Gold Fields Limited (GFI) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Gold Fields Q3 results. [Operator Instructions] Please also note that this conference is being recorded. I would now like to hand the conference over to Willie Jacobsz. Please go ahead.

Thank you, Dylan. Good day, ladies and gentlemen, and thank you very much for joining us for this third quarter results. We are going to start off with Nick Holland, who will give a few opening remarks. And after that, we will open up the lines for questions. Nick is joined on this call by Paul Schmidt, our Chief Financial Officer; as well as Michael Fleischer, our General Counsel. I now hand over to Nick.

Thank you very much, Willie, and good morning or good afternoon, ladies and gentlemen, depending where you are in the world today. Thank you for joining us today to discuss the Gold Fields' results for the third quarter ended September 2013. I'm pleased to report that despite the gold price being more than $50 an ounce lower this past quarter compared to the previous quarter, our operations were cash-positive again in the September quarter. Gold production was up 10%, at 496,000 ounces, and that's against the previous quarter. Net earnings of $9 million were generated compared to a net loss of $129 million in the previous quarter, which reflects a positive swing of $138 million from last quarter. And as I said earlier, this was despite a gold price that was around $50 per ounce lower in the September quarter than in the previous quarter. The main feature of the quarter was the continuation of our concerted and focused strategy to engineer a sustainable and structural shift in the Group's cost base, a process that started in mid-2012. Underlying the strategy of rebasing the Group's cost structure is a fundamental shift in strategy away from a primary focus on ounces of production to a greater emphasis on generating free cash flow and improving the margin. Our goal is to rebase the Group's all-in costs for 2014 and beyond, to ensure that we can sustain our business in the long term. We have made good progress towards this goal, as is reflected in all of the Group's cost metrics for the September 2013 quarter. Our Group all-in sustaining cost for the September quarter was $1,089 per ounce, which is 23% lower, or $327 an ounce lower than the $1,416 per ounce reported in the June quarter. And as I'm sure you'd all agree, that is a sizable reduction just in one quarter. The Group all-in costs for the September quarter, this includes all capital expenditure, of course, was $1,176 per ounce, which is 25% lower, or almost $400 an ounce lower than the $1,572 per ounce reported for the June quarter. Total cash cost for the September quarter was $772 per ounce, which was 10% lower than the $857 per ounce reported for the June quarter. And Group Notional Cash Expenditure of $1,064 per ounce was generated for the September quarter, which was 14% lower than the $1,239 per ounce reported in the June quarter. I must apologize for giving you so many different cost metrics. But the good news is that as from the March quarter of 2014, we will only be reporting on the World Gold Council guideline of all-in sustaining costs and all-in costs. But the reason that we're giving all the other metrics is because we have provided guidance on these metrics, so we want to provide a reference point for people. And we also wanted to do early adoption of the World Gold Council cost measures so that people will be used to it when we move into this in 2014. So if you can indulge us for yet one more quarter, I think it will become much easier after that. Interestingly, if you exclude South Deep, which is a developing mine in buildup, essentially a project, if you exclude that from the September quarter costs and the Group NCE, was $962 an ounce. And the all-in costs, $1,088 an ounce. Nothing that gives you a good indication of the robust of the rest of the portfolio we have in the Group beyond the potential at South Deep. If you compare Gold Fields all-in cost with the rest of the top 10 peer group, you'll find that on all-in cost basis, these figures have been derived by us because they're not always reported by the companies in question. Gold Fields, in fact, is one of the lowest cost producers in the industry on an order-cost basis. Certainly, you can generate these numbers yourselves by looking at the guideline, and then disaggregating all of the numbers from the various companies. Other highlights for the September quarter included, as I mentioned, our gold production at 496,000 ounces, which on an annualized basis, places us actually way above the upper end of even our guidance that we've given for the year on an annualized basis for the quarter. And net earnings, as I mentioned, were $9 million back in cost of territory again. I'd like to talk -- touch briefly on some of the mine interventions that we've done on some of the specific operations to help us rebase our costs. As I mentioned before, and I'll remind people who may have forgotten, the reduction in marginal mining at St Ives, Agnew and Tarkwa -- Tarkwa by closing down unprofitable production, the benefits of which are largely reflected already in the September quarter results. At Tarkwa, the North heap leach operation will be stopped by the end of 2013, and the cost benefits of this will flow into 2014. That North heap leach operation is costing more than the value in gold price, so it makes strategic sense for us to shut that down. Also, restructuring and rightsizing of the corporate office, as well as the regional and operational structures to be fit for purpose in a model with operational responsibility and accountability devolved to the regions on the assumption that they are appropriately resourced. And by and large, they are at this stage. That's helped us to reduce our headcount across the global portfolio by around 5%. And including contractors, we have reduced our headcount by round about 9%. I think at the end of the year, that's going to be somewhere close to round about 11% to 12% by the time we're finished with these further cost reductions. Capital expenditure for 2013 has been reduced by approximately $180 million to $790 million. How have we achieve that? By real cost reductions, by reducing our growth capital, and also by looking at a different profile of expenditure over the life of the mine, without impacting our production or our flexibility. Cancellation of new mine growth projects has also resulted in less expenditure, given that certain of these projects did not provide an adequate return. General cost savings and improved efficiencies are being pervasive across all operations, as business improvement projects continue across the globe. Also reducing the cash burn at Damang has been a key initiative, as well as reassessing the long-term potential of the mine. And we think we're making progress on that and hope to give you some further information on where we stand at the next quarterly results early next year. South Deep's cost base is being rightsized to match its slower-than-anticipated production buildup. But importantly, without impeding the development and production momentum associated with this mechanized mine. The breakup of the Growth and International Projects division and a significant reduction of all associated expenditures has also taken place during the quarter. I want to talk briefly about the impact of all these cost savings on the growth strategy of the Group. And in the light of our breaking up of the Growth and International Projects division, I may have touched briefly with you how we have reorientated our growth strategy. Greenfield exploration has been reduced from 16 projects across the globe to a smaller nucleus of the most promising projects is round about 5, mainly in the Americas. These projects will be managed from within the existing Americas region, rather than by a dedicated exploration division, as we've done previously. With that said, we have absorbed some of the key personnel into the Americas region to make sure we have continuity on these important projects. All other greenfield exploration projects will either be relinquished or disposed of depending on the status of those projects, and whether or not we have vested an interest in these projects. In the Australia region, the key focus will be on near-mine exploration. In the Yilgarn South region, where Gold Fields has an extensive and highly perspective tenement position, associated with the newly acquired assets from Barrick, together with further brownfields exploration that continues at both St Ives and Agnew. All greenfields exploration in Australia has been stopped so that we can dedicate most of our resources onto the near-term brownfields potential at the 5 mines in WA. The Arctic Platinum project in Finland, the Woodjam project in British Columbia, the Talas project in Kyrgyzstan and the Yanfolila project in Mali have all been earmarked for disposal. Where disposal proves impractical in the current market environment, some of the projects may be retained for optionality, but with significantly reduced holding cost and the historical cost we have incurred. No final decisions have been made on the sale of any of these projects. And we continue to monitor interested suitors that are looking at these particular assets. Activities at the Far Southeast project in the Philippines have been largely limited to those associated with securing of the FTAA permit, which allows foreigners to earn a majority interest in mining deposits. And as a consequence, expenditure has been significantly reduced. And we expect the holding costs during this process to be pretty small. At the Chucapaca project in Peru, expenditure has been limited to the completion of a scoping study focused on exploring the viability of a smaller higher grade underground option for this project. And this work will continue into 2014. As a consequence of these interventions, the combined expenditure on all growth and exploration related activities is expected to reduce from around $280 million in 2012 to around $150 million in 2013, and we expect significant further reductions in 2014. I think it's pretty safe to say that we're looking at a round about half of what we spent again in 2013, a half of that $150 million, somewhere around that is a reasonable benchmark. The breakup of the GIP division is well underway and is expected to be completed by the end of this calendar year. While some of the anticipated savings are reflected in the results for the 2013 quarter, the bulk of the savings will be realized at the remainder of 2013 and into the first half of 2014. And that's expected to further contribute to the rebasing of our costs. Turning to the Yilgarn acquisition, finally. We can report that we have concluded the acquisition of the Yilgarn South assets in Western Australia from Barrick Gold on 1st of October. And as the Granny Smith, Lawlers and Darlot mines now belongs to Gold Fields and have been integrated into the Gold Fields portfolio in a very short period of time. A thorough operational review has been concluded on each of the mines, and Agnew and Lawlers is being merged in order to realize the synergies inherent in the combination of these contiguous operations. In fact, the Lawlers plant has already been stopped and has been cleaned out. And all of the new orders arising from the -- the mining from the 3 underground operations of New Holland, Genesis, Sheba are now being sent across to the Agnew plant, enabling us to completely fold that plant and benefiting by reducing the overall cost structure to the benefit of both Agnew and Lawlers. The transition to Gold Fields management was seamless at all 3 mines, and our attention will now turn to optimizing the value of these operations. For the December 2013 quarter, Gold Fields will report on all 3 of these mines for the fourth quarter, with Agnew/Lawlers being reported as a single entity, and I'm sure you can appreciate that, that is a practical way of doing it, given the fact that the operations have essentially been combined with one processing plant as well. It is expected that the 3 mines will collectively add between 90,000 and 100,000 ounces to Gold Field's production for the December quarter, and an NCE of around USD 1,165 per ounce. As a consequence of the yield on acquisition, group production guidance for the full year has been revised upwards, to between 1.915 million ounces and 2 million ounces. And the original guidance, as you can remember, was 1.825 million ounces to 1.9 million ounces. So we're essentially added between 90,000 to 100,000 ounces to our regional guidance, which we are holding. Cost guidance for the year remains unchanged from previous updates with total cash costs of $830 per ounce, and notional cash expenditure of $1,240 per ounce. The original guidance we gave you in February was that cash cost would be a $860 per ounce, so we're lower there; and NCE was $1,360 per ounce, so we're sizably lower. In essence, what I want to say is, the original portfolio of assets that we had before the Yilgarn acquisition is set to achieve the guidance at low costs. And the Yilgarn assets are going to help us to add somewhere between 90,000 to 100,000 ounces this year at similar cost to the guidance I've given. With that, we are now happy to take any questions that either myself, Paul, Michael or Willie will be happy to answer. Thank you very much to all.

[Operator Instructions] Our first question comes from David Leffel of Deutsche Bank.

Nick, just one question, I guess, related to the exploration projects that now you're looking to dispose of. Can you maybe share with us what the current book value is and if you intend, I guess, to reassess the valuation as you move them to assets held-for-sale at the end of the financial year?

On the exploration projects, we expensed everything that we spend as we incur it. We only start capitalizing once we've got a reserve and a feasibility study. But if we look at the various projects that we've got, I think Paul has got a reasonable idea of the carrying value in all of this.

Yes. We've got about $130 million on APP and about $40 million on Yanfolila that's related to the acquisition from [indiscernible]. All the other projects have effectively being expensed because they never got past the prefeasibility study. So that's -- total is about $170 million of carrying value that we'll have to assess at yearend.

Okay, excellent. That's very helpful in that regard. Just a second question, I guess, in a different direction. There was announcement, I guess, during the quarter of an investigation by the Securities and Exchange Commission. There is some commentary in your release. I was just wondering if you could add any additional color on whether you do intend to try to engage SEC instead of listen. Should we hear that negotiations are -- will be occurring, I guess?

David, because of the stage of the investigation and being a legal process, we are precluded from making any comments on this at this stage. So if you'd forgive us, we would prefer not to speak to that point.

[Operator Instructions] We have a question from Adrian Hammond of BNP Paribas.

Just wanted to talk a bit more about the operating model at South Deep. Could you give us some more color in how that's panning out so far, compared to the beginning of this year? And with that, talk to us a bit on face time and what's being achieved their?

Adrian, overall, we've taken our average reef tons per month up to round about 160,000 to 170,000 tons a month range. Last year, that figure was somewhere round about 130,000 tons a month. That's certainly the outputs from the operating model. Face time has been improved at this stage by round about 20% from what we have before. But there's still quite a lot of optimization that we can put in place. For example, we've just commissioned man carriers on the underground, which can get people to the workplace a little bit quicker. But more importantly, less fatigued. We don't -- people asked to walk all the way to workplace up and down the ramps, they get fatigued when they've got a long shift ahead of them. So that will help them manage their fatigue, but it will get them a little bit quicker. And we're doing time and motion studies to assess where the blockages are. For example, the meetings in the master room, the preparations and the meeting place before we go to the different stops could be expedited. And that's all part of the process of continuing to optimize where we're going. But those are the benefits so far, about a 20% improvement in the face time, and round about a 25% improvement in reef tons broken and trend.

Just new updates on completion of the new ore pass systems?

Yes. We've got 2 ore passed that are due to be completed before Christmas. And in fact, I was underground last week and went again to see the status of all ore passed, so I think we're making good progress. We've got another one coming in the first quarter of 2014 and another one that should come around about the middle of the year. So I think that's going to make quite a big difference, and will help us to move our tonnage more easily through our infrastructure once it's been broken. So good progress is being achieved on all of that, too.

Our next question comes from John Tumazos of John Tumazos Very Independent Research.

Do you have people and dollar capacity to buy more good properties or things on neighboring assets, good ideas, as other companies retrench? Or should we expect that, for now, that one good transaction is about all you're going to bite off?

John, we always say that M&A is opportunistic, and we continue to look for opportunities. I don't think we'll be doing anything in the remainder of 2013. I'm pretty confident of that. But certainly, into 2014, we'll continue to look for opportunities. We're very selective. We screen everything across the globe on an ongoing basis. We've made some, I think, fairly successful acquisitions over the last decade. But that's because we're patient and we only buy the things that we think we can make a difference to. So we're going to continue looking. And I think if we can sustain the kind of operational performance that we've done in this quarter and the gold price doesn't completely dive on us, then we should be able to continue to sustain our business at these sort of price levels. And hopefully, that will put us in a position where we've got a more financial flexibility to look at things. But obviously, it's an opportunistic approach, and most times, it doesn't fly. But from time to time, it works like this one has. So we continue to look for opportunities, that's all I can tell you.

[Operator Instructions] Gentlemen, it would appear we have no further questions. Do you have any closing comments?

Dylan, I'd just like to thank everyone for dialing in, and great to have the interest on the call. We hope to see some of you who've dialed in today face to face in the not-too-distant future. And we hope you have a wonderful remainder of what is left of 2013. Thank you, once again, for your interest, and goodbye.

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