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Gold Fields shows hand on South Deep Posted: Thu, 03 Aug 2006 [miningmx.com] -- GOLD Fields said it would quadruple capital expenditure in its 2007 financial year, spurred by an improvement in operating cash flow, and then made comments suggesting its interest in South Deep might be more far-reaching than thought. Unveiling growth plans for the 2007 financial year, Gold Fields CEO, Ian Cockerill said R900m would be spent on developing the South African assets, including R100m on a deepening project at the firm’s Kloof mine on the west Rand of Johannesburg. All in all, capital expenditure is to total 4bn in 2007 compared to R1.1bn in 2006 and R2.2bn in the 2005 financial year. A further R1bn would be spent on international operations with a further R1.9bn developing the Cerro Corona asset. In addition, Gold Fields executive committee is to submit proposals later this month for a R3bn to R3.5bn deepening project at the Driefontein and Kloof mines, both on the west rand. The capital spend, which was planned over five to 10 years, would produce 10 million oz for 15 to 17 years. “We’re pretty optimistic that we will get approval for the deepening projects,” said Cockerill. Gold Fields’ balance sheet is largely unworked with 4% net debt:equity. “We have a lot of firepower,” said Nick Holland, Gold Fields’ chief financial offer. However, it was comments regarding Gold Fields’ 18.9% stake in Western Areas that raised eyebrows. Western Areas owns half of South Deep, a mine with a 720,000 oz/year nameplate capacity, and some 30 million ounces in resources. Barrick Gold owns 50% of South Deep and has operating control of the mine. Cockerill said South Deep represented an opportunity to replace ounces at Driefontein, a 1 million oz/year producer. “South Deep is a typical Gold Fields franchise asset. It has a long life.” “Gold Fields will have to replace ounces at a mine like Driefontein. South Deep could play a role in such a replacement,” he said. Asked by an analyst to clarify whether South Deep could provide replacement ounces for Driefontein, Cockerill said: “Absolutely yes.” This provides insight as Gold Fields’ strategy regarding its investment in Western Areas takes shape. When first lifting its stake in Western Areas to 15% from about 3% in June, the company’s officials said it was to establish a bargaining position, possibly to engineer cross-border cooperation with the eventual owner of South Deep and Gold Fields’ Kloof mine, which is adjacent to South Deep. Weeks later, however, at an analyst meeting in London, vice president of corporate development, John Munro, told Reuters: “Clearly, there are ... some commercial synergies, day-to-day overlap, between the two operations. But our thinking is bigger than that. “Against the background of what I said earlier about regional consolidation, we are thinking beyond just some of the small-scale synergies,” he said. Cockerill said he had not shifted his strategy on Western Areas. Nonetheless, analysts said the inference was that Gold Fields may want to seize outright control of South Deep. “Why get involved in Western Areas when Harmony has the lead position?” said Leon Esterhuizen, a gold analyst for Investec Securities. “I’m just speculating here, but what if Gold Fields were able to negotiate buying Barrick’s stake in South Deep?” he said. Although Gold Fields has placed emphasis on building its international assets, the prospect of replacement ounces is an equally important strategic goal, wherever they be. “Replacement ounces is the new growth. That is the reality,” said Cockerill. “Every gold company in the world is struggling with replacement. The role of an executive team is that in 10 to 20 years time you still have a company,” he said. In contrast, the lesser ambitious alternative to outright control of South Deep is for Gold Fields to offer its infrastructure from Kloof to help the quicker development of South Deep’s deeper resources. In return, Gold Fields would participate in mining those ounces. “Working with Gold Fields could accelerate the orebody,” said Cockerill. “That’s the real synergy. They’d be a huge improvement in net present value [of South Deep] if you could do that.” But analysts were less convinced. “It’s fairly untested whether accessing South Deep from Kloof would be that easy,” said Steve Shepherd, an analyst for JP Morgan. He suggested Gold Fields consider an asset swap with Barrick for its stake in South Deep. “Gold Fields strategy is bigger and longer term,” said David Davis, a gold analyst for Andisa Securities. “They have indicated that they effectively want to replace Driefontein with South Deep oz. And getting Western Areas seems the way to do it,” he said.Free news alerts: click here to subscribe
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