David Davis, Credit Suisse Standard Securities
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» Gold mines don't need 'enforcement culture'
» A vigorous asset spring clean at Gold Fields
» DRDGOLD to lose 50kg output in mine closure
» Mining remains crucial for S.Africa ecomomy
» Harmony to lose 32,150 oz gold in mine closure
» Four more workers die on SA gold mines
» AngloGold attracts vote of confidence

» JSE:GOLD FIELDS LIMITED:
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Cost are the enemy in SA gold firms' Sept quarter
Allan Seccombe
Posted: Tue, 23 Oct 2007

[miningmx.com] -- ALL eyes will be on costs of South African gold miners after a hefty wage increase and rising input prices were felt during the September quarter.

“The major theme to look out for is costs. We had wage increases, high fuel costs and winter power tariffs during the quarter,” said David Davis, an analyst with Credit Suisse Standard Securities.

He said the rand price per kilogram of gold had risen just 1.7% from the June quarter so keeping costs as low as possible would be important in realising more revenue from gold production.
major theme to look out for is costs
South Africa’s electricity supply is under increasing pressure because of higher than expected economic growth. In recent weeks mining companies and metal producers, which are heavy power users, have been asked to cut back on their consumption and have had power disruptions to their operations. Admittedly this falls outside the September quarter, but it gives an indication of what mining companies face.

Winter tariffs are higher because of increased consumer demand.

The temporary mine closures the government has begun enforcing after the deaths of workers underground has fallen outside the September quarter, but will most certainly be a factor on production in the December quarter.

During the September quarter the three major gold companies – AngloGold Ashanti, Gold Fields and Harmony – agreed a 10% wage increase for the lowest paid workers and eight percent for those in the higher grades. The minimum wage for the industry has been increased to R3,000 per month from R2,500.

Deutsche Securities said in June it had downgraded the gold industry because a double-digit wage increase would compound the burden of steadily rising cash costs that have accompanied falling output.

“Operationally (Gold Fields will be) pretty much in line with management guidance, with the wage increase in South Africa and rainfall in Ghana the negative impacts on costs and production for the quarter,” JP Morgan gold analyst Steve Shepherd said in a note.

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Gold Fields brings out its results on 25 October and production is forecast at 1.02 million oz for the quarter, with improved output from Kloof and Driefontein in South Africa offsetting reduced output from Ghana, where there were heavy rains impacting the opencast operations at Tarkwa and Damang, he said.

Gold Fields has acquired the South Deep gold mine, neighbouring its Kloof mine, for R20bn in cash and shares. It has budgeted R3bn towards developing the mine to lift ore output to 330,000 tonnes/month. It produced 69,500 oz of gold in the June 2007 quarter from an average 122,000 tonnes/month.

The market will be watching closely for any further news on the mine, which has one of the largest untapped ore bodies in South Africa.

Gold Fields is also steaming ahead with it Cerro Corona project in Peru now that it has slimmed down its international portfolio with the sales of Essakane in Burkina Faso and Choco 10 in Venezuela. Again, the market will be closely monitoring news on the Peruvian project.

Harmony Gold will fall under particularly close scrutiny after a particularly awful June quarter and year-end. Harmony had problems with new accounting software that distorted costs and the market will want to see those issues have been resolved.

“Despite a slightly higher rand gold price average for the quarter we expect earnings at Harmony will once again disappoint (with a loss) despite a recovery in underground production in South Africa,” said Shepherd.

At AngloGold, costs are seen rising by more than the other major South African gold producers because of wages, fuel costs, winter power tariffs and maintenance, he said.

The market will also be interested in what has been done with the hedge book, particularly now that Anglo American is no longer the dominant shareholder in the company, Davis said.

As of its June quarter results announcement, AngloGold has some net forward sales of 8.75 million oz until 2016, of which 5.3 million oz is to be sold between 2008 and 2010. By having a hedge book AngloGold receives less for its output than its unhedged peers, a fact that niggles shareholders.