be fully paid by the end of June 2009
and the demobilization of all contractors should be complete by mid-June 2009
after contractors have completed the testing of the mills. In the second half of
2009, the monthly cash requirements at New Afton will be reduced to a minimal
level of approximately $2.7 million to Cdn$3.6 million. In addition, we
anticipate funding of $1.6 million for El Morro capital during the permitting
stage, which is net of the carried funding from Xstrata (i.e. 70% of New Golds
30% share of project costs).

Management believes that the Company will need external
financing (which may include acquisitions of cash generating mines, bank
borrowings and future debt and equity offerings) to complete its major
development projects, however these development projects are not likely to
commence full construction until the second half of 2010 at the earliest.
Continuing low copper prices may necessitate the deferral of capital
expenditures which may impact future production from mining operations. In
addition, the Company will need external financing to repay its long-term debt
in 2014 and 2017. 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.

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Contractual Obligations

|                                         |   |         |  |   |           |  |   | Payments due by period |  |   |             | 
|---------------------------------------- | - | ------- |  | - | --------- |  | - | ---------------------- |  | - | ----------- | 
|                                         |   |         |  |   | Less than |  |   |                        |  |   |             | 
|Contractual obligations (in 000's US$)   |   | Total   |  |   | 1 year    |  |   | 1 - 3 years            |  |   | 4 - 5 years | 
|Long-term debt                           | $ | 238,447 |  | $ | 0         |  | $ | 0                      |  | $ | 0           | 
|Interest payable on
      long-term debt |   | 187,654 |  |   | 21,599    |  |   | 43,198                 |  |   | 43,198      | 
|Commitments                              |   | 25,591  |  |   | 21,916    |  |   | 3,675                  |  |   | 0           | 
|Other                                    |   | 406     |  |   | 231       |  |   | 175                    |  |   | 0           | 
|Asset retirement obligations             |   | 33,200  |  |   | 0         |  |   | 13,000                 |  |   | 0           | 
|Total contractual obligations            | $ | 485,298 |  | $ | 43,746    |  | $ | 60,048                 |  | $ | 43,198      | 

The majority of the Companys contractual obligations consist
of long-term debt and interest payable. Long-term debt obligations comprise of
senior secured notes and subordinated convertible debentures. The senior secured
notes (Notes), which were originally issued by NGI 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 December 31, 2008 the face value of
the Notes totaled Cdn$237.0 million with remaining interest payable totaling
Cdn$229.8 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 obliged to offer to repay a face value
amount equal to 50.0% 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 117.0% to 101.0% (decreasing 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 the other assets of New Gold.

Subsequent to the year-end, the Company acquired Cdn$50.0
million face value of its Notes for Cdn$30.0 million from noteholders. This will
result in reductions of principal of Cdn$50.0 million and interest of
approximately Cdn$5.0 million per year (this reduction is not reflected in the
above table).

The Company has 55,000 subordinated convertible debentures that
bear interest at a rate of 5.0% per annum and are convertible by the holders
into common shares of the Company at any time up to June 28, 2014. At December
31, 2008 the aggregate principal of the subordinated convertible debentures was
Cdn$55.0 million with remaining interest payable totaling $15.6 million.
Interest is payable in arrears in equal semi-annual installments on January 1
and July 1 each year.

In May 2008, the Company entered into a one year $25.0 million
revolving credit facility, which is secured on the assets of the Metallica group
of companies and is available for general corporate purposes. Amounts drawn
incur interest at LIBOR plus 1.5% per annum and undrawn amounts are subject to a
0.5% per annum commitment fee. At December 31, 2008 the Company had not drawn on
the facility.

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Commitments

The Company has entered into a number of contractual
commitments related to equipment to purchase long lead items or critical pieces
of mining equipment related to the New Afton Project. At December 31, 2008,
these commitments totaled $9.4 million and re expected to fall due 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 December
31, 2008, these commitments totaled $12.5 million and are expected to be paid
over the next 12 months.

Contingencies

The Company is terminating various employment, consulting and
service agreements as a result of slowing development activities at the New
Afton Project and placing Amapari on temporary care and maintenance. Certain of
the affected parties may make legal claims in response to such terminations, but
to date no such claims have been commenced. The Company cannot reasonably
predict the likelihood or outcome of any such actions, but would vigorously
defend against them.

The Company has received notice that legal claims in the amount
of approximately $46 million have been filed in Brazilian courts against the
Companys subsidiary, Mineração Pedra Branca do Amapari Ltda (MPBA). The
claims allege that MPBA has adversely impacted the quality of William Creek
causing economic loss and health concerns. The Company believes that these
claims are unfounded and intends to vigorously defend against them.

The Company is, from time to time, involved in various claims,
legal proceedings and complaints arising in the ordinary course of business. The
Company cannot reasonably predict the likelihood or outcome of these actions.
New Gold does not believe that adverse decisions in any other pending or
threatened proceedings related to any matter, or any amount which may be
required to be paid by reason therein, will have a material effect on the
financial condition or future results of operations.

Subsequent Events

On March 4, 2009, the Company announced that it had entered
into a definitive agreement to acquire all of the outstanding common shares of
Western Goldfields Inc. (Western Goldfields). Under the agreement, the Company
will exchange one common share and Cdn$0.0001 in cash for each common share of
Western Goldfields (the Western Goldfields Transaction). Upon completion of
the Western Goldfields Transaction, existing New Gold and Western Goldfields
shareholders will own approximately 58% and 42% of the combined company,
respectively, subject to the approval of both companies and regulatory approval.

Off-Balance Sheet Transactions

The Company has no off-balance sheet arrangements.

Outstanding Shares

As of March 13, 2009, there were 212,860,746 common shares of
the Company outstanding. The Company had 11,125,304 stock options outstanding
under its share option plan. In addition, the Company had 60,136,032 common
share purchase warrants outstanding.

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Risks and uncertainties

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, currency fluctuations, government regulations, foreign operations,
environmental compliance, the ability to obtain additional financing, risks
relating to recent acquisitions, and dependence on management.

Metal Prices

The Companys revenues and cash flows are subject to
fluctuations in gold, silver and copper prices. At Peak Mines there can be a
significant time lag between the time of recording of copper revenues and final
pricing of copper. Therefore changes in the price of copper during this period
can have a significant impact on the Companys revenue and working capital
position (refer to liquidity section for further analysis). Metal prices are
affected by a variety of factors including interest rates, exchange rates,
international economic and political trends, inflation or deflation,
fluctuations in the value of the US dollar and foreign currencies, global and
regional supply and demand and the political and economic conditions of major
metal producing countries throughout the world. However, to address the recent
volatility in copper prices, the Company is currently renegotiating its copper
concentrate contract to mitigate the Companys exposure to fluctuations in
copper price. The Company does not presently have a metals hedging policy nor
has it conducted any metals hedging in the past.

Currency Fluctuations

Exchange rate fluctuations may affect the costs that the
Company incurs in its operations. Gold, silver and copper are sold in US dollars
and the Companys costs are incurred principally in Canadian dollars, Australian
dollars, Mexican pesos and Brazilian reals. The appreciation of non-US dollar
currencies against the US dollar can increase the cost of gold, silver and
copper production and capital expenditure in US dollar terms and the
depreciation of non-US dollar currencies against the US dollar can decrease the
cost of gold, silver and copper production and capital expenditure in US dollar
terms.

The Company has recorded future income tax liabilities on
mineral interests relating to the acquisitions of the Amapari Mine, Peak Mines,
Metallica and NGI. The future income tax liabilities and long-term debt
obligations are monetary items, which are revalued each period end at current
exchange rates, with the gain or loss recorded in income for the period.

The Company has assessed this risk and has not presently
adopted an active currency hedging program given the correlation between metal
prices and the currencies in which the Company operates. In 2008, favorable
changes in metal prices have mitigated the adverse effect of the appreciation of
relevant foreign currencies against the US dollar.

Government Regulations

The mining, processing, development and exploration activities
of the Company are subject to various laws governing prospecting, development,
production, taxes, labour standards and occupational health, mine safety, toxic
substances, land use, water use, land claims of local people and other matters. No assurance can be
given that new rules and regulations will not be enacted or that existing rules
and regulations will not be applied in a manner which could have an adverse
effect on the Companys financial position and results of operations.

24

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Foreign Operations

The Companys operations are currently conducted in Brazil,
Mexico, Canada, the United States, Chile and Australia, and as such the
Companys operations are exposed to various levels of political, economic and
other risks and uncertainties. These risks and uncertainties vary for each
country and include, but are not limited to, extreme fluctuations in currency
exchange rates; high rates of inflation; labor unrest; exploration and
fluctuations in currency and exchange rates; renegotiation or nullification of
existing concessions, licenses, permits and contracts; illegal mining; changes
in taxation policies; restrictions on foreign exchange and repatriation; and
changing political conditions, currency controls and governmental regulations
that favor or require the awarding of contracts to local contractors or require
foreign contractors to employ citizens of or purchase supplies from a particular
jurisdiction.

Changes, if any, in mining or investment policies or shifts in
political attitude in these countries could adversely affect the Companys
operations or profitability. Operations may be affected in varying degrees by
government regulations with respect to, but not limited to, restrictions on
production, price controls, export controls, currency remittance, income taxes,
expropriation of property, foreign investment, maintenance of claims,
environmental legislation, land use, land claims of local people, water use and
mine safety.

Failure to comply strictly with applicable laws, regulations
and local practices relating to mineral right applications and tenure, could
result in loss, reduction or expropriation of entitlements.

The occurrence of these various factors and uncertainties
cannot be accurately predicted and could have an adverse effect on the Companys
operations or profitability.

Environmental

All phases of the Companys operations are subject to
environmental regulation in the various jurisdictions in which it operates.
These regulations mandate, among other things, the maintenance of air and water
quality standards and land reclamation. They also set forth limitations on the
generation, transportation, storage and enforcement, increased fines and
penalties for non-compliance, more stringent environmental assessments of
proposed projects and a heightened degree of responsibility for companies and
their officers, directors, and employees. There is no assurance that future
changes in environmental regulation, if any, will not adversely affect the
Companys operations.

Government approvals and permits are currently, and may in the
future be, required in connection with the Companys operations. To the extent
that such approvals are required and not obtained, the Company could be
curtailed or prohibited from continuing its mining operations or from proceeding
with planned exploration or development of mineral properties.

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Asset Backed Commercial Paper (ABCP)

As at December 31, 2008, the non-bank ABCP market remained the
subject of a restructuring process with the express intention of replacing the
ABCP with a number of long-term floating rate notes. The restructuring plan
would upon completion pool all of the underlying assets from all the ABCP trusts
with the exception of those assets designated as ineligible for pooling
(Ineligible Assets) and those series of assets backed exclusively by
traditional financial assets (Traditional Series). ABCP relating to the pooled
assets will be replaced with four classes of notes named A1, A2, B and C in
declining order of seniority. ABCP relating to Ineligible Assets and Traditional
Series would be replaced with new tracking notes whose characteristics are
designed to track the performance of the particular assets of the series to
which they correspond. The planned completion date for the restructuring was
January 21, 2009 (see Subsequent Event).

The Company has estimated the fair value of ABCP at December
31, 2008 by using a discounted cash flow approach which estimated the cash flows
to be received in respect of each class of notes and then discounted each class
of notes at a rate that reflects an estimated yield requirement for that
particular class. Additionally, the valuation incorporates the anticipated
distribution of income earned by the Companys ABCP during the restructuring
period from August 2007 through August 31, 2008.

There can be no assurance that this estimate will be realized
in the market. Subsequent adjustments, which could be material, may be required
in future reporting periods.

A number of the notes to be received by the Company are not
rated by any credit rating agency and the Company has not yet had access to the
underlying asset information which would enable it conduct its own assessment of
the credit quality of the new notes. Accordingly, the Companys valuation and
credit assumptions rely heavily on the limited information that has been
disclosed during the course of the restructuring process.

The ABCP restructuring was completed on January 21, 2009 and
the Company received its new notes. Additionally, income relating to the period
from when the ABCP was initially purchased until August 31, 2008 was distributed
to all investors. New Gold received Cdn$5.8 million in respect of its holdings.
Accordingly, this amount will be excluded from the value of its notes in future
periods.

Additional Financing

The Companys mining, processing, development and exploration
activities may require additional external financing. Failure to obtain
sufficient financing could result in the delay or indefinite postponement of
exploration, development or production on any or all of our projects. There can
be no assurance that additional capital or other types of financing will be
available if needed or that, if available, the terms of such financing will be
favorable.

Risk Relating to Recent Acquisitions

The Company recently completed a business combination of NGI,
Metallica and Peak Gold. There can be no assurances that the benefits
anticipated from these acquisitions will be realized.

Peak Gold has been identified as the acquirer for accounting
purposes for the business combination. The cost of the acquisition will be
allocated to the assets acquired and liabilities assumed based on the fair value
at the date of acquisition. The estimation of fair value for mining interests
takes into account expected future cash flows associated with the life of mine
plans.

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Dependence on Management

The Company relies heavily on the business and technical
expertise of its management team and it is unlikely that this dependence will
diminish in the near term.

Title to the Companys Mineral Properties

The acquisition of title to mineral properties is a very
detailed and time-consuming process. Title to mineral concessions may be
disputed. Although the Company believes it has taken reasonable measures to
ensure proper title to its properties, there is no guarantee that title to any
of such properties will not be challenged or impaired. Third parties may have
valid claims underlying portions of the Companys interest, including prior
unregistered liens, agreements, transfers or claims, including aboriginal land
claims, and title may be affected by, among other things, undetected defects. As
a result, the Company may be constrained in its ability to operate its
properties or unable to enforce its rights with respect to the properties. An
impairment to or defect in our title to certain properties could have a material
adverse effect on our business, financial condition or results of operations.

Exploration and Development

Risks related to our recent start of production at the CSP Mine
include risks associated with the operation of a mine and risks of encountering
unexpected geological formations or unanticipated variations in grade.

Accounting Policies implemented effective January 1, 2008

The Company has adopted three new presentation and disclosure
standards that were issued by the Canadian Institute of Chartered Accountants:
Handbook Section 1535, Capital Disclosures (Section 1535), Handbook Section
3862, Financial Instruments  Disclosures (Section 3862) and Handbook Section
3863, Financial Instruments  Presentation (Section 3863).

Section 1535 requires the disclosures of both qualitative and
quantitative information that enables users of financial statements to evaluate
an entitys objective, policies and processes for managing capital. Section 1535
requires that disclosure of (i) an entitys objective, policies and processes
for managing capital; (ii) quantitative data about what the entity regards as
capital; (iii) whether the entity has complied with any capital requirements;
and (iv) if it has not complied, the consequences of such non-compliance.

Section 3862 and 3863 replace Handbook Section 3861, Financial
Instruments  Disclosures and Presentation, revising and enhancing disclosure
requirements and carrying forward unchanged the presentation requirements for
financial instruments. Section 3862 and 3863 place increased emphasis on
disclosures about the nature and extent of risk arising from financial
instruments and how an entity manages those risks.

On January 1, 2008, the Company adopted Section 3031,
Inventories, which replaces the existing Section 3030, and establishes standards
for the measurement and disclosure of inventories. The new standard provides
more extensive guidance on the determination of cost, including allocation of
overhead, requires impairment testing and expands the disclosure requirements.
The adoption of Section 3031 did not have a material impact on the Companys
consolidated financial position and results of operations for the year ended
December 31, 2008.

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Accounting Policies to be implemented

Effective January 1, 2009, the Company will adopt Section 3064,
Goodwill and Intangible Assets, which replaces Section 3062, and establishes
revised standards for recognition, measurement, presentation and disclosure of
goodwill and intangible assets. Concurrent with the introduction of this
standard, the CICA withdrew EIC 27, Revenues and Expenditures in the
Pre-operating Period (EIC 27). The Company is still evaluating the impact of
this new accounting pronouncement on the Companys financial position and
results of operations.

In January 2009, the CICA issued Handbook Sections 1582,
Business Combinations, (Section 1582), 1601, Consolidated Financial
Statements, (Section 1601) and 1602, Non-controlling Interests, (Section
1602) which replaces CICA Handbook Sections 1581, Business Combinations, and
1600, Consolidated Financial Statements. Section 1582 establishes standards for
the accounting for business combinations that is equivalent to the business
combination accounting standard under International Financial Reporting
Standards (IFRS). Section 1582 is applicable for the Companys business
combinations with acquisition dates on or after January 1, 2011. Early adoption
of this Section is permitted. Section 1601 together with Section 1602
establishes standards for the preparation of consolidated financial statements.
Sections 1601 and 1602 are applicable for the Companys interim and annual
consolidated financial statements for its fiscal year beginning January 1, 2011.
Early adoption of this Section is permitted. If the Company chooses to early
adopt any one of these Sections, the other two sections must also be adopted at
the same time.

Critical Accounting Policies and Estimates

In preparing financial statements, management has 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 reported amounts for revenues and expenses. The Companys
accounting policies relating to work-in-progress inventory valuation,
depreciation and depletion of mineral property, plant and equipment and site
reclamation and closure accruals are critical accounting policies that are
subject to estimates and assumptions regarding reserves, recoveries, future
metal prices and future mining activities. All estimates used are subject to
periodic review and are adjusted as appropriate. Life of mine plans are prepared
each year, so all estimates relating to mining activities, reserves, recoveries
and gold prices are re-assessed annually, or more frequently as determined by
management. Because of the ongoing review process, the Company has been able to
update its estimates on a timely basis as developments affecting the underlying
assumptions have necessitated such modifications.

Inventories

Finished goods, work-in-progress, heap leach ore and stockpile
ore are valued at the lower of average production costs or net realizable value.

The Company records the cost of mining ore stacked on its leach
pads and in process at one of its mines as work-in-progress inventory and values
work-in progress inventory at lower of cost or estimated net realizable value.
These costs are charged to earnings and included in cost of sales on the basis
of ounces of gold recovered. The assumptions used in the valuation of
work-in-process inventories include estimates of metal contained in the
ore stacked on leach pads, assumptions of the amount of metal stacked that is
expected to be recovered from the leach pads, the amount of metal in these mill
circuits and an assumption of the metal price expected to be realized when the
metal is recovered. If these estimates or assumptions prove to be inaccurate,
the Company could be required to write-down the recorded value of its
work-in-process inventories, which would reduce the Companys earnings and
working capital.

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Asset Backed Commercial Paper

For the assumptions used in the valuation of the Companys ABCP
see Asset-backed Commercial Paper (ABCP) under the Risks and uncertainties
secton.

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.

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. Due to the volatility and
uncertainty in todays markets and the Companys current cash position, coupled
with the funding requirements of the fast track construction at the New Afton
Project, the Company made the decision in the fourth quarter to slow development
of the New Afton Project. In light of the slow down, management reviewed the
carrying value of the New Afton Project to determine whether there has been an
impairment. Based on managements current view of future metal prices, foreign
exchange rates, and cost assumptions, the carrying value of the New Afton
Project was not impaired as of December 31, 2008.

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.

The recent volatility in equity and commodity markets could
have a significant impact on the valuation of our mineral properties and the
potential for impairment of these mineral properties.

29

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During the third quarter of 2008 the Company reviewed the
carrying value of the Amapari Mine and concluded that there was impairment of
$156.9 million. Based on managements current view of future metal prices,
foreign exchange rates, and costs assumptions, the carrying value of the
Companys other mineral interests was not impaired as of December 31, 2008.

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 exiting 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 unit-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.

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.
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. In
light of the recent volatility in commodity prices, in particular copper prices,
the Company has reviewed its tax assets at December 31, 2008 and based on
managements current view of future metal prices and exchange rates has
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.

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.

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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.

Financial Instruments

The Company thoroughly examines the various financial
instrument risks to which it is exposed and assesses the impact and likelihood
of those risks. The following discussion on risks and risk management includes
some of the required disclosures under the CICA Handbook Section 3862 
Financial Instruments  Disclosures related to the nature and extent of risks
arising from financial instruments, as required by the standard. Further
information is also available in note 4 of the notes to the audited consolidated
financial statements for the year-ended December 31, 2008. The Company is
exposed to a number of risks associated with financial instruments that have the
potential to impact operating and financial performance. The Companys primary
financial instrument risk exposures are liquidity risk, currency risk, commodity
price risk and credit risk.

In 2007, NGI issued 55,000 convertible subordinated debentures
(the Debentures) for an aggregate principal amount of Cdn$55 million. The
Debentures, which were issued pursuant to a debenture indenture dated June 28,
2007 (the Debenture Indenture), each have a principal amount of $1,000, 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. The Debentures do not allow forced conversion by
the Company prior to January 1, 2012, but after that date the Company may redeem
the Debentures if the market price of the Companys shares is at least 125% of
the conversion price. The Debentures are classified as compound financial
instruments for accounting purposes because of the holder conversion option.

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 as
outlined in Note 14 (a). The following table summarizes the contractual
maturities of debt commitments. The amounts represent the future undiscounted
principal and interest cash flows and therefore do not equate to the carrying
amounts on the consolidated balance sheet.

|                                         | Less than |           |           | After   | 2008   
|---------------------------------------- | --------- | --------- | --------- | ------- | -------
|                                         | 1 year    | 1-3 years | 4-5 years | 5 years | Total  
|                                         | $         | $         | $         | $       | $      
|Accounts payable and accrued liabilities | 44,823    | -         | -         | -       | 44,823 
|Short-term borrowings                    | 7,198     | -         | -         | -       | 7,198  
|Long-term debt                           | -         | -         | -         | 238,447 | 238,447
|Interest payable on long-term debt       | 21,599    | 43,198    | 43,198    | 79,659  | 187,654
|                                         | 73,615    | 43,198    | 43,198    | 318,106 | 478,117

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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 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 four 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 December 31, 2008 is not considered to be high.

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 and government with
high investment-grade ratings.

Currency Risk

The Company operates in Australia, Brazil, Canada, Mexico, and
the United States. As a result, the Company has foreign currency exposure with
respect to items denominated in foreign currencies. In particular, the Company
is exposed to currency risk through the following assets and liabilities
denominated in currencies other than the US dollar: cash and cash equivalents,
accounts receivable, ABCP, accounts payable and accrued liabilities, short-term,
long-term investments and long term debt and future income taxes and
liabilities.

Interest Rate Risk

Interest rate risk is the risk that the fair value of 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 outstanding
borrowings and short-term investments. In particular, the Company is exposed to
interest rate changes on those ABCP investments that are expected to pay
interest. Interest is proposed to be based on the Canadian bankers acceptance
rate which may fluctuate. A 1% change in the bankers acceptance rate would
result in an annual difference of approximately $0.4 million in the interest
income to the Company. The Company has not entered into any derivative contracts
to manage this risk.

The Company follows the policy of issuing fixed interest rate
debt to avoid future fluctuations in its debt service costs.

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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. World gold prices are affected by
numerous factors beyond our control, including:

- The strength of the US economy and the economies of other industrialized
  and developing nations
- Global or regional political or economic crises
- The relative strength of the US 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
- Investment activity, including speculation, in gold as a commodity

In 2008, the Companys revenues and cash flows were negatively
impacted by the declining copper prices. 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
December 31, 2008, working capital includes copper concentrate receivables
totaling 8.1 million pounds. A $0.10 change in copper price would have an impact
of $0.8 million 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 not entered into any hedging activities to mitigate these price
risks.

International Financial Reporting Standards (IFRS)

In February 2008, the Canadian Accounting Standards Board
(AcSB) confirmed January 1, 2011 as the date IFRS will replace current
Canadian generally accepted accounting principles (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 conversion to IFRS will likely impact the Companys
statement of financial position and results of operations. To transition to
IFRS, changes may be required to the Companys information technology and data
systems, internal control over financial reporting, disclosure controls and
procedures, financial reporting expertise and training requirements, and
business activities, such as compensation programs, debt covenants and other
contractual arrangements.

The Company has established a project team to manage the
conversion process in January 2009 and, completed a high-level impact assessment
to identify key areas that will be affected by the conversion. The development
of a detailed IFRS conversion plan is expected to be completed by end of the
first quarter of 2009. The detailed analysis of the IFRS  Canadian GAAP differences, and the selection of accounting policy choices
under IFRS has commenced and is expected to be completed by the end of the third
quarter of 2009. The Company will continuously monitor changes in IFRS leading
up to the changeover date, and will update its conversion plan as required.

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Outlook

Weak global economic conditions and a tightening in credit
markets have lead to uncertainty in the general global outlook. As a result, the
markets experienced significant decreases in copper prices in the second half of
2008 (from over $3.50 per pound in July to under $1.50 per pound in December
2008). However, gold and silver prices have held up relatively well. Volatility
has been exceptionally high and forecasting metal prices and demand,
particularly base metals such as copper, has been difficult. In addition, credit
market conditions have severely restricted the ability to raise equity and debt
financing. In response to these difficult conditions management is assessing the
effects on the business; however, we believe that the long term environment and
prospects for our business remain favorable.

In the current volatile global economic environment, the
Company intends to preserve capital and maximize cash balances while maintaining
flexibility and a strong balance sheet. New Gold is committed to maximizing cash
balances by increasing operating cash flow, containing costs, controlling
expansion capital and reviewing strategic alternatives for non-core assets. This
commitment is evidenced through the recent decisions to slow down the
development of the New Afton Project, and temporarily suspend mining operations
at the Amapari Mine while we complete a PEA of the sulphide resource and
consider strategic alternatives. As inflation and general price levels moderate
or even decrease, the Company expects to achieve lower costs in the areas of
consumables, steel, transportation and other products and services. In addition,
New Gold expects to benefit from recent favorable movements in local currencies
(against the US dollar) where the Company operates, particularly in Canada,
Australia and Mexico. In Australia, the declining currency effectively serves as
a natural hedge to declining copper and other metal prices. We have not hedged
metal prices and foreign exchange rates.

New Golds growth plan is focused on organic and acquisition
led growth and the Company is seeking to maintain flexibility in the current
environment in order to be able to respond to opportunities as they arise, such
as acquisitions, debt buybacks and other transactions. In order to fund its
major development properties, namely the New Afton Project and the El Morro
Project, the Company will need external financing. Sources of external financing
may include acquisitions of cash generating mines, bank borrowings and future
debt and equity offerings. There can be no assurance that financing will be
available on acceptable terms if the current economic environment does not
become more favourable, however these projects are of a long term nature and
short term financing is not required.

New Golds operations are forecasting 2009 gold production of
between 190,000 and 210, 000 ounces. Total cash cost for 2009 is expected to be
between $465 and $485 per ounce (net of by-product sales). Assumptions used in
the 2009 forecast include copper and silver prices of $2.00 per pound and $10.00
per ounce respectively and Canadian dollar, Australian dollar and Mexican peso
exchange rates of $0.90, $0.70 and $12.00 to the US dollar, respectively.

Capital expenditures for 2009 are expected to be $107 million,
including $78.5 million for continued development at the New Afton Project
(including capitalized interest of $19.3 million) and $24.5 million for Peak
Mines. As a result of current difficult market conditions we have been reviewing
our discretionary capital expenditure and will continue to do so in 2009.

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Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures are designed to provide
reasonable assurance that all relevant information is gathered and reported on a
timely basis to senior management, so that appropriate decisions can be made
regarding public disclosure. As at the end of the period covered by this
Managements Discussion and Analysis, management evaluated the effectiveness of
the Companys disclosure controls and procedures as required by Canadian
securities laws.

Based on this evaluation, management has concluded that the
disclosure controls and procedures were effective in providing reasonable
assurance that information required to be disclosed in the Companys annual
filings was appropriately disclosed as such term is defined under National
Instrument 52-109  Certification of Disclosure in Issuers Annual and Interim
Filings (NI 52-109), is recorded, processed, summarized and reported within
the time periods specified by those laws, and that material information is
accumulated and communicated to management as appropriate to allow timely
decisions regarding required disclosure.

Internal Controls and Procedures

On May 9, 2008 NGI entered into an agreement to complete a
business combination with Metallica and Peak. The transaction was completed June
30, 2008 wherein the three companies consummated a reverse merger. Although the
New Gold name prevailed, Peak became the accounting acquirer. The new
management of New Gold acting reasonably carefully considered the scope of their
evaluation of internal control over financial reporting (ICFR) taking into
consideration guidance in National Instrument 52-109 Certification of Disclosure
in Issuers Annual and Interim Filings when a business is acquired not more than
365 days before year end. Management concluded that it would be impractical to
complete an evaluation of the design and operational effectiveness of the
controls over the Peak business, other that the controls over the period-end
financial close process, as of December 31, 2008. Accordingly management
excluded from its assessment the internal control over financial reporting
concerning the former Peak business other than the controls over the period-end
financial close process from their evaluation of the design and operational
effectiveness of ICFR as of December 31, 2008

The Company evaluated the design and operational effectiveness
of its internal control and procedures over financial reporting as defined under
NI 52-109 for the year ended December 31, 2008. Based on this evaluation,
management has concluded that the design and operational effectiveness of these
internal controls and procedures over financial reporting are effective. There
has been no change in the Companys design of internal controls and procedures
over financial reporting that has materially affected, as 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.

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Limitations on Controls and Procedures

The Companys management, including its President and Chief
Executive Officer and Executive Vice President 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, a 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 detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty and breakdowns can occur because of simple error or 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 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.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Managements Discussion and Analysis contains forward-
looking statements, within the meaning of the United States Private Securities
Litigation and Reform Act of 1955 and applicable Canadian Securities
legislation. Forward-looking statements include, but are not limited to,
statements with respect to the future prices of gold, silver and copper, the
estimation of mineral reserves and resources, the realization of mineral reserve
estimates, the timing and amount of estimated future production, costs of
production, capital expenditures, costs and timing of the development of new
deposits, success of exploration activities, permitting time lines, currency
exchange rate fluctuations, requirements for additional capital, government
regulation of mining operations, environmental risks, unanticipated reclamation
expenses, title disputes or claims and limitations on insurance coverage.
Generally, these forward- looking statements can be identified by the use of
forward-looking terminology such as plans, expects, or does not expect,
is expected, budget, scheduled, estimates, forecasts ,intends ,
anticipates, or does not anticipate, or believes, or variations of such
words and phrases or state that certain actions, events or results may,
could, would, might or will or will be taken, occur or be
achieved. Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors that may cause the actual results, level of
activity, performance or achievements of the Company to be materially different
from those expressed or implied by such forward-looking statements, including
but not limited to: anticipated synergies from the business combination may not
be realized; there may be difficulties in integrating the operations and
personnel of the NGI, Peak Gold and Metallica; the Company is subject to
significant capital requirements associated with its expanded operations and
portfolio of development projects since completion of the Transaction;
fluctuations in the international currency markets and in the rates of exchange
of the currencies of Brazil, Canada, the United States, Australia, 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 Brazil,
Canada, the United States, Australia, Mexico and Chile; or any other country in
which the Company currently or may in the future carry on business; taxation
controls, regulations and political or economic developments in the countries in
which the Company does or may carry on business; the speculative nature of
mineral exploration and development, including the risks of obtaining necessary
licenses and permits; 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; and 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 risk of inadequate insurance or inability
to obtain insurance, to cover these risks) as well as the Risks and
Uncertainties included in this document and the section entitled Risk Factors
in the Joint Disclosure Booklet of the Company, Peak Gold and Metallica and the
section entitled Risk Factors Relating to the Operations of the Combined
Company in the Companys management information circular dated May 16, 2008,
both available on SEDAR at www.sedar.com Although the Company has attempted to
identify important factors that would cause actual results to differ materially
from those contained in forward-looking statements, there may be other factors
that cause results not to be as anticipated, estimated, or intended. There can
be no assurance that such statements will prove to be accurate, as actual
results and future events could differ materially from those anticipated in such
statements. Accordingly, readers should not place undue reliance on
forward-looking statements. The Company does not undertake to update any
forward-looking statements contained herein, except in accordance with
applicable securities laws.

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