Gold Fields Limited (GFI) Q3 2014 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Gold Fields' third quarter results. All participants are now in listen only mode and there will be an opportunity for you to ask questions after today's presentation [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 Dillon and good morning or good afternoon ladies and gentlemen, wherever you are in the world today. Thank you for joining us to discuss Gold Fields' results for the third quarter ended September 2014. On the call with me today, I’ve got Paul Schmidt, our Chief Financial Officer; I’ve also got Ernesto Balarezo, who is our Executive Vice President and Head of our Operations in South America; and I’ve also got Willie Jacobsz, our Head of Investor Relations and Taryn Harmse, our Group Executive Counsel for the company. So I’m pleased to report that despite the recent volatility in the gold price during this past quarter, Gold Fields delivered results in line with guidance for 2014. Now that has enabled us to continue to generate cash very importantly. That’s one of the key objectives of the company and at the same time we’ve been able to further strengthen our balance sheet, which we’ve done every quarter this year and I’ll talk a little bit more about the details a little later. Key features for the quarter, included a strong performance from the international mines, all seven of which were cash generative, as well as the completion of the production critical safety related ground support at South Deep that we talked about for the first time in May this year, which has really impacted production quite heavily of around about four months to the end of September. Thankfully that’s largely behind us now. In quarter three we generated $63 million of cash. This brings total cash flow from operating activities for the year-to-date after taking account of capital expenditure, environmental payments, debt service costs and non-recurring items, to a figure of $182 million for the year. In essence, the business as a whole after all the bills have been paid has made $182 million in three quarters. I believe that that positions Gold Fields as one of the strongest free cash flow generators in the gold mining peer group. We understand looking at the comparisons, it places us at number three we believe for the year-to-date. Now this effort reflects our continued and firm commitment to generating a sustainable free cash flow margin of at least 15% at a $1,300 gold price. In fact in quarter three we achieved free cash flow margin of 12% against a realized price of $1,265. I think if you recalibrated that price to $1,300, we essentially would have made the 15% this last quarter. Now this target of 15% free cash flow margin at $1,300 gold price also ensures that we have a safety cushion to withstand gold prices down to lows of around $1,050 per ounce. We had an eye on the potential of lower gold prices and that’s one of the reasons we incorporated this cushion into our planning. Together with the achievement of the free cash flow margin and despite the severe curtailing of money related activities at South Deep, because of the safety related ground support, Gold Fields remains on track to achieve its production guidance for the full year 2014 of 2.2 million ounces of gold equivalent production. An additional positive is that costs are now expected to be lower than guidance, with all in sustaining costs 3% lower at $1,090 and all in costs 2% lower at $1,130 per ounce. Continued strong cash generation, plus the sale of our holding in the Chucapaca project during the quarter enabled the Group to make further progress on another key strategic objective for this year, and that is to further improve the strength of our balance sheet by reducing net debt by a further $137 million during the quarter, taking our net-debt down to $1.498 billion at the end of the quarter. Now if you look at the year-to-date that means that we’ve reduced our net debt from the first of January through to September by $237 million and that lowers the net debt to EBITDA ratio down to 1.33. Looking at the individual regions across the Group, the four mines in the Australia portfolio reported gold production of 269,000 ounces at all in costs of US$990 per ounce. This brings total production for the year-to-date to 771,000 ounces in Australia at an all in cost of US$1,043 per ounce and that compares to the guidance for the full year 975,000 ounces at an all in cost of US$1,130 per ounce. Over the past 12 months, since acquiring the Yilgarn South assets from Barrick in October last year, Gold Fields’ Australian operations have produced more than 1 million ounces of gold. The key strategic objective of the Australia region continues to be significant investment in near-mine exploration. $65 million of near-mine exploration at all of our mines this year is aimed principally at improving their mineral resource and reserve positions of all of these mines over the next two to three years. It’s going to take us more than a year to achieve the goals we want, and I would expect that in 2015 we’ll be spending similar or slightly additional amounts on exploration to draw out this objective hard over the next two to three years. It’s early days, but I must say we are showing early signs of success across the Australia portfolio, and that’s not surprising given the originic nature of these ore bodies, which tend to continue to replace reserves that are mined every year. We want to try and get a little bit ahead of that, but that’s going to take us two or three years we believe to get there. At St Ives early capital development has commenced on a newly discovered high-grade invincible deposit, with a view to getting first open pit production by the middle of the year. And remember, this is a open pit deposit with grades between 3 and 4 grams a tonne, and that compares to the average grades we’ve been mining at St Ives from open pits over the last five years or so of between 1.5 and about 1.8 grams per tonne. So it is going to make a difference to the mine. At Agnew/Lawlers access development has also commenced into the new high-grade underground FBH deposit, where first production is also expected around about the middle of next year. Now just to orientate you, this is a deposit that is adjacent to the Kim Lode, which we’ve been mining for the last eight years or so and we are looking at really good grades here, double-digit grades in FBH. So I think we are going to continue to see good results coming out of Agnew/Lawlers At Granny Smith, exploration results during the quarter provide further support for the replication of numerous deeper lodes in the Wallaby underground deposit, and will continue that work into 2015. If I can go across to Africa and into Ghana; Tarkwa’s year-to-date production of 425,000 ounces at an all in cost of $1,045 an ounce puts it on track to better its 2014 production guidance of 520,000 ounces at an all in cost of $1,100 per ounce. The expansion of the Carbon in Leach plant from an annual throughput of 12.3 million tonnes to 13.3 million tonnes per annum has progressed well and this programme is expected to be completed by the end of December. And this expansion should enable Tarkwa to increase its steady state production to around about 550,000 ounces per annum. Turning to Damang. It further consolidated its return to profitability with another strong performance and this has now been three quarters in a row and we’ve seen a sustained turnaround at Damang. With the year-to-date production of 130,000 ounces, at all in cost of $1,210 per ounce, Damang is also on track to exceed its 2014 guidance of 165,000 ounces at an all in cost of $1,240 per ounce. I think we will end up beating both the production and cost of targets there. And I think 2015 is looking reasonably good for Damang as we’ve mentioned before. Cerro Corona, our copper/gold operation in Peru had another outstanding quarter with gold equivalent production up by 10% to 85,000 ounces at an all in cost of $718 per equivalent ounce. And Corona is on track also to exceed its production guidance for the year of 290,000 ounces at $865 per equivalent ounce. I’m delighted that Ernesto could be with us today who has come from Lima and after the call if you have some specific questions for him on the operations, this will be a great opportunity for you to ask him directly. Finally, let me deal with South Deep. Gold production at the project decreased by 18% as expected during the September quarter. This was mainly as a result of the ground support program that was announced in May, where a significant part of the current mines production was knocked out as we had to close down the access ramps and some of these access ramps were the only way that people could get to the workings. Thankful that program is behind us as I’ve mentioned and all of the production critical areas have been reopened. I must say, I think that the fact that we only limited the decline in production at South Deep at 18% I think is a great achievement from the team given the constraints they operated under and we certainly hope that South Deep will come back strongly. As I said, the production and critical support has now been completed and access to the production areas was reestablished at the start of the current quarter that we are in now. However this program of course delayed de-stress mining and the opening up on a number of long haul stocks that were originally planned to be mined in the December and March quarters ahead of us. And the other thing that had impacted is back-fall of old stocks, which of course is an integral component of the mining cycle and so we have backlogs there that we need to catch-up as well. While we expect that this will have a commensurate knock-on effect on output, we think that production will gradually ramp up or improve over the next couple of quarters as new areas are opened up, and we are certainly trying to get back into some of the open stocks as quickly as we can. Now the impact of this delay and its around about a six month to eight month delay if you take into account the full knock-on effects on the open stocks and de-stress are still being assessed and will have a better idea of what 2015 is going to look like for South Deep when we give our guidance for 2015 in February, and we are still working through that obviously and we’ll be able to give you an update as to what next year will look like in February when we announce our results on February 12 next year. The Australian team of consultants at South Deep continue to contribute to the up-skilling of our people and are helping us to develop a truly mechanized mining culture at South Deep. Particularly pleasing is that South Deep is now starting to attract talent from a highly sought after, albeit small South African mechanized mining skills pool and we were fortunate in persuading Nico Muller, who was formerly the Chief Operating Officer of Royal Bafokeng Platinum to join Gold Fields as Executive Vice President for the South Africa Region. Now he has joined us on October 1. He is recognized as one of the top mechanized mining experience in South Africa. In closing, I wanted to briefly refer you to two corporate developments during the quarter, which are detailed in our quarterly results book. There is a tax dispute over South Deep’s capital allowance and Paul Schmidt who is here can give you more details on that if there are questions. It is set out in the book, but he is here and he is the expert in this area. So he can answer questions on that. Also just to remind you about this week’s announcement of a joint working group by SA gold mining companies to try and find a comprehensive solution to the occupational lung disease issue, that’s been a legacy problem in this country for some time. Well, thanks for your time. I’m sure that you’ve got some questions. So I think without further ado, lets up open up the lines for questions and either myself or my colleagues with me today will endeavor to deal with the matters you want to raise. Dillon, with that I’ll pass it back to you.

Thank you. [Operator Instructions]. Our first question comes from Patrick Mann of Deutsche Bank. Please go ahead.

Hi, good afternoon guys. Just a question on South Deep. If the ground support hadn’t been necessary, do you feel that you would have been on track with the revised guidance that you gave us earlier in the year or have you encountered anything else that might have put that at risk regardless of the ground support conditions? Thanks.

Look, what I would say Patrick is up to Easter we’d really built up good momentum at South Deep and we were starting to see a really good build up and unfortunately with mines like this when you pull back their momentum and their rhythm, it takes a while to reestablish it. So I think up until Easter it was really looking good and so the decision that I had to make with the team to pull back the mining and fix the ground support was obviously a heart wrenching decision, particularly when you were seeing momentum getting up there. And yes, of course we’ve lost the balance of the year really compared to where we were going to be. Impossible to say Patrick, but what we’ve got to try and do now is reestablish the momentum we had, that we saw around about March to April before we pulled back in May, and that’s going to be one of the key objectives going into this quarter and into next quarter.

Okay, thanks a lot.

[Operator Instructions]. The next question comes from Mike Jalonen of Merrill Lynch. Please go ahead. Mike, you’re live in the conference. Please go ahead with your question. Our next question comes from Howard Flinker of Flinker & Co. Please go ahead.

Thank you. Hello everybody.

Hello Howard.

Hello Howard.

I just want to comment. It is very rare for a company to deliver lower revenues and higher profits. Even if you exclude the lower stock payments and exclude the foreign exchange benefit, you still had slightly higher profits. That is highly commendable and is a pretty encouraging sign. I just wanted to pass that on. I see that rarely – in any industry, I see that extremely rarely, less than one out of 100 times.

Howard, we really appreciate that and one of the reasons the revenue was lower is that we couldn’t sell all of the concentrate at Corona, but Ernesto is with me today and he might want to comment on what he expects to do on that concentrate that wasn’t sold in this quarter.

I think that’s already been solved and we had some problems with the port [ph], we sometimes have those, but the problem has been solved and we are aiming to get everything out by the end of the year, everything we produce.

But one thing about gold is that it’s not oranges or eggs, it doesn’t decay next week, so you can sell it tomorrow; that’s why people save it. Adjusted for your dispositions and your acquisitions, in either ounces or metric tonnes, how much did actual production decline year against year, third quarter against third quarter, just roughly.

Howard if you look at the same quarter last year, I think we are up almost 20% on our production, because of the acquisition of the Yilgarn South assets, and also…

Yes, I know.

Yes, if you look at our all in costs, I think we’ve managed to keep them pretty much in line overall. So we’ve been able to increase the production and we’ve been able to absorb inflation and improve the cash generating ability to spike the lower gold prices, but all of this I think you’ve analyzed.

Yes, I understand Yilgarn. You and I discussed it one time at lunch. That was a great purchase, it was really cheap. But if you take out Yilgarn or the Aussie assets and measure what you had before against what continued, can you remember what production was year-against-year. Excluding acquisitions and dispositions, what would it be?

I think we were reasonably flat, Howard. I think if you do the reconciliation, I think most of the increase was from the Yilgarn, but we have to remember that we also shut down the heap leach at Tarkwa. So Tarkwa was also – I think if you re-base Tarkwa for the heap leach and take that out, we would have been flat; we were slightly off there. Damang, I think we were similar. South Deep is off, but I think you will find South Deep and Tarkwa is probably offsetting each other and then St Ives and Agnew, between them I think are fairly similar. So all in all I think the portfolio ex the Yilgarn South assets was reasonably flat.

I forget, did Iamgold buy the rest of Tarkwa? Was it Iamgold?

Yes, we bought it back from them. So the government owns 10%. We own 90% of Tarkwa in the bank. So the government’s got a free carry of 10% in Ghana.

I thought you said you closed or sold Tarkwa.

It was in a heap leach.

We closed…

Oh! The heap leach.

The heap leach operation we closed. We said that we would be closing that at the end of December last year. We did so, so that knocked out around about 120,000 ounces a year and the reason we shut that is because recovery had declined. We were getting deeper into the ore body. It didn’t make sense to leach them. It made more sense to process them from CIL plant.

So that was 120,000 ounces a year. So from the point of view of industry wide demand and supply, that shutdown reduced production by about 4 metric tons.

Yes. I think the other thing Howard is we moved away also from thinking about ounces to cash and I think if you look at the Group this year, we are making a lot more cash than we were last.

Yes, Howard for the quarter last year we made $3.1 million as opposed to the $62.5 million with a lower gold price, we’ve done well.

$62.5 million was after payment of principal on debt, correct?

Yes, I’m just comparing debt service cost, not debt repayment. So it was $3.1 million from operations as opposed to $62.5 this quarter, almost a $60 million increase with a lower gold price.

That I saw. I thought the $62.5 million came after the quarterly payment of principal. Am I correct?

It’s including debt service, but before principal.

Yes, it does include the principal.

Oh! I see, interest but not principal, okay I misunderstood. Okay, nice job guys. Thanks.

Thanks very much Howie.

We have a further question from Patrick Mann from Deutsche Bank. Please go ahead. Patrick you are live in the conference call. Please go ahead.

Hi. Sorry, I was on mute there. Sorry about that. And I just had a follow-up question quickly. The South African gold industry has to renegotiate wages this year or next year rather. How are you guys feeling about that? I know that you are NUM majority and obviously being a mechanized mine you’ve got sort of more skilled better paid employees. But do you foresee any difficulties at your operation. Is AMCU making any headway or trying to, and can you just remind us of the situation there please. Thanks.

God, NUM represents around about 70%, early 70% of the workforce. UASA represents around about 10% and the rest of our employees are not affiliated at this stage. So we don’t have AMCU on the mine at this stage, but it’s obviously no secret that they are aggressively trying to recruit members across the industry, including at South Deep. So we can’t discount the possibility that there will be a union that is recognized at South Deep, but right now they are not. In terms of the wages, its far too early to conclude on the way the wages are going to come out, except to say that we expect this year to be as challenging as all of the prior years. I think that always are a challenging situation. Now one of the benefits of gold in this country Patrick is that we negotiate as a collective as opposed to Platinum, which negotiates independently. But that said, words of strength, I think we are all expecting difficult times on the wage negotiations. I think though you had to get a steer from some of the settlements that have been made in this country by the public sector and also private sector. That would give you an indication as to what is likely. But we certainly as an industry don’t have the capacity to pay significant wage increases that maybe asked for and sustain the operations. So I think it’s going to be tough, but usually we end up with a solution. Whether or not we are going to need a strike to get to a solution remains to be seen, but I wouldn’t discount that as a possibility.

Great, thanks.

[Operator Instructions] Nick, we have no further questions. Do you have any closing comments?

Well, thanks very much for joining us today. I think that you’ve seen our results for the quarter. Importantly, they are in line with guidance and we are certainly aiming to finish the year off on a high note and make sure that Gold Fields can achieve its guidance for the full year, which would be the second year in a row that we’ve achieved or over achieved on our guidance. So that’s our commitment that we want to achieve and we want to do it safely and healthily for all of our employees. So thanks once again for your participation today and we look forward to catching up with you soon. Thank you and bye-bye.

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