[miningmx.com] – IT was one of those moments where the question was
more important than the answer: will you meet production growth targets by 2015?
For Gold Fields CEO, Nick Holland, it’s really an unanswerable question. The company
has earmarked production of five million ounces by 2015 but as Holland said, it’s in
the nature of the industry not to guarantee the targets.
“Five million ounces will be in production or development,’ said Holland, who was
fielding questions following the publication of Gold Fields’s first-quarter operating and
financial results. Gold production, incidentally, had been down 6%; no more than
3.5m oz could be produced this financial year. Earnings took a knock as well.
As always, Christmas holidays and the New Year interrupted the industry, which, like
a Panamax supertanker, needs to grind remorselessly before it achieves momentum.
Welcome to the South African gold industry.
Investors are seeking certainty, desperately. Introducing more low-cost ounces will
lower Gold Fields’ all-in costs, which it refers to as earnings after notional capital
expenditure (NCE), the true cost of producing an ounce of gold. But the true cost of
producing gold is a nasty reality.
According to Aram Shishmanian, CEO of the World Gold Council, the gold price will
need to reach $3,000/oz in five years for the industry to remain profitable as costs
climb ever higher. This compares to an average break-even of $1,300/oz now, and
which includes the cost of dividends and host nation taxes, Shishmanian said.
Scotiabank reported recently that free cash flow stops at $1,550/oz. The gold price at
the time of writing is struggling to breach $1,600/oz.
Then the gold price got panned, amid general panic in the markets, falling $100/oz in
May at one point. Even before then, gold counters were discounting a lower price. As
a result, the SA Gold Index is down about a fifth this year; Gold Fields is 23% weaker.
John Paulson of Paulson & Co, sold 1.1 million AngloGold Ashanti depository receipts
in the first quarter as its Advantage Plus fund took pain (although, Paulson hastened
to add that AngloGold remained a long term bet).
“The sell-off has been general in nature,’ Holland told Miningmx in an interview.
“We’re really caught up in a much wider contagion here with redemptions in
investment funds moving into cash and the dollar.
“We’re dealing with a world where risk is very concerning. People see the need to
protect their capital and when they liquidate we’re seeing it across the board,’ he
says. Perhaps in lieu of guaranteeing better quality gold production is retaining the
dividend – but analysts have questioned Gold Fields can achieve this exactly because
it is committed to significant capital expenditure in an effort to up output.
Gold Fields has one of the highest dividend yields in the industry, but Holland stopped
short of saying it wouldn’t be sacrificed, even though it is adding 1.5 million oz to
annual production in about three years. “We’re a high-yielding stock having paid out
between 26% and 33% of earnings over the last five years. We don’t need to sit on
our cash and I don’t think the board will rein things in,’ Holland says. Paying the same
percentage of earnings isn’t the same as protecting the dividend yield.
Standing in the way of new gold production is so-called resource nationalism,
however. Holland is negotiating with the Ghana government to win a stability
agreement on taxation. Gold Fields pays 5% in royalties from Ghana; other companies
pay 3%. “They are sympathetic to our problem,’ he says. Gold Fields is hoping to
extract more gold from the Damang super pit expansion in Ghana.
Then there’s the question of winning community support for Gold Fields’s Chucapaca
project in Peru, an operation in the south of the country. As Holland explains, the
project is far from the northern-based Minas Conga project, the $4.8bn venture being
developed by Newmont Mining, and which has been suspended pending improvements
on factors such as water provision and other community benefits. “There’s no
fundamental opposition to the Gold Fields project,’ said the company’s head of South
American projects, Juan Kruger.
Closer to home, Holland has to get the South Deep project up to full tilt, estimated to
be 700,000 oz/year. In its quarterly statement, Gold Fields said that the reasons for
the strike in the 2010 financial year, in which unions asked for more involvement in
decisions relating to issues such as human resources, had not yet been resolved. It
sounds rather ominous: “In the event that South Deep experiences work stoppages or
delays due to union activities, these may have a material adverse effect on the
business, production levels, operating results and financial condition’.
Said Holland: “It’s about improving the operating environment [at South Deep] with
things like the roster and incentive schemes. We’ve been in discussions for some
time, but we’ve not found each other yet.’ It won’t take many hiccups to disturb that
gold production target of Holland’s, hence his caution to commit.
