Gold Fields has not been very popular with investors since unbundling most of its South African gold mines – including the rich East Driefontein, West Driefontein and Kloof – to form the start of what has grown into the much more lucrative and exciting Sibanye-Stillwater.
Although ageing, the rich and established gold mines in SA continued to produce acceptable results that have allowed Sibanye-Stillwater to expand its footprint in SA since its inception in 2012.
After the restructuring, Gold Fields shareholders were stuck with the problematic South Deep mine, which has failed to reach its full potential for decades, right back to the first attempt by the old Johannesburg Consolidated Investments (JCI) to develop the huge ore body in 1995. Global groups Placer Dome and Barrick Gold partnered with JCI one after the other, but also failed in their attempts to mine what is often referred to as the greatest gold reserve in the world.
Gold Fields could not resist the allure of 66 million ounces of gold – more than 1 800 tons – and acquired the mine in 2006. And they could not let it go in 2012 when they sold off all their SA operations.
Shareholders were less enthusiastic about South Deep and the other developing mines in Africa, Australia and South America that Gold Fields staked its future on, and the share price stuck between R40 and R50 since the unbundling, except for a brief surge up to R87 in 2016 during a short-lived commodity boom.
However, it looks like things are starting to change.
The latest operating update for the quarter to March shows a definite improvement at most of the group’s mines and progress to shield Gold Fields from the poor performance of South Deep.
Hard work starting to pay off
Nick Holland, CEO of Gold Fields, reports that the group is starting to see the benefits of the last few years’ worth of hard work. His review of the results suggests that Gold Fields has reached the turning point.
His opening comment to the quarterly report states: “Over the past two years, Gold Fields has been focused on reinvesting into the business with 2019 expected to be the inflection point as capital expenditure on projects decreases, while new projects start to contribute to the group. The motivation behind the investment focus is to ensure that our portfolio of mines continues to generate cash sustainably into the foreseeable future, while at the same time lowering our costs and extending mine life.”
More to look forward to?
He creates the impression that while the first quarter of the new year produced good results and things were going well in April, results will even be better in the second half of the financial year.
The figures seem to support his optimism. Gold production increased by 6.5% from 509 000 ounces in the quarter to December 2018 to 542 000 ounces in the March 2019 quarter, while total costs decreased nearly 11% from $1 213 per ounce to $1 080. A year ago, in the March 2018 quarter, it was still sitting at $1 373 per ounce.
Operating cost (what Gold Fields terms its sustaining costs) decreased to $963 per ounce compared to $1 016 in the December quarter and only slightly higher than a year ago.
It is important to note that the cost figures included, for the first time, operating results from the Gruyere mine in Australia. The mine is still building up to full production and unit costs are still higher than they will be towards the end of the year.
It is noteworthy that all of Gold Fields’s operations around the world showed improvement in the quarter, from West Africa and Australia to South America and South Africa. However, the big improvement in SA is not as good as it seems since South Deep produced very little for a few weeks in December due to the effects of a wage strike.
Production recovered to 34 000 ounces (1 069kg) in the March quarter compared to the paltry 11 000 ounces (343kg, or only about 12 bars of gold) in the three months to December 2018 that reflected the huge impact of the strike.
Most of January was also wasted, as it took a long time to bring the mine back into production. Holland mentions in the report that most of January was dedicated to ensuring that the working environment is safe and to retrain workers.
Gold Fields stated in its results for the year to December 2018 that production will hopefully recover from the 157 000 ounces produced that year to 193 000 ounces in the year to December 2019. The latest quarterly report states that the production of 34 300 ounces in the three months is in line with the annual target, which indicates that management is optimistically expecting high production for the rest of the year.
However, management also said that Eskom’s problems and regular power disruptions affected production.
That South Deep remains a drag on Gold Fields is also seen in production costs. The costs are still way out of line with the rest of the group’s mines. In the past quarter, total production costs equalled $1 992 per ounce of gold produced, nearly double the average for the whole of Gold Fields.
For the whole of 2018, production costs at South Deep remained above $2 000 per ounce – much higher than the average gold price of $1 251 per ounce for the year.
Progress at the other mines in the group countered the South Deep handicap. Holland points out that international operations achieved its goal of producing 2 million ounces of gold per annum – and the new mines that started producing last year will contribute to profit for the whole of the current financial year.
It is telling that the development of mines outside of SA has changed Gold Fields dramatically. “The globalisation of our portfolio has been evident in a gradual shift in our reserves,” says Holland. Until two years ago, over 70% of its reserves were held by South Deep. This was reduced to less than 60% due to capital expenditure outside SA. Reserves in SA are shrinking slowly year after year as high and increasing operating costs continue to reduce the amount of ore that can be mined economically.
Gold price up
More good news is that the gold price has increased over the last six months. Gold Fields reported that it sold gold at an average price of around $1 298 per ounce during the last quarter – 7% higher than in the previous quarter. It is noteworthy that the gold price has consistently been higher to date this year than during the second half of 2018.
This fits in well with Gold Fields’s investment programme of the last few years which aimed to reduce total cost to around $900 per ounce by the end of next year. This will in turn improve cash flow. The target of a 15% free cash flow margin will be reached this year at a gold price of around $1 200 per ounce. Previously, Gold Fields required a gold price in excess of $1 300 per ounce to achieve the target.
The market seems to approve of the results and what Gold Fields has achieved. The share price was the best performer on the market yesterday, increasing 4.7% to R54.95. This compares to a low of R33.94 in September last year.