Gold Fields Limited (GFI) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Gold Fields Third Quarter 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 or good morning, depending on where you are today. Thanks for joining me for this call to discuss Gold Field's results for the March quarter of 2013. Also with me today is our CFO, Mr. Paul Schmidt. This was certainly an eventful quarter for Gold Fields, and I'm going to briefly touch on some of the highlights, and we'll leave some time for your questions. The March quarter was the first full quarter that the operations of Gold Fields and Sibanye were effectively managed as separate entities by their respective management teams, although the actual separation only took place and was finalized on the 11th of February 2013 with the distribution finalized on the 18th of February. When you look at our results book, you'll see that the results for KDC and Beatrix, which technically formed part of the Gold Fields Group until the unbundling of Sibanye Gold, are shown under the heading Discontinued Operations in the accounts. However, these results have no impact on the overall group results as the contribution from Sibanye for the quarter was included in the distribution of the Sibanye shares. We're not going to talk about any of the Sibanye results for those 2 months, and you will notice that the commentary in the book also does not include any comments on those results. So if you do have any questions on Sibanye, I would respectfully request that you report them through to Mr. Neal Froneman and his team at Sibanye. The group's operational performance during March quarter was in line with the guidance provided for the full year if one annualizes the production results and also the cost results. The quarter also saw significant further progress on the restructuring and refocusing of the group for cash generation, in line with the outcomes of the portfolio review completed in late 2012 and announced on 14th of February 2013. The envisaged on-mine interventions, which are referred to on our last call, were implemented during the quarter or at the end of the previous quarter. And these included the closing down of marginal production at Tarkwa, St. Ives and Agnew in order to improve the overall margin per ounce. Looking at the results itself for quarter 1, attributable gold production declined by 11% from 534,000 ounces in the December quarter to 477,000 ounces in the March quarter, which was planned and largely the result of shutting down the marginal production I have mentioned earlier. The lower output, as I've mentioned earlier, is also in line with guidance for the full year if you annualize it. Total cash costs were impacted by lower group productions and partially offset by an 8% decline in net operating costs from $451 million in the December quarter to $401 million in the March quarter. And the net effect of the lower production combined with the lower cost resulted in a 5% increase in total cash costs from $798 per ounce to $819 per ounce. Notional cash expenditure, which includes the capitalized costs for projects in the growth portfolio and is the true measure of the cost of producing an ounce of gold, decreased from $1,355 per ounce at the December quarter to $1,291 per ounce in the March quarter. This decline was due to lower operating costs referred to above, as well as reduced capital expenditure during the quarter, which was partially offset by lower production. As a consequence of the above factors, the NCE margin for the group increased from 20% to 21% for the quarter, and both total cash cost and NCE for the March quarter are either below or in line with the guidance provided for the full year. I'd now like to just focus briefly on the individual mines and then the growth projects. At South Deep, the project produced 63,000 ounces of gold in the quarter, similar to the previous quarter, and that was despite the Christmas break, the impact of which is always felt in the March quarter. And although South Deep has implemented a new operating model in November 2012, the preexisting longer Christmas break was honored. Next year, a shorter Christmas break will apply under the new operating model. So in January, we effectively only had about half a month's production for South Deep. The March 2013 quarter was the first quarter that South Deep operated for the full quarter under the new operating model, and the full benefits of this new way of working still need to be fully realized. Nonetheless, the trends are positive, and we had record ore tonnes mined of over 200,000 tonnes during the March month and bearing in mind the full production in 2016 is slated to be at 330,000 tonnes. So that indicates that with that kind of performance, we're almost 2/3 of the way there in terms of our tonnage output. Certainly, we're making progress. At West Africa, Tarkwa's production declined from 187,000 ounces, as planned, in the December quarter to 170,000 ounces in the March quarter. And this was because of the cessation of ore stacking at the high-cost South Heap Leach facility, which we announced in February of this year, together with the decline in grade to reserve grades, which is also expected. At Damang production was unchanged at 44,000 ounces. Worth noting is that after the close of the quarter, we had some illegal industrial action in Ghana, which saw us lose 6 days of production at both Tarkwa and Damang, and the impact of that is going to be around a 20,000-ounce reduction in production in the June quarter. Fortunately, these issues have since been resolved, and I can gladly report to you that production is back to normal levels. Australia, at St. Ives production was 102,000 ounces for the quarter, again, down from 111,000 ounces in the previous quarter, as expected, and in line with our guidance for the full year. And this decline was due to the closure of the heap leach operations at the end of December. Again, these were very high-cost operations, very low margin, and we took the decision to close it. Agnew produced 44,000 ounces, down from 54,000 ounces in the previous quarter, which is in line with what we expected given the withdrawal from the higher-cost and lower-grade Rajah and Main lodes also announced in February 2013. And that's resulted in a significant improvement in the operating and NCE margins at Agnew. In South America, Cerro Corona produced 77,000 ounces of gold equivalent compared to 98,000 ounces in the December quarter. Again, this decline was expected and in line with lower gold and copper grades, which are now approaching those very similar to the reserve grades published in the recent declaration in 2012. In fact, that declaration went out -- was part of the annual report in 2013 March. Wage negotiations in Ghana and South Africa are worth mentioning in that we moved into negotiations in both of those jurisdictions. And as always, I think these negotiations will be challenging for us, particularly so in South Africa. In Ghana, wages make up around about 10% of our cost, so we're less exposed to wage increases there. But in South Deep, they make up around about 40% of our costs. Obviously, I can't tell you at this stage what the negotiations is going to look like. We haven't yet received the wage demands, but it's clear that we cannot afford to continue giving double-digit wage increases with declining productivity, which has certainly been a trend over the last 10 years. And this is the year that we really do need to factor productivity to any kind of settlement in order that we can increase the size of the cake and not actually be bickering over how we divvy up a declining cake. And that's the theme that I'll certainly be giving our unions and our negotiating team as they enter into the negotiations, which we hope will start towards the end of May. Looking at the growth portfolio now. We've had a significant refocus of the growth portfolio, which reflects, we believe, the smaller size of the company, the reduced cash-generating ability, for the present time, at least, while South Deep rolls up, and also, the outcomes of the portfolio resume. Growth is nonetheless very important, and greenfields exploration has been cut, but we'll still be spending $80 million, 8-0 million dollars, in 2013. And we're going to be looking to spend that money in and around our regions, focusing on the Americas and West Africa and the primary purpose and looking for opportunities for us to get smaller higher-grade mines, which are more capital-efficient and quicker to bring to production. I believe that the focus in the past on very significant large deposits, in particular, the porphyry-type deposits, which are typically very big, capital-intensive, I'm going to need to rethink in terms of the Gold Fields strategy. So we're quite happy to discover and develop much smaller operations, even though it might be 100,000 ounces a year. Provided they make money, it's not a problem for us. Near-mine exploration is also being curtailed from $65 million in 2012 to around $28 million in 2013, with the focus being on the most prospective short to medium-term targets in and around our mines. And the key focus here is to make sure that we can continue to replace ounces as we mine them each year and upgrade the quality of the portfolio at the same time. In terms of capital and evaluation projects, also, the expenditure here and the activities are under review, as I mentioned earlier, and we're looking to reduce our spend in materials as well. In fact, as we speak, we're looking at how best we could curtail some of our expenditure and channel it in those projects that are more likely in the short to medium term to be successful projects, and then taking a slow-burn approach on the other projects. What I will do now briefly is deal with where we are in some of these projects. First of all, Chucapaca in Peru, a project in which we have a 51% interest and all the operators. As you've heard earlier, the feasibility study completed last year didn't give us a viable return. And as a consequence, we've gone back to a scoping study level. And this study is looking at various options, including the possibility of an underground operation, which will be a lot smaller, focusing on the higher grade, as well as additional exploration on adjacent targets. And we're also considering the possibility of a smaller open pit. It's too early to comment on the likelihood of success in any of these particular options, but we'll keep you updated as the work progresses. At the Far Southeast project in the Philippines, the focus remains on limited surface geotechnical drilling as that's very important input since the pre-feasibility study that we have to conduct into the future. But predominantly, on activities and at securing the Free Prior and Informed Consent from the indigenous peoples, which is a prerequisite for obtaining a Foreign Technical Assistance Agreement, an FTAA, which allows foreigners to earn a majority interest in Philippines projects. This process is expected to slow down somewhat due to the pending elections in the Philippines scheduled for the last quarter of this year. So it's difficult to give you an indication as to when we hope to secure these permits. At the Arctic Platinum project in Finland, the addition of the Suhanko North deposits brings the overall resource for the project to over 200 million tonnes for almost 1 million ounces of gold, 2.5 million ounces of platinum, almost 10 million ounces of palladium and 1 million pounds of copper and almost 0.5 million pounds of nickel. Clearly, a large, very prospective project. The pre-feasibility study is close to completion, and we'll make a decision on the way forward before the end of the year. And we're not so sure what that decision will be at this stage, but my primary objective here is to work out how we can valuize this project for the benefit of shareholders. Whether or not that means redevelopment still depends on how we see all the various outcomes in the best way forward. We'll keep you posted on that. In Yanfolila in Mali, which is a project in the southwest corner or virtually on the border with Guinea, we've got some really good news there in that, that project has doubled its resource to 1.4 million ounces. That's also advanced to a resource development stage during the quarter, and we're looking at this project in terms of whether it could be fast-tracked to a development decision possibly by the end of the year, particularly given the fairly low technical risk of the project. We do understand the ore body very well. We drilled it out extensively. We've done over 100,000 meters of drilling. We've done also extensive metallurgical test work. We understand all of the characteristics of the ore. So we're going to be doing some more in-fill drilling just to get a closer resolution on the ore body, getting more of it into a proven and probable level. And then we'll do some additional work on technical environment with social impact studies. And we'll do all that work and see where we stand at the end of the year. Of course, all of that is good and well, but we'll have to monitor political developments in that country because that will be key to any decision that we may take. Fortunately, the location of the project is far away from the areas that have been subject to the unrest. We're about 400 kilometers southwest of Anaka. And of course, as most of you will know, most of the activity has taken place 400 to 500 kilometers north of Anaka. So we're a long way away from activities, and other mines in the country have been virtually unaffected during the unrest. Again, we'll update you on this towards the end of the year. I think a final word on the issue that probably concerns all of us beyond anything else is the gold price and, of course, the impact on our business. As you know, we have, over the past 6 months, been making a lot of interventions across our activities, which will stand us in good stead. In some respects, it's been fortuitous that we've done all the things that we've done over the last 6 months. Given the decline in the gold price, there's probably more work for us to do, but I believe that Gold Fields is in good shape to withstand low gold prices, potentially lower gold prices than where we are today. I think we can certainly withstand gold prices lower than spot, and we're set up to do that. It's hard to predict where the gold price is going in the short term, but we believe that the fundamentals in the long term remain strongly supportive of higher gold prices. I think the important thing now is for us to hunker down and make sure that we can emerge from this tough period intact and with our operational leverage still available for shareholders in the event that higher gold prices eventuate. And with that, I'm going to conclude by thanking you for joining us today and leave time for us to deal with questions that you may have. Thank you.

[Operator Instructions] Our first question comes from Patrick Chidley from the HSBC.

First question goes on Chucapaca, just a little follow up there on what the options might be. Can you remind us what the grade of the previous plan was going to be in terms of the larger open pit? And then can you maybe outline how big the higher-grade area might be that could be underground mineable and just a bit more detail about what might happen there?

Yes. The grade, on a gold equivalent basis, because there is a little bit of copper and silver in the deposit, there's about 1.8 grams per ton gold, bearing in mind that we had around about 7.6 million ounces there. So what we're looking at within that envelope, there are some high-grade sections within that ore body. And we're looking at seeing whether we could develop a much higher grade than that underground operation. But we're still modeling that work at the moment, so we don't have the final results of that. But I guess we should be finished with that analysis in about a 3-month period from here, and then we'll assess whether, in fact, that still works, taking into account we still have enabling capital on the site and there is other capital and whether, in fact, this operation can support what would be a significantly lower-volume operation than what we were contemplating in the feasibility study. The feasibility study, Patrick, was contemplating a 30,000-tonne-a-day plant. So this would be a lot lower than that but obviously, much higher grade. And whether or not this is going to translate into a viable project with all technicals, it's too early, I'm afraid, to give you a view on that. But you'd be looking at much, much higher grade than what I've given you there for the original study.

So that's possible to actually go down to just a smaller resource that has a much higher grade, I don't know, underground mineable grades, let's say.

Yes. Technically, it could be possible. Now whether or not this is going to be economic, we still have to see. But technically. we're stress-testing it. We may have to do some more drilling to firm that up because I think we need a tighter resolution of drilling, particularly on the high-grade areas. And we're doing all that work. And that might be the start of a modular process, where we start that and then we graduate to something bigger over time. The other thing is there are other ore bodies in the area of interest that we might look at, and there's another interesting exploration play within 2 kilometers of what is actually Canahuire. We refer to Canahuire as Chucapaca, but Chucapaca has actually got about 4 or 5 targets. And there's another target that we're looking at drilling, which may also provide some additional flexibility. So there's a number of options here, but I can't give you any guarantee that we'll be successful at this stage on any of them.

Right. And just the order, is it refractory or...

No. There's an element of that there, and that's why we have to put it through 2-stage processing. It's got copper. It's got silver. So recoveries are not easy. You don't get sort of 90%, 95% recoveries. You're getting much lower recoveries because of the refractory nature of the ore body. So it does make it somewhat more complex, together with the fact that the material is quite hard to dip. So the processing is complex. We have to float, first of all, and then we have to process the gold in residue through a CIL. So we actually recover gold in concentrate form and recover gold in CIL form, in bar form. So the process is complex, and we'll have to look at that, too.

Okay. And final question is just on regional consolidation opportunities. Now are you considering any sort of consolidation deals maybe around your current operations?

Look, I think one always is looking for opportunities for consolidation if it makes sense. And again, it's always down to where you can get to a sensible deal with the vendors. I think with the tightness in the gold market and balance sheets under pressure, funding drying up, I think people will be more amenable to that as time goes by. But we'll see. You've got to be opportunistic with these things, and there's no guarantees.

[Operator Instructions] Our next question comes from Igor Gladyr of BMO Capital Markets.

I have a few operations-related questions. Just the first one is on Tarkwa. With the closure of your South Heap Leach operations, how should we think about the expected heap leach stacking rates going forward?

Well, I think you should look at the historical rates that we had on the north facilities, at least for the next year or so. And that means that we're stacking at the order of about 8 million tonnes a year. We believe that we can continue to do that on the North heaps. The South heaps were much smaller than that. So 8 million tonnes will go through the heaps going forward, and we'll still be putting about 12 million tonnes through the CIL plant. And we'll certainly be doing that for 2013 and 2014. We are looking at different options of processing in the future. We've been considering whether we move to another CIL plant. At this stage, that work has not been concluded, and we continue to evaluate those options. But for 2013, that's what you should be thinking about.

Okay. And just moving on to South Deep, just as the operation ramps up to full capacity in 2016, what sort of tonnages and grades can we expect between sort of in 2013 through 2015?

Well, I think you've got to basically look at a steep buildup in 2014 and '15 between where we are now. We've set guidance this year. It's going to be around 315,000 ounces for this year. The year thereafter will have a fairly significant increase and then another big increase in 2015. So you should probably be looking at a linear relationship between what we're saying this year and 2016. That's probably the best way to characterize it. Now tonnes this year, we're looking to average reef tonnes each month of somewhere around about 170,000 reef tonnes a month for this year. And then next year, that will average over 200,000 reef tonnes. And then for 2016, you'll get up to the 330,000 reef tonnes. And the grades, at full production, we're looking at around about 5.3 grams a ton -- 5.3 to 5.4 grams a ton, depending on where you are and the ore body at the time and special compliance to where you are. So that's what you'd be looking at at full production in 2016.

Okay. And just on Agnew, sort of what's the expected milling and grade ahead of plans for lower tonnage and higher grades?

Yes, we're doing around about 60,000 tonnes a month, 30,000 to 60,000 tonnes a month out of Agnew because now we're only mining the high-grade Kim Lode, and that's at around about 9 grams a ton. So that's what you can expect going forward. We've pulled back all the other mining. So this is quite a nice little gem to have in that although it's getting deeper, we're down to around about 900 meters, it's a high-grade ore body, fairly low costs. And so you're looking here at a mine that is going to be one o the cheaper operations in the group with that kind of profile.

Our next question comes from Tanya Jakusconek of Deutsche Bank.

I think I'm at Scotia, but thanks for the Deutsche Bank call. I just wanted to ask 2 questions. Just Nick, my first question is on South Deep, and my second one is on M&A. Just on South Deep, you mentioned the wage negotiations that are going on and obviously, focusing on increasing productivity. Maybe you can remind me of what the productivity right now is at South Deep and what is our target for improved productivity there.

Well, the way I look at this is to say right now, we have around about 3,700 employees producing, as you've heard, around about 170,000 to 180,000 ounces -- 180,000 tonnes of reef per month. And at full production, we will have 5,000 employees that are doing 330,000 tonnes a month. And you might ask, well, how are you going to get to that level of productivity increase? The reason is that we've got a lot of people already that are part of the services and managing the twin shaft system, the plant, the backfill plant, the tails turn, all of the surface administrative functions. And now all of those are now fixed. We have everybody we do need. So the only thing we need from here on out is to put more people into the trackless mining area to man the additional fleets and all the associated loading and tramming. So the mine is incredibly leveraged to the extra volume that we're going to be mining, and that's really the magic of South Deep.

It's all volume-related then?

It's all volume-related. We're sitting with already 80% or so of the cost that we'll need at full production already. And that's why the unit cost is so high because we've had to actually manage our systems. You have to, on a 24-hour basis, you need 2 shifts to do that. You have to man all the tiles facilities. None of that's going to change at full production. So it's a function of the volume that we'll be getting.

Okay. And just my second question on M&A, and you mentioned that with this lower gold price, you're hunkering down. And you mentioned maybe 100,000 ounce per year of production seems to be sort of target that would make sense for you. So would it be safe to assume that any M&A that you're looking at, Nick, would be in the couple hundred million dollar range versus bigger acquisitions at over $1 billion?

Yes, I think it's going to be very hard in this market to be looking at those kind of deals, particularly given the valuations of all of our companies and I think the difficulty of doing those kind of deals with these valuations. So you're right. Given our mid-tier status now, Gold Fields is now #11 in market capitalization, we think that we should be fishing in that kind of pond. And I think there's a lot of value in that area. Certainly, things have got cheaper. I think there's going to be more companies in distress. And they're going to be looking for big brothers to help them out, certainly bigger than where they are. But that type of range, maybe a little bit more, but billions-of-dollar range, I think, at this stage, that's going to be very unlikely for us.

Can you just remind me what your availability is on your lines of credit and so forth? I mean, we have your cash and your debt balance, but just remind me what do we can do in addition.

Paul is here.

We've got about just over $600 million of available U.S. facilities, and there's probably about ZAR 1 billion of rand facilities as we speak today.

Okay. And I'm assuming that there would be a minimum requirement of cash that you would like on your balance sheet for working capital that you'd like to maintain.

We're keeping our -- our cash fairly consistent at the moment. In and around, if you're looking at dollars around $500 million, between $500 million and $600 million. We've done that certainly for the last 5 years, most probably if you look at it. If we have any surplus cash, we always use it to pay down debt.

No, I'm thinking of it more from an M&A standpoint, that whatever M&A you would do, #1, you would use cash; and #2, you would look at, obviously, availability on your lines of credit. But obviously, you would want to keep a minimum amount of cash on your balance sheet.

Well, I suppose it just depends where we are as to the exact amount we want to keep on the balance sheet. There's a certain amount we like to keep for each of the operations at any given time. So it's not going to be a minimum amount. It's still going to be a couple of hundred million dollars that I'd like. Distributing [indiscernible] mixed in $400 million I'd like to keep as available because you never know when you need it.

Yes, one of the things we're doing, Tanya, is with the gold price going down, even now, we've done a lot of rationalization in the company over the last few months, cutting exploration, cutting project spend. You've heard all of them. It was fortuitous we did all of that before the gold price went down, but we still believe we need to do some more. And I'd like to create more headroom for us. In the event that gold, for whatever reason, drops to, say, $1,300 and stays there for a period of time, we want to make sure that we can emerge from that without any damage to the portfolio and still leave us with some flexibility to be opportunistic if things come along, but it could be cheaper than normal.

Yes, just looking at the numbers that you've provided. I mean, you could do something in the $500 million, $600 million range if you saw the opportunity.

Yes, I think if it was really good value, we would do it. But I'm not going to do any M&A unless we can see a clear path to value. There's got to be demonstrable value on the table. And we couldn't do things just for strategic reasons. It would have to be based on value. Typically, if there were assets close to ours that were available that were synergistic straight away, that becomes the obvious choices to do. And we'll see how things pan out in the space. I think we're going to see asset sales increasing over the year.

And the assumption would be to use cash in that, correct?

Preferably, we want to use cash. Now with these kind of equity valuations, you've all seen the price to NAV consensus valuations. I don't have to tell you. We prefer, if we could, to use our cash except if something was significantly cheaper than even we were, and then we'd consider using our options. But that wouldn't be my first prize at all.

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

I just like to say thanks to everyone for joining us today, and let's hope that the gold price recovers. But if it doesn't, let's make sure that we do all the right things to emerge from this difficult time stronger than what we were before. With that, I want to wish you all a great weekend, and I look forward to seeing you all soon. Thank you so much. Bye-bye now.

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