Gold Fields Limited (GFI) Q4 2014 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Gold Fields’ Fourth 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, Dylan and good afternoon ladies and gentlemen or good morning depending on where you are in the world today. Thanks for joining us to discuss Gold Fields’ results for the quarter ended December and also the financial year ended of the same date. On the call with me today I've got Paul Schmidt, our Chief Financial Officer. I also have Nico Muller who is the Executive Vice President for the South African region. I have Avishkar Nagaser who is our new Head of Investor Relations, also Willie Jacobsz who heads Investor Relations now for North America and of course Taryn Harmse, who is our Group Legal Counsel. Before we go into the Q&A, I'd like to give a few salient comments and numbers and then we'll dedicate as much time as we can for any questions you might have. Starting first of all with safety, we reported no fatalities in the December quarter and saw a strong overall safety performance from our international operations, in fact over the year-to-date we reduced our total injury frequency rate by 18% compared to 2013. Regrettably, during the past year we had three fatalities, these took place in the earlier part of the year and all of them were at South Deep. Our strategy continues to deliver sound results, in quarter four our production was virtually unchanged at 556,000 ounces. For the year as a whole, production was up by almost 10% to 2.22 million ounces for in 2014 year. All-in costs fell by 4% during quarter four to $1,047 per ounce and for the year as a whole all-in cost were 17% lower than the previous year at $1,087 per ounce. And normalized earnings for the December quarter was $17 million compared with $23 million for the September 2014 quarter resulting in normalized earnings for the year of $85 million. Despite a 7% low average gold price during the December quarter and a 10% decrease in the gold price during the year, the Group generated positive cash flow from operating activities of $54 million for the quarter ended December and for the entire year '14 we generated $235 million and this was before any asset disposals, this is the core cash flow from the operations that's after all capital expenditure, after all taxes, royalties and other disbursements. Our ability to operate successfully in the current low gold price environment is now excellent. It is due to the significant transformation that Gold Fields has undergone over the past two years. The strategy has certainly yielded the results that we were looking for and we hope that this will continue to yield positive results in the future even if gold prices may decline. Our improved cash generation enables us to address two of our key strategic imperatives. We continue to make significant progress in reducing debt, which declined from 1.498 million at the end of September '14 to 1.453 million at the end of December 2014. A further 45 million reduction in quarter four takes total net reduction in debt for the year to $282 million, so that's what we have reduced debt over the year $282 million and it's lowered our net EBITDA to debt ratio, net debt to EBITDA ratio rather to 1.3 at the end December. Now that's a key metric that was included in our loan covenants and typically our loan covenants was about 2.5, so good to see that we got substantial headroom relative to those covenants. In line with our policy, we declared a final dividend of ZAR0.20 per share, and that translates to 34% of normalized earnings. It brings the total dividend for 2014 to ZAR0.40 a share and this makes us one of the few companies in our peer group to achieve the strong cash returns and reward shareholders by paying dividends from these cash returns. Turning to our regional performances, we need to start with South Deep. A number of issues arose in 2014, which highlighted the numerous challenges facing the mine. This included the ground support remediation program and skills deficit and mechanised mining practices as previously indicated. Now with the ground support program just to remind people, we have to close around about 70% of the production down at the mine for around about four months and as you can imagine this is having a material knock on effect in terms of our ability to get to the big open stops that previously we thought we'd be able to achieve. I did indicate to you in November that this would have a knock on effect in 2015 and clearly in these results and with the guidance given for ’15 you can see that this is evident. And few of these issues Gold Fields has decided to take a step back and get the basics right on the operation and rather set the foundation to unlock the long-term value in the assets. As opposed to trying to chase long-term targets our main focus right now is to get better with what we have on the table in front of us. Gold production for the quarter increased by 16% at South Deep, to 48,500 ounces mainly as a result of the resumption of full production after the four month ground support program was completed during the September quarter. However, production for the full year was severely impacted by the ground support program dropping production by 34% relative to previous year and ending at 200,000 ounces for the year. Management retains full confidence in the ore body and the world-class infrastructure in place to successfully exploit the ore body nothing has changed on that front in our view. Many of the challenges however faced by the mine are related to the shortage of mechanized mining skills in South Africa and our competition with other players for this limited pool of skills. The skills do exist but the pool is not large. We now have put in place a strong senior management team with South African mechanized mining experience headed by Nico Muller as Executive Vice President for the region. Nico was previously in the platinum industry and has extensive experience in mechanized underground operations. In addition, we’ve attained a small part of the Australian team that was brought here in 2014 and they will remain to assist with ongoing mentoring, training and coaching with the view of getting a skills transfer as quickly as we can. The key focus areas in 2015 for South Deep are upgrading the skills of operators and associated maintenance crews in the trackless sections and here we’re talking about a nucleus of between 500 and 600 people that really is the key area where we need to upgrade skills and where we believe that there is a scarcity of these skills. We need to improve our fleet management so that we can improve both availability and utilization of our equipment. A big focus will be on plan maintenance systems and making sure that we have skilled artisans, diesel mechanics et cetera. We need to improve the underground working conditions so that we can actually leverage off the significant size that should be available as we continue to open up the ore body further. Lastly we need to optimize the installation of our support and in particular we need to move to a robust one pass support system which will then obviate the need for us to come back and do secondary support or do remediation like we had to do in 2014, we want to do it right the first time and avoid having to go back to fix. The knock-on effect of these stoppages last year will have a material effect on 2015, but we nonetheless forecast a 15% rise in production to 230,000 ounces in 2015. I think it’s fair to say that 2014 although a very challenging year should be seen as a low point in the cycle of South Deep and we believe we can only do better from here. We expect the efforts of the new team to start to come through in ’16 when we forecast that given the current price environment in South Africa and the rand per kilogram price that we currently see on our screens that we expect South Deep to move to a breakeven position sometime during the course of next year. Moving to Australia, where our portfolio of four mines had another strong quarter and achieved a free cash flow margin of 20%. Production for the quarter was 260,000 ounces with all-in costs of $930 per ounce. Calendar 2014 was the first full year of the inclusion of the Yilgarn South assets with the region achieving in excess of 1 million ounces of production at an all-in cost of $1,015 per ounce. Cerro Corona continues to be a solid performer with gold equivalent production stable at 84,600 ounces for the quarter. All-in cost was lower than the September quarter at $682 per equivalent ounce of production. Production and all-in cost from the West Africa region was similar to the September 2014 quarter at 181,000 ounces and the cost being $1,126 per ounce. Both these mines are performing in line with our best expectations. At Tarkwa gold production decreased by 4% to 133,000 ounces and all-in costs increased by 4% to $1,142 per ounce. The success of the turnaround of demand is evidenced by the December quarter results, with production increasing by 12% to 48,000 ounces while all-in costs was down by 13% to $1,082 per ounce. We believe that there is a lot more to come out of demand and we're focusing lot of our efforts in 2015 and looking at opportunities in and around the original demand fit and further around on the lease. Looking ahead our group guidance for 2015 is for virtually unchanged production of 2.2 million ounces, all-in sustaining costs are expected to be $1,055 an ounce and all-in costs $1,075 per ounce, and I will add that these cost estimates are lower than what we've achieved in 2014 which in turn was lower than the previous year. Thank you for your time, I will now open the floor or the lines rather for questions from either myself or any of my colleagues who are here today. Thank you very much Dylan.

Thank you. [Operator Instructions] Our first question comes from David Horton from The Bank of Montreal. Please go ahead.

I guess the biggest news there is South Deep and a much slower ramp-up than what we had anticipated before, I understand all of the comments that you had said about the distress and staffing and all that kind of stuff. And I guess I am struggling to see where it goes beyond 2015. I mean it’s a phenomenal ore body but just wondering can you give us an insight as to what kind of path we can see beyond '15?

I am going to ask Nico Muller to address this issue David and then if there's follow-up you need to add we'll go there.

Thanks Nick.

David I think we have to adopt a more cautious approach in terms of forecasting or giving guidance further into the future, there is so much work that we have to do fix the base right now. The one thing that I am encouraged about is that the mining mix is going to change and that we're going to see an increasing contribution from long- haul stoping which provides not only a greater percentage or a greater return per blasts with regard to between 4,000, 10,000 tonnes per blast, but it also is typically associated with the higher grade. So I think what we're going to do is we're going to focus this year on addressing all the current operational shortfalls and we're also going to take the time during the year to rebase our views on future increased production. I have got actually no doubt that it will increase from 2015 onwards, but I think it will only be not in our best interest to try and judge at this point the exact numbers for the years after 2015.

With that increased emphasis then on the long-haul stoping method. Do you have the right equipment at this stage or do you need to bring more equipment on site and how are you going for the training to undertake that technique?

So first of all as far as the type of equipment that we have, I think I believe that we have the right type of equipment onsite. With regards to the numbers, at this point the view is that any investment in further expansion of the underground fleet will reverse back into over congestion and it also complicates our efforts to optimize the use and maintenance of the current fleet. So we do not foresee a significant increase in the fleet size for this year, we will return it, if there is an opportunity and we do see that these operational efficiency is improving, we'll have a discussion with Nick, if there is an opportunity for us to increase our output and we believe that we're making good progress as far as improving operational excellence we'll no doubt infuse additional fleet units which can assist us in expanding our output. As far as the training is concerned, I think we have potentially had a reliance on external capacity and expertise as far as training. The South Deep has got a 70 year life, it's fully mechanized operation and I think that we do have the means -- I mean I have done it personally and the members of my team from other operations have successfully implemented this three competent training facilities at the mines that we've operated before and I can't see any reason why we can't do the same at South Deep. I think what you'll see in a number of years time and South Deep being a late supplier of skills into the industry it is a core requirement, it’s a core skill required and we will probably spend the first number of months during 2015 to develop a very robust internal training strategy and then we'll roll it out in the latter half of the year. The one thing that I am encouraged by is that we do have the infrastructure the brick and mortar that exists at South Deep I think what we need is the curriculum, as well as competent trainers, that is where I see we've a shortfall but I think both of those issues are not intermountable.

And with a greater emphasis then on long haul stoping can you see that there is sufficient capacity from a distress point of view and logistics point of view to be able to double or triple the kind of production rate that we have seen in 2014 over the next 4 or 5 years?

So, we are going into the future again but I certainly don't see a doubling of production over the next two years I don't think that's possible. And we are currently producing at around 100,000 tons a month and if I look at the operation and scoring and weaknesses at the moment, I know that we're at the bottom-end of the curve. We can do a lot better and can we do double production? I think in due course that's not over the next two years but I can fully appreciate a significant increase even to double the current output going forward. Exactly when we will reach that position is the -- what we will focus all our energy this year in deep basin the Gulf plant facility.

Alright, well switching over to some assets that appear to be outperforming expectations Granny Smith, I was fairly surprised to see the kind of level of production that you've got in 2015 being forecast, it's fairly clear that 2014 was an excellent outcome. So I guess the influence that I'm drawing from that is that you have got the confidence to maintain the throughput and more importantly the kind of grades that we had seen recently in 2014 going through 2015 and I'm just wondering how long that kind of good story could continue?

Yes David I think Granny Smith has performed exceptionally well under our ownership for a number of reasons we have first of all been able to improve the mix of the in-situ grade so in other words the areas we are mining are just inherently higher grade but more importantly there has been a big focus on dilution. Now, given that this was room and pillar operation, there is quite a lot of ground that you can leave behind. So it's very important that we optimized our stop designs and we minimized external or skin dilution as well as the internal dilution. The team has done a hell of a good job on that and we've reduced dilution by about 15% from when it was under the Barrick ownership and that's probably worth at least a half a gram or three quarters of a gram alone. Those two areas have helped just by doing some fairly easy process modifications in the plant, we've been able to improve throughput, we have changed some cyclones, the smaller cyclones because we stopped tolling so smaller cyclones and moreover than now we had them in the store and we’ve improved the recoveries just by doing that and automating some of the process closed to the plant from 88% to 93%. That alone is probably worth 25,000 ounces a year of the recoveries. So that’s the reason we’ve done better because on the Barrick ownership Grant Browning used to do about what 240,000-250,000 ounces a year. So we’re pretty confident that we can continue to do above that. Zone 100 is the area we’re getting into in 2015 there is obviously going to be a lot of development that’s necessary for us to ramp that up and there is no reason for us not to believe that it’s going to continue to improve. The other nice thing that was seeing David is the lateral extensions as we get deeper tend to be bigger. So one of the programs we’re doing is some step up drilling on both Zone 90 and Zone 100 at Goanna to see how we can understand that better. The exploration program continues with that and we’re seeing the potential for Zone 110, Zone 120 up to Zone 130 and we’re going to be spending a lot more time improving that up over the next year or two so. So, I think Granny Smith has got many good years ahead of its divestment.

Where does the infrastructure go down to, what zone have you got decline to?

So we are down to Zone 100, that is where we are now and we got 12 platforms that are going into these other areas underground drill case that are cutting into these other areas. Now so clearly if we want to go down further we’re going to have to optimize the way that we mine and consider whether we need to look at different kind of infrastructure to access the level of 130 and below but I think we are some years away from that still we have got a lot of good stuff ahead of us.

Moving over to Tarkwa if I may…

One more question David, we just want to give others a chance as well.

Okay.

So we will deal with this last question, sure.

What kind of -- it looks the middle is outperforming landsite expectations, should we expect that to continue or do you anticipate harder ore to negate that?

No the harder ore is not a problem because we’ve got secondary crushing facilities. But I think you should be thinking about 13.3 as a steady state. Now from time-to-time they can do a little bit better but 13.3 million tonnes is what you should be modeling for Tarkwa into the future.

All right, thank you Nick I will leave it there.

Thank you, David. And David if you have additional questions please contact myself or Avishkar will help you those I assume.

[Operator Instructions] Our next question comes from Tania Jakusconek at Scotiabank. Please go ahead.

Just wanted to come back to South Deep, just trying to understand I appreciate that a lot of work to be done at this operation, maybe we could just go through some of the critical milestones that we need to do for this year to stabilize or put the appropriate stabilization infrastructure in place? That’s my first portion. Secondly what exactly are the training programs in place for this Tarkwa area these 500, 600 people that you’re focusing on and as your training and getting the mechanized mining skills, what programs you have in place to so once you get the people there that they’re not poached to other mining companies because it’s a limited pool. And then maybe on your long haul stoping and thinking about the mining method, you can kind of give us a sense from a North American perspective we know what a long haul mining stop and mining cost is but maybe what you’re envisioning in your cost structure for long haul stoping? Thank you.

Okay, Tania, Nick here I’m going to ask Nico to deal with the issues around training in particular. He will give you some more color as well on the dimensions of our open stoping, but just to come back to your first question, I think most of the infrastructure that we need is in place but that’s not the issue we have got the basic infrastructure in place. The bottleneck really at the moment has been skills and availability of equipment. So again it comes back to your second question is how robust and relevant is the training going to be? So I think Nico should probably devote most of his time answering that question for you.

Yes I think the question was what training is in place? So the way I look at training is there are various levels of training. What we do have in place at the mine is the base training i.e. to ensure that our operators can operate machines safely. So at least you know where the emergency stop is, you know what the correct procedures to operate the units, you understand the fire extinguisher, how to park a vehicle and so forth. Having said that, at the moment I am having discussion on one or two of the curriculums the concern I do have is that some of the training material is outdated and relevant to similar unique type of equipment but tailored to the current unit that we currently have underground. So there are some refreshments, some update required. Secondly is like I tell people once you go to core license you're probably not going to beat Schumacher on the F1 circuit. And so there is another level of training which involves developing the competence to optimize the use of the equipment. None of that is in place at South Deep at present. And so we require a refreshment of existing curriculum, tailored to our current fleet, as well as an expansion to promote the improved performance of the use of the equipment. As far the dimensions of the long haul stopes are concerned typical item of long haul stope ranges from 15 to a maximum of 45 meters and certain terms of the capability of our equipment. The average dimension in current practice is around 17 meters height and 17 meters width of long haul stopes.

But what does it cost you like $40 a tonne, $50 a tonne?

Apologies, I am not in position to actually answer that right now. And so we got the all-in cost, I am not sure I am -- it is not something that I negotiate and had time to touch on specifically the unit costs.

Well I can try and help just by saying if you look at what we're doing now, to answer this in a slightly different way. Is about 25% of our mining is open stopes and an open stope typically will give you between 8,000 and 10,000 tonnes a blast, whereas a conventional bench or drift might give you 10% of that, so 800 tonnes. So it's all for the current cost. So if you look at the current cost structure it is about 25% of open stoping and about 15% to 20% for de-stress and the rest is bench and drifts. Where we're going to is to get to round about 70% open stoping which will give you the commensurate change in volume with de-stress being about 20% and bench and drifts probably 10 to 15. So you'll get basically the extra volume at the same all-in cost. Most of the costs already in the system, so you'll find that the extra volume that comes from the change in mix will actually be quite profound in terms of its impact on the operation. And that's always been the business thesis for South Deep. It's getting all combining done at reasonably low cost because of the volume that comes through against the fixed cost. And so it's difficult to envisage what it is today because that extra volume all comes through with very limited extra variable cost Tania. And we're not in a position to give you specifics now as to what open stope cost is it's not something we've reported.

Well maybe just from my thoughts to understand in your cost guidance for 2015 for South Deep, what sort of equipment availability have you forecasted and maybe what sorts of productivity have you forecasted? And when are we going to get to where you feel comfortable and with this training that we have the skill sets on the productivity and the equipment availability?

To certain terms of the assumptions that we've used in the guidance, we have used the exact same productivity and efficiency parameters that we achieved in 2014. So we've -- it maybe a conservative approach but we've assumed no increase in productivity or efficiency and that is because it is hard to improve these things given the current position that we are in. There is a number of things that we have to correct in order for us to achieve improvements in productivity and that is not only the skills of the operator and the technicians maintaining the equipment it is also related to underground water management, ventilation temperatures, work methodology, organizational discipline. I expect us to start improving in productivity and efficiency during the course of this year it has not necessarily been accounted for in the guidance and I would be exposing us if I tried to make any assumption just having joined the company recently, I think we will probably discuss the answer to these questions during the year Tania.

Can you just maybe remind us what your productivity is and your equipment availability is today?

So, equipment availability ranges between 55% and 65% for the flooring that is D classes. Productivity I can quote meters per rig per month I am not even sure I want to quote it because it is pretty decimal but it's probably between 40 and 60 meters per drilled rig per month, which on a global standard is pretty low. In Australia and Canada performance is probably a range between 250 even up to 300 meters per month when things go well.

[Operator Instructions] Our next question comes from Andrew Byrne of Barclays. Please go ahead.

The first one is, just on the long haul stopes in terms of mining, what do you charge being as the accurate rate at the end of the year as a percentage of the mix I know previously that we have been looking for 50% book I think that's a kind of something around that window, what is it that you are looking for there? And then the second question is I think kind of a low basis that we had with productivity that we see at South Deep, we have seen similar situations at Bevier view with K checks I think by gold we have seen them bring in and some of those contract miners and those rigs at ground exceptionally fast over six month period is that a curve from that you have considered if you don't start see improvements through this year?

Sorry I'm not sure I got the second question.

And basically, if you don't start to see the improvements in productivity as you move through the year, would you at all consider bringing in full time contractors from offshore if necessary?

Let’s talk about the exit rate I think this year we're going to be at native rate of 50% based on our current planning. And then as far as the introduction of offshore mechanized expertise, it is something that we attempted in 2014, the issue that we have is a political one, we've made a significant reassessments politically from our unions, the insurance of government to the extent that we've add some of the work permits, the work on renewals refused over and above that, I'm not sure that I believe that it is a long-term sustainable method for us and we've newest examples in South Africa where we have very successfully introduced mechanization and I cannot see why it is not possible at South Deep with a very aggressive list approach to developing those skills and I’m not talking about through the operator maintenance level skills I’m talking about the management skills. I believe at point that the top-tier management that all come from mechanized operations and I believe that we have the capacity to develop ourselves as the premier mechanized operation in Africa actually, and I think that’s very possible.

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

No I think Dylan, thanks to everyone for dialing in. Thanks for all of the questions and we hope to see as many of you as we can face-to-face on our travels and various functions. So thanks once again everyone and we look forward to seeing you soon.

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