Gold Fields Limited (GFI) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Gold Fields Global Third Quarter 2012 Results. [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. Thank you for dialing into our third quarter results. Also on the call with me are Paul Schmidt, our CFO. I've got Peter Turner here, who's the Executive Vice President and Head of South African operations; and Willie Jacobsz, Executive Vice President and Head of Investor Relations and Corporate Affairs. Before I take your questions, I'd like to make a few comments, and let me start with an overview of the high-level numbers. As a result of the strikes at our South African operations during the quarter, as well as the fire at the KDC West Ya Rona shaft, our group production has dropped by 6% to 811,000 ounces for the quarter from 862,000 ounces the previous quarter. In effect, if you adjust for those 2 items I've mentioned, you more than account for the difference quarter-on-quarter. Net earnings for the September quarter were $171 million compared to $198 million in June and $293 million a year ago. Lower production has obviously impacted our unit cost because of the high fixed cost nature of the business, with cash costs up 8% to $916 per ounce from $851 per ounce in the previous quarter. This also resulted in higher all-in costs. That's operating cost plus all capital expenditure or NCE, which is our acronym for the total cost for the business, which is the only true measure, in our view, as to how the business is doing. That went up to $1,448 per ounce, 11% up on the previous quarter, and resulted in a margin of 13% after capital expenditure compared to 18% in June. The group's fatality injury frequency rate improved to 0.08 in the September quarter from 0.15 in June. And I must say, great achievements during the quarter. In -- the KDC East, for the first time in its history, achieved a 3 million fatality free shifts and has passed over a year without any fatal accidents. South Deep also recorded 3 million fatality free shifts during the quarter and went 19 months without recording a fatality, and I'm really pleased with that improvement in the South Deep performance. Unfortunately, we had 3 fatalities at Beatrix during the quarter which, in some respects, blemished our record. But having said that, our safety stats year-to-date are better than the same stats a year ago. So we have again improved this year and are immeasurably better than what we were 3 or 4 years ago. This quarter also heralded a landmark agreement between the National Union of Mineworkers and Gold Fields to implement a new operating model at South Deep. And this agreement has in fact now been implemented, and we started the new working arrangements last week. The South Deep is now on a 24/7 working arrangement. We now have a much more tailored line of sight to incentive scheme. And we believe that, combined with the new working arrangements, will lead to an improvement in productivity and efficiency at South Deep, which is very important for Gold Fields. As you are aware, some of the difficulties faced by the South African mining sector, and the gold sector in particular, over the last 3 months will also impact on quarter 4 as well as quarter 3. And we have estimated that the strike has actually cost Gold Fields about 145,000 ounces of gold or close to $300 million in lost revenue. Having said that, in my view, one of the things that we can look back on with pride over this particular difficult time is the fact that we managed to get through this strike without any significant safety incidents for our people. We kept our people safe. We avoided damage to property. And also, we adhered to our 2011 wage agreement. We did not capitulate in the face of this pressure. And we now have everyone back at work, and it's good to see that it's starting to get close to steady state. I think, another week or 2, we should be hitting very close to our stride. And the key issue now for the operations in South Africa is to make sure that they get back to the same production levels we were at in the first half of this calendar year, and that will be the objective into the first and second quarters of 2013. Our growth in exploration portfolio, like the rest of the portfolio, is being subject to a stringent review process in terms of the ability to generate of short-, medium- and longer-term returns and cash flows and to make sure that we only do projects that are going to get us over the required hurdle rates using robust long-term prices. And the Chucapaca project in Peru is a project that we are looking at again in the sense that we finished a feasibility study there and we're not happy with the outcome in terms of the returns. That doesn't mean to say that the project is not going to work. It's still a very large ore body, almost 8 million ounces, high-quality discovery in South America over the last decade. And our job now is to work out how best to configure the project to generate the kind of robust returns at robust prices that I spoke about earlier, and that will be a big area of focus during the course of 2013. We should also remember that we declared a maiden resource at Far Southeast, 43 million ounces of gold equivalent. And that is a high-grade copper gold toll-free [ph] underground operation or underground project in the Philippines that we believe will be an interesting opportunity going forward. We have 5 end projects that we're looking at which are all greenfields projects. And in addition, we have a number of brownfields projects, being a plant expansion at Tarkwa; a potential expansion at Damang, which could be either a cutback of the original pit or a much bigger project; also a project in Southern Mali called Yanfolila -- sorry, also a -- not a project in Mali, called Yanfolila; a coal-fired plant expansion in Peru. The project in Yanfolila is a greenfields project. An expansion in Peru that will bring forward ounces, we're looking at that. That's an interesting project in terms of its risk profile, fairly low risk profile, and the return that we get. And we also have a heap leach operation potential in Peru. So there's lots to keep us busy. And I think our challenge is going to be, let's take those projects which -- whether they're brownfields or greenfields, which are going to give us the best returns. And let's focus on those first. It's not ounces for ounces' sake. It's not growth for growth's sake. And we'll be giving thought and consideration on how best to optimize the portfolio of current assets that we have in production, as well as our projects, a view on cash flow and value delivery. But I think it's what the gold industry needs to do going forward if we're going to get the gold equities to respond to higher gold prices over time. I think that's probably enough of an introduction. And I'd like to dedicate the rest of the time now to answer any questions that you have that either myself or my colleagues will deal with. Thank you. Dylan?

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

Can you just talk us through the procedure in getting back to these working faces in South Africa? Here we are in later part of November, you're getting up to the production level. What's being required to get to this stage, so far?

David, thanks for the question. I'm going to ask Peter, who's the head of the SA operations, to specifically deal with that. And he will give you some of the background so that you can get a better understanding as to the challenges we face.

Thank you. David, it's Peter here. David, you spoke with specific reference to the procedure. Obviously, one of the most important aspects of getting back into this environment -- and let's talk about the physical environment first in brief. That would be ensuring firstly that our cooling and our ventilation circuits that power and cool these mines are in good shape, firstly; secondly, obviously, ensuring that our people that are going down the mine are subject to the necessary natural acclimatization procedures on their first week of work, remembering that a lot of these faces would have stood for in excess of 3 weeks. So very importantly, going back into these environments, one would have to ensure that proper making-safe procedures are in place, ensuring that there's a frontline and 2 levels of supervision down the mine at any one time while our employees go back to work, ensure that the places are made correctly safe and securing the faces and making sure that the stopes and the development ends up production-ready to continue going forward. These are but a few of the elements that we speak of. So rigorous risk assessment, ensuring that the operating environment from a natural ventilation point of view is in good shape and ensuring that our people, above all, can work safely. And I'm really happy to admit that, in this startup process thus far, we've seen very good results as far as our risk assessments have gone. And I must say that, in the underground operation environment, specifically the stopes, we've been very fortunate and had a very good startup record.

With 3 weeks of standing idle, have you found any of the faces to be sterilized but you just can't get back to in a safe manner and you've had to work around?

Well, what we have done, David, is we have found a few, but it would be less than 5% of our working faces. We would have reestablished these. One of the things that's worked very well for us during this 3-week period is the technology of using roof bolts and netting in our hanging walls, which is not something that we've had. We commenced this -- with this in February of this year. So we've really been quite surprised as to the level of support that we've had in -- from these base [ph] reporting and the procedures we've adopted. So far better than in the past, I must admit.

Okay. So that roof support is quite encouraging because it also helps during the extended Christmas-New Year break as well, which is not that far away.

Great. That's right, David.

David, the other thing is it -- that improves -- it also improves the safety in the sense that we have less falls of ground, which used to be a major source of accidents. And in fact, over the last 4 years, that has reduced by around about 80%, 90%, so this has really helped to take it to another level. So it's been a good breakthrough for us.

Just switching to the new projects, if I may. Looking at Chucapaca, was there any particular facet of that, that made it difficult to get the returns that you're after? Was it the CapEx? Was it the geopolitical situation? Was it the supposed -- the assumed operating cost? Is there any particular item the you can do more work on to get this across the hurdle?

I think we've got to look at different processing configurations, David. We were working on a 30,000-tonne a day plant. We're now going to do sensitivities on 20,000- and 25,000-tonne per day operations. We think that will provide more capital efficiency for the projects. The project has good grades, that's the one thing. And we're also looking at the potential for an underground extension because we're seeing that the ore body dips down from East to West. And as it goes West, the potential for higher grades is good. We will look also at an underground option, which may be able to come in and dissect a higher-grade core of the ore body, and have a look at that as well. And that could be a smaller-tonnage operation but quite a lot higher grade. Now some of the grades at depth are 5 to 6 grams and so that might be an opportunity. The ground is fairly friable so we're going to have to look at that carefully as well to see whether that works. The capital, obviously, is one of the big concerns. Once you've built the projects, I think the ongoing costs will be competitive. And I think we'll find a lot more here in time. But we can't base our investment decision on gut feel. We've got to have hard technical data. So we're going to go back and look at the hard technical data. An 8-million-ounce ore body like this, I think, will turn this into a mine of some kind. We're just going to need some more time to work on it. I'm sure that we'll give some more information during the second half of 2013.

What sort of CapEx number did the feasibility turn up for the 30,000-tonne per day option?

We were looking at just under $2 billion, 100% basis, so that's more than what we were thinking it would be. And I think, in our Investor Day of a year ago, we thought it would be about $1.3 billion, $1.4 billion. So it's got up more than it needs to. And if we could get it back to something around that, I think we'll be in the races again. But we need to look at the right configuration against that capital as well.

Switching over now to Far Southeast, if I may. You're going through the FTAA process. You've got your documents lodged. You've got some other work underway. What kind of time line should we be thinking about for the next major step for Far Southeast? And where we would you see it ultimately coming into production, if it passes the various hurdles that you've got?

Too early say at this stage, David, because the key issue here is going to be getting the FTAA process completed. It's out of our hands. We have to go through an FPIC process as well: free, prior and informed consent process. We hope to finish that over the next couple of months. So I would say we should have the FTAA during the course of the middle to second half of 2013. In parallel with that, we're doing a lot of work to engage with the communities around the mine to make sure we get broad acceptance of the project and what it will look like. And if we can get over those 2 hurdles, then I think we'll be into a pre-feasibility study, which I think the earliest we can get into would be towards the end of 2013. This would still require a whole feasibility after that, detailed engineering, permitting. We're probably still a good 3 years away from getting a construct decision, so this project is going to take quite a lot longer.

And have you got your various exploration permits that you need? Earlier this year, there had been a holdup whilst the mining act went under review. Have you been able to secure what you need to be able to do the drilling?

With underground drilling, we've had no holdups. We've done all of the underground drilling we needed, which enabled us to declare the maiden resource of 43 million ounces gold equivalent. The area of delay was on some of the surface geotech drilling that we have to do. There, we had some issues with the local communities, but I think, by and large, we're now past that. And it wasn't so much with the communities, there was some sporadic NGL activity in the area. But by and large, we've got that behind us and we are now starting to do more of the geotech drilling in and around the ore body.

Question comes from Tanya Jakusconek of Scotiabank.

Just wanted to come back to Chucapaca again. And Nick, I know you've mentioned that the CapEx sort of moved towards the $2 billion line. What exactly happened with the CapEx that had this significant growth? Where and what component of it did this occur?

It's really the resolution you get, Tanya, from doing a full feasibility study, that we finished over the course of 2013. And the figure that you had earlier was based more on a scoping study level. So a higher level of resolution. We've seen that we needed to increase owners costs. We needed to increase some of the strip. We had to spend more work on some of the waste storage facilities. We reconfigured how we're going to do the waste storage facilities compared to where we were in the scoping study because we saw long-term operational cost savings, and that caused some changes in the upfront capital. So it's all down to resolution between scoping study results and full-blown feasibility results. But I must stress, this is an interim feasibility. We're going to go back and dissect this and come back with something more definitive once we've vetted [ph] all the options again. And so, we're not going to close the book on this yet, so this has really left [ph] us to where we are.

And when we you looked at the economics and said it didn't meet your hurdle rate, what sort of hurdle rate are you looking for in Peru? Is it above your cost of capital or -- I mean, just something that we can benchmark ourselves.

Well, I'd be looking for double digits in our...

Okay. It didn't give you double digits.

Not giving us double digit, at conservative gold prices of around $1,500 per ounce. That's what we'd want to get here as a minimum, and then understanding what upside exists. The one thing about this area, it is well mineralized. There's a number of other satellite deposits within the joint area of interest. And so as part of our next program, we'll be doing some more exploration as well and seeing what further upside exists; the down-dip extensions to the West, whether we can hang an underground operation onto this discretely, potentially alongside an open pit; what's the best configuration for the plant, as we've discussed. There's a whole bunch of different options we could look at here. And that will be the focus for 2013.

So would it be fair to say, Nick, that the next time we hear about this project in terms of any other detailed numbers would be the end of 2013?

I think the earliest would be -- if we were in Denver in September next year, then we might be able to give some sort of an update. That would be good forum. But I think work on the end of next year to give us enough time to look at this properly.

With the exception, of course, any exploration that you do that may be of interest.

Yes. I mean, an exploration can always add more, but that takes time and we'd have to get the exploration to the right level of resolution. We couldn't make investment decisions based on inferred resources. We need to do much closer drilling to get a good feel that it's at least in the indicated category and then see how we add that on. So that will take a bit of time and probably would even go beyond the end of next year. But the early work is relooking at all of the different options and how we can take 7.5 million ounces of high-resolution indicated and measured resources and turn that into a project that makes sense. So that's our big area of focus.

And maybe just looking at it from a strategic basis, all of your development projects. When you look at their returns today, how would you rank them?

Well, I think they're all looking like they could go at one time or another. Chucapaca, I think, with the right configuration, it could well be up there. Far Southeast, just the sheer size and the quality of the ore body, even though it's going to be quite a high-capital upfront spend, I think that's going to be high quality. So I would say that's up there, something that...

[indiscernible] that one as your first, Nick. Like just if you had to rank them for us and say, "Okay, based on what we know today in terms of our hurdle rates, Far Southeast is our first and Yanfolila is x, Chucapaca is y. Just so that we have an idea. Arctic Platinum [indiscernible].

Yes. The platinum project, I think, is an interesting project too. And that's probably -- they're all pretty close to each other, but if you forced me into a long-term portfolio assessment, I'd say Far Southeast is definitely quality. Something like Yanfolila in Mali, it's not big, but it's going to be very simple to mine, and I think we can get a pretty good payback over there. APP, the platinum project, now with what's happening in South Africa in the platinum industry, now once you get this into production, I think it's going to be in the lower half of the cost curve. So that's going to be an interesting one. The question is whether it's for us or not. That's really the key decision whether that's something that we should try and monetize in some form or another. And I've always said, and you will remember, Tanya, that there are a number of different options on APP and we're getting more resolution on what those should be. But that's a good project. I think it will be built by someone. And then Chucapaca, depending on the outcome, that could move up the standings pretty quickly. So that's more or less the ranking. But don't forget brownfields -- don't forget the brownfields projects, too. Now the second Tarkwa plant, which is a good project. There's a second Cerro Corona sulfide plant that can move forward a lot of ounces from the back end of the life to the front end. There's the oxide project in Peru as well. And there's some sort of expansion project at Damang, whether it's the original greater Damang or whether it's something smaller that focuses on the high-grade core. We're doing all of those trade-off studies now. And so you'll have to watch this space, and we'll get back when we've got more information on that too.

Our next question comes from Andrew Byrne of Absa Capital.

Just a couple of questions on South Deep. That's on a -- you obviously kind of -- you just start to see some progress there, kind of pros and cons. Good to see the tonnage going up but a little bit of dilution on the waste, and obviously the pick-up on the call this morning. I'm just wondering if you can maybe just talk us through kind of the milestones for the assets over the next 18 months and the production profile that you expect them to see and then, obviously, as well the CapEx and, more importantly, the unit costs you expect to see out of that asset as we exit the 18-month period.

Yes. The key milestones, Andrew, are to get the plant expansion finished, which we're slated to do before the end of the year. We've got the second bold mower inned [ph], which is a good sign. We've tested it, so that seems to be working. The ventilation shaft -- in fact, I was out at the mine not so long ago and saw one of the first hoists of rock, 30 tonnes of rock, that we brought to the ventilation shaft. So that's going to be commissioned in stages. The first stage of 48,000 tonnes a month is being commissioned now. And then the subsequent stages will be commissioned through to the end of 2013. So that means, by the end of next year, we'll have enough hoisting and processing capacity to support full production. So now we got a hungry point [ph] system and a hungry plant that we've got to feed. So the big focus after that is to de-stress the ore body which is providing the -- essentially, the development so that we can get in and do the long-haul stoping, which is going to be around about 2/3 of the overall mining that will take place in the future. Pleasingly, that has increased significantly over the last year. We've gone up around about 70% from where we were a year ago, and we're going to need something similar in 2013 to get to the levels we need to. That will enable us to get our production rate up. And next year, I think we'd like to be hitting somewhere around about 325,000 ounces. This year, it was about 275,000, so we'll be looking at around about a 15% to 20% increase next year. And then thereafter, we'll move it up. And the intent is to still get to a run rate of around about 700,000 ounces by the end of 2015. And you will see that, towards the latter part of that, by far, we see a bigger pick-up, particularly as the de-stress opens. We've been able to reduce the risk of the de-stress, Andrew, by opening up a lot of attack points at the ore body. And once we get them in full swing, even if we just continue at the levels of productivity we're at now, that will enable us to open up a lot of those areas, but we also believe we can increase the productivity as well. The new operating model will make a big difference. And we've just gone on to the 24/7 shift arrangements literally last week. So we're working 24 hours a day, 7 days a week. And I'm sure that, over time, once that beds down [ph] , we'll see the requisite benefits. It will give us around about 23% more time at the face, and that's got to give us a head start in terms of improving the productivity of this operation. So I'm looking forward to a better 2013 now that we've got those arrangements agreed, together with new incentive schemes.

Yes, sure. And now, obviously you have a big hurdle to overcome there. And just kind of, with developments kind of being the key push at kind of the, well, I suppose, the back end of next year and into '14, what CapEx should we be plotting in for '13 and '14 at the assets?

About ZAR 1.9 billion for 2013. And then it starts coming down in 2014, probably about ZAR 1.4 billion, ZAR 1.5 billion. And then it will come down to pretty much ZAR 1 billion, 2015. And then after that, we think sustaining capital is probably going to be ZAR 1 billion a year. ZAR 800 to ZAR 1 billion a year is what we'd be looking at. So now once we get through 2013, we should be over the hump of the capital. And really, all of your fixed infrastructure on the surface will be in. Your plant expansion will be done. The ventilation shaft will be done. The full plant tailings facility will be in place. We've got the new tails dam already. That was done a year ago. Refrigeration capacity has been increased. So a lot of the money that's needed for the infrastructure has been spent, and then it will be ongoing developments. So I don't know if you've been out to the mine, but it's one hell of an operation. We'll be doing a visit there again, most likely in February.

Yes, I was hoping there might be something around the endeavor [ph], which obviously makes sense. And then, first, kind of just to clarify: Obviously, this is all subject to the review, which to my understanding, you're looking to make public, as and when booked. Well, probably, that's the next major playdate [ph] in February. But what CapEx figure are you -- for the group should we be thinking of for '13 as it stands at the moment?

Yes, we'll -- it's going to be probably somewhere around about ZAR 10 billion or ZAR 11 billion, so far. That's more or less what we think it will be for the group as a whole. And of that, as you heard, almost ZAR 2 billion is going to be for South Deep, some sustaining capital. But that is a figure that we're still modeling and looking at, so I may change some of it. But the idea is that we're really going to examine every dollar we spend on all capital requirements, sustaining and project capital, so that we really get a return on every dollar we spend. So we've taken a very hard critical look at all of our spend. And you have to remember, inflation on capital is no less than inflation on working cost. Everything gets hit by all of these factors. But we'll give you a fuller update, Andrew, when we give the final year-end results in December.

Yes, yes, sure. And at first, kind of, like, really thinking about it, it's 2014 where the delta on your CapEx really sits, isn't it, in terms of kind of if you take -- for instance, you've got about -- just talking a number out there, you've got kind of, like, ZAR 5 billion to ZAR 6 billion of sustaining CapEx across the portfolio, plus the South Deep expansion. And then there's obviously other small projects going on for you throughout the portfolio. But it's really '14 where there's that delta, if you like. Is that the right way to think about it?

I think it also depends how much brownfields projects we do and if we get one of the greenfields projects or more away. Obviously, we'll be looking at all of these numbers again. So I don't really want to give you a longer-term year-by-year capital profile because it does tend to change depending on the outcome. We haven't fully finished all of our portfolio review work, and there will be some outcomes as a consequence of that. And I'd prefer to give you a better update as to where we look in February, if you can indulge us 'til then.

[Operator Instructions] Our next question comes from Fidros Katzaras [ph] of FIA.

I have a question with regards to your credit rating and the downgrade by S&P. How committed are you to maintaining Moody's investment grade rating? And is my understanding right about -- that S&P's downgrade was -- had mostly to do with your exposure to Africa going forward and whereas Moody's speaks more to the financials?

It's Paul here. You're correct, the main thing. S&P did a major downgrade of the South African sovereign. And on the back of that, they downgraded Gold Fields as well, where Moody's has taken a more benign view on South Africa. They did take away our positive outlook and put us back at BBB positive stable. I think that's the only difference you will see. It's the 2 rating agencies' view of South Africa.

Nick, we have no further questions. Do you have any closing comments?

I just want to thank everyone for dialing in today. And thanks for your questions. And we look forward to chatting to you again soon. And have a wonderful December and Christmas. Thank you very much.

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