Gold Fields Limited (GFI) Q1 2012 Earnings Report, Transcript and Summary

Good day, and welcome to the Gold Fields First Quarter 2012 Results Conference Call. [Operator Instructions] Please also note that this conference is being recorded. I would now like to hand the conference over to Nick Holland. Please go ahead, sir.

Thank you very much, Dylan, and good afternoon, everyone, or good morning, if you are on the other side of the Atlantic. Thank you for joining us on the call to discuss Gold Fields' results for the first quarter through March 31, 2012. Joining me today are our CFO, Paul Schmidt, and I'm very grateful to have all of our EVPs from the regions here today: Peet van Schalkwyk from West Africa; Peter Turner from South Africa; Richard Weston from Australasia; and Juancho Kruger from South America. Tommy McKeith also is here, who's the head of our growth and exploration projects. Lastly, Michael Fleischer, our General Counsel and Willie Jacobsz, Senior Vice President, Investor Relations. I trust that you've had the opportunity to view the results announcement via SENS and our website. Let me give you a brief overview of the first quarter, and then we can spend more time dealing with questions that you may have on the results. Quarter 1 group's attributable production was 827,000 ounces. It was down 6% from the previous quarter to December 2011, but on par with the performance for the same quarter a year ago. Production in quarter 1 is, of course, seasonally lower as a result of the Christmas break at the South African operations. Essentially, we shut down the operations a day before Christmas, and that flows through into the first week in January and, of course, that impacts this entire quarter. Key results for the quarter include revenue of $1.4 billion. That was down 6% from the previous quarter on the back of the lower production, as indicated earlier. Net operating costs increased from $656 million in the December quarter to $743 million in the March quarter. However, what's key here is that around $40 million of that increase was related to translation adjustments, given the changes in exchange rates quarter-on-quarter. And also, we've had some fairly large gold and process swings between December quarter and the March quarter, particularly at the St. Ives operations in Australia. And that's, of course, also impacted the costs. The actual spend itself is still very well controlled. Total cash costs increased from $767 per ounce to $870 per ounce, as expected, and our NCE, that's the all-in cost of production, a really true measure of what it costs to produce an ounce of gold, that went up from $1,206 per ounce to $1,280 per ounce. The quarter-on-quarter increase in unit costs is also partially attributable to the lower production. As I said earlier, also due to the exchange rate effects on the translation of the offshore costs, as mentioned earlier. Net earnings for the March quarter were $268 million, compared with $336 million in the December quarter, again, to repeat, as a result of the seasonally lower production. Nonetheless, when compared to the March quarter last year, our net earnings were up 70% from $158 million in quarter 1 2011 to the $268 million this quarter. And I do believe that shows the leverage of Gold Fields to the gold price. One of the concerns investors have had over the last couple of years is whether gold companies could show leverage to the gold price, and I think this clearly demonstrates that it can take 2 comparable quarters, taking into account the Christmas break, that we show the sizable increase in earnings over that period of time. Our NCE margin of 24% is in line with our long-term objective of 25%, and of course, higher than the short-term target of 20%, and provides a healthy situation for the company. Very briefly on our growth projects, we're progressing well and worthy to note that on the 20th of March , the group made a $110 million payment to acquire a 40% interest in the Far Southeast project in the Philippines. And of course, we still have an option to take this up to 60% for a further $110 million and take a 60% interest in the project. Of that, we expect to exercise some time out of this year or next year. The Chucapaca feasibility study in Peru is progressing well and remains on track for completion this year. And we expect to submit the Environmental Impact Assessment towards the end of this year. Drilling activities at the Damang Super Pit project in Ghana were completed during the quarter, and we also finalized resource models for execution of the pre-feasibility study. What's particularly pleasing here is that we set ourselves a target at the mine for a 4 million-ounce resource. And when we announced our resource statement in March this year, in fact, we've increased our resource to 10 million ounces. We certainly exceeded your expectations and also our own, and this provides a wonderful platform for us to bring this to account. All activities are on schedule for completion of the pre-feasibility study in the second half of 2012. We should finish this, in fact, by the end of the year. And we're currently assessing the impact of the recent tax changes and also the changes in capital allowances in terms of the overall viability of the project. I think it's worth saying that the government has put together a commission of inquiry to look into stability agreements in the country, and they've already started engaging with us. This is pleasing to us because we're particularly concerned about the absence of a level playing field in Ghana, where we, for example, are paying 5% royalties, other gold companies are paying 3%. Certain gold companies have stability agreements. We don't. And we told the government we believe that this is not equitable. They are sympathetic to this problem, and I'm hopeful that this full review will enable us to get an equitable environment for all the companies involved, and at the same time, allow an environment where we can make additional investments into a country that we really do like and we understand. Finally, during the quarter, we released our latest mineral resource and reserve statement, reflecting that our reserves at the end of December were 80.6 million. That's 5% up compared to December 2011. And what's also nice to see in that number is it represents now a much greater technical and geographical spread, with the legacy operations now making up only 23% of the total reserves. And 5 years ago, that used to be around about 46%. So it does show that we're getting diversification, not just in our production, where only 48% of our production is now coming out of South Africa, but also in our reserves and our resources. I think that's all for me. And I'd rather now open up the line for questions, and either myself or my colleagues with me today will endeavor to answer your questions. Thanks very much. Dylan?

[Operator Instructions] Our first question comes from Carly Mattson of Goldman Sachs.

I was just wondering if you could give us an update on the factoring that you're taking into account as you look at potentially -- if you would reconsider registering your bonds?

It's Paul. Yes, we've done a lot of work at looking at registering the bond, and we don't believe it will have a material impact on our rating, et cetera. The issue with our bond right at the moment is not the lack of demand, it's the lack of supply. And that a lot of bond haul is a long-term haul, so they're not prepared to sell. We've just probably spent 6 months analyzing the situation, hearing stories, pushing both sides, reviewed if we should register or not. And that we've decided that the current bond we're not going to register it, because it will not -- we won't get the benefits of all the effort, we'll have to put in and the additional cost of it.

Our next question comes from John Bridges of JPMorgan. John D. Bridges - JP Morgan Chase & Co, Research Division: Just wondered with what's going on in Peru and the uncertainty there. What's your read on that and how it would affect Chucapaca?

This is Juancho Kruger from South America here. The Conga project is clearly marking, I think, an interesting point for the industry because I think it has allowed for the government to go publicly in support of the development of the mining industry and the future projects in the country. So what we have right now is a situation by which the Yanacocha, meaning by that, Newmont and Buenaventura are evaluating the outcome of the independent review of the Conga project EIA. And we all expect that the project should be moving forward. Going back to our Chucapaca project, I think we have a difference, and the difference is that there is no fundamental opposition to the project. When I say fundamental opposition, it's opposition driven by political interests or ideological movements. What we have in Chucapaca is a group of people in the communities that is supportive of the project. And that not only then, but also the regional and local authorities are supporting the project. When I say supporting, is that they all understand the importance of the project, and they're all willing to support the project because they see the benefit that they can get in terms of future economic and social development in the region. What we are now in the middle of is negotiations with the communities who own the land. And obviously, as in any negotiation, they're going to push to get the highest price possible and we need to get into fair and equitable terms with them. But I think that we have a completely different situation in Southern Peru, specifically, in the highlands of Moquegua, where our project is located, compared to what we have in the northern part, where the Conga project is located, with a framework agreement with the government, where the government is really supportive and looking forward to developing the industry. John D. Bridges - JP Morgan Chase & Co, Research Division: Oh, so the local government there is supportive as well?

The local government is supportive. I have been personally meeting with them. My last meeting with the regional president of Moquegua was actually Wednesday last week, and we are in permanent interaction with them. And actually, they are -- just to illustrate how supportive he is, he's willing to help us mediate on the land discussion -- land acquisition discussion with the communities.

Our next question comes from David Haughton of BMO Capital Markets.

I've got some questions, just looking at Ghana. Damang has had some issues, it looks like some maintenance issue together with growing versus recovery kind of problems. Downgraded the guidance. What do you see for the future there? Does it need a further investment to get the equipment back up to the standard you would like or are we looking at lower throughput and grade going forward?

I'm going to ask Peet, who's the EVP of the region, to deal directly with your questions.

David, if I could answer your question, it's probably worth saying that basically the safety issues in the Damang CUpEx specifically, where we are mining at the moment, created a prevailing problem for us. We are obviously delighted to be part of the issues in the processing unit. But that's mainly because we are mining quite excessively on the sides of the upper -- the northern and southern side of the pit, diving down and opening up the ore body because of the reserves that we have established. The plant is getting older. This plant has been built in around 2000, and we have been keeping it alive. And obviously, there is some extra additional capital that we invested in this process to get it back up to actually cater for the harder playing field we want to feed.

All right. So with that revision for the guidance that we've seen, would we expect an improvement going into next year and beyond given what you've just said?

Most definitely, because this is basically which -- we can say that every year, we basically reset the processing unit. We reduce the throughput, and mainly, the direct result of that is that we will see the gold ounces being produced is will be lower. But from next year onwards, it will be definitely growing. And we're obviously also basically looking also at the super pit at Damang going forward. Because that most definitely is also a strong driver for us, appreciating the current digital parameters that we prepare ourselves for the super pit that's coming in the next 2 or 3 years.

Okay. I'm glad you mentioned the super pit because that was a follow-on question. What kind of scope and scale, just broadly, are you thinking about?

Sorry, I didn't hear that.

The scope and scale.

The scope and scale, we're looking at what -- at the moment, we're basically doing the final analysis in terms of the mining activity, and we're looking at around 8 million to 10 million tons per annum at the processing unit. And so we don't have this fixed number yet, but looking at the what the mine can handle in terms of fleet and requirements to get the ore out of the ground, that's probably the size that we're looking at. And that's an order of basically doubling the production at the mine.

Okay. and that's through CIL? Is that an expansion of the CIL? Okay.

Yes. All those basic tests indicate that it will be a typical CIL process. There's a huge amount of gravity gold upfront varying from 35% up to 75% so we will obviously have gravity recovery of gold upfront in the center.

All right. Switching continents, over to Australia. The ground conditions at Agnew have also resulted in a reducing of the guidance. Just wondering whether you see that as an issue that can be resolved or whether we should recalibrate the expectations from Agnew going forward?

It's Richard Weston here, David. There's 2 questions in quarter 1 at Agnew. The first one, which we think is limited to quarter 1, the kymaro [ph] body moved further to the north, plunged further to the north. And we had to take stipend [ph] front to follow that. We had issues with ventilation, which slowed their production. We've since overcome those issues. So I don't think Kym [ph] will be an issue going forward. The other issue concerns the mine load, and that's poor ground conditions. Those conditions, we expect, will continue in quarter 2. But we are reasonably confident we'll overcome those issues by the end of quarter 2.

Okay. So once we move into 2013 or maybe even the second half of this year, those kinds of problems would be behind us and we're moving into better ground and increasing production? Is that a fair assessment?

Yes. We're fairly confident with the initiatives that we have currently got in place for the mine load. We'll overcome those issues by quarter 3.

David, we should be able to get back to a range of between 40,000 and 45,000 ounces on a sustainable basis per quarter at Agnew and also at Damang, I believe probably around about towards the end of quarter 3, quarter 4. That's what we're looking to do. And then those sort of levels would be a good proxy to use for what we would expect in 2013.

Our next question comes from Adrian Hammond of BNP Paribas.

I have 2 questions. Firstly, I'd like to focus your attention to the South Deep operation there. You had a production over the last year falling from about 76,000 ounces per quarter to about 58,000 now. And in the last quarter, development -- rigs development fell quite a bit by 25%. Could you just give us some sort of highlight as to what's happening on the ground? Are there any issues that we should be concerned about? And could you give us some sort of guidance on production for the year?

It's Peter Turner here, from the South Africa region. The development issues that -- maybe let me deal with that first. The upfront development issues that you see were really, I think, seasonal, and we had a fairly long shutdown over the Christmas break, where we had hoist work to be done, specifically on what we call the Hooke's joint of one of our brief winders. And essentially, what happened there is we became waste constrained within our ore prices. And when we came back after the Christmas break, in essence, we had to empty our systems. And that really kind of pushed back all the way into our development and, consequently, caused that result in loss of waste production. I'm happy to report that going forward, in terms of reef developments, as far as the destress goes, which you would know is one of the issues that's measurable for progress at South Deep going forward. And I'd like you to watch the next quarter's production because certainly, we're seeing a positive trend in this regard. And we expect to be back on our destress targets by midyear of this year. And I think with respect to gold production, we're holding our guidance at this stage at 10.5 as planned for the year. So I think on that note, that's where we are.

And in terms of reaching the target of 700,000 ounces, are you still confident on achieving it?

Yes. Absolutely, Adrian.

Excellent. And then just on my second question, which is more of a general one, you've given us a number of 5 million ounces, either in production or development. Do you have a better idea now of what actual production could be?

2015?

Yes, yes. In 2015.

No, not at this stage. And that's one of the reasons that we've not given a production guidance going out so far. And the reason you might think we're a little coy is because we don't know how long some of the permitting processes are going to take. And the other thing is we're not going to rush these projects because once you get into the execution phase, you've got what you've got. You've got to make sure that you plan that properly, so we need to do these projects right and take the time, if necessary. So whether we'll have some of them in production or not, it's difficult to say. We may have 1 or 2 in production. We may have none in production. It depends very much on how long it takes for community support to be going for the projects for government permitting, et cetera. So I wouldn't want to tell you exactly what our full production is going to be in 2015. But I still feel confident that we will have enough of our projects at the actual construct stage at the end of 2015 to still stick to our promise to have the 5 million ounces, either in production or development. Sorry, we can't be more precise. But that's the nature of our industry and what we're dealing with in terms of processes, sometimes of which we have no control.

[Operator Instructions] Our next question comes from Anna Mulholland of Deutsche Bank.

Just a quick question back on the subject of South Deep, if I can. In your results statement, you mentioned that you're in ongoing discussions with the unions at the mine. Could you please just remind me what the specific issues are there with the employees in the union and when you expect to have some resolution of those negotiations?

It's Peter Turner here from South Africa region. We are in ongoing dialogue with the union at this point. And as is written in the text, it's all about looking at our future operating model for South Deep and dealing specifically with issues around work cycles, business optimization processes in a bid to ensure that we have a benchmark mine for the future. And these are matters that we are discussing with the union of South Deep. I think you'll also notice at times, we've -- there have been issues with the union at South Deep, and these are matters that are in consultation with them at the moment that we really need to get in place for the future of South Deep. It's a long-life mine, and there are certain business operating practices that we'd have like to have in place for the future. So that's a dialogue that's ongoing at this particular point in time. In terms of timing, I guess I can't commit to a specific timing right now but it's a process that we'll play by ear as it goes. We'll be dealing with issues in resolving them as time goes by. I don't have a feel for far long that will be, but certainly, I don't know, Nick, what you would think, probably. I don't think we can have it done at this stage.

Now we're hopeful of finding a solution to the issues. We're engaging, but it's critical that we have some changes in the operating model in order for us to increase the demands on this particular asset.

[Operator Instructions] Gentlemen, it appears we have no further questions. Would you like to make some closing comments?

Dylan, I don't think so. I just want to thank everyone for their attendance this afternoon, and we wish you a good day, and look forward to talking to you again in the future.

Thank you very much, sir. On behalf of Gold Fields, that concludes this conference. Thank you for joining us. You may now disconnect your lines.