Better than expected production results from its South Deep operation in South Africa and a development agreement in Ghana may provide Gold Fields investors with some hope for future growth in Africa.
In its operational update for the quarter ended 31 March, chief executive officer Nick Holland said Gold Fields had a “solid start” to 2016 with attributable equivalent gold production of 515koz up 3% year-on-year, but down 9% quarter-on-quarter. All eight operations – across South Africa, Ghana, South America and Australia, exceeded their planned production for the quarter.
One of the more positive developments was at South Deep, where voluntary shifts worked over the holiday season partially offset the effect of the generally seasonally weak quarter for South African mines.
Production was 75% higher year-on-year and 7% lower quarter-on-quarter at 64koz – significantly above previous estimates of 50koz. As a result, all in costs were 20% lower year-on-year and 18% higher quarter-on-quarter in rand terms at R616,706/kg ($1,215/oz).
Despite billions of rands of investment and the unsuccessful importation of skills from Australia, South Deep has so far failed to live up to its promises which included an already downwardly revised production target of 650,000 to 700,000 oz and complete mechanisation.
Holland said previously that a cash flow positive target had been set for the end of this year. Shareholders are not holding their breath, but a significant rise in the share price over the past few months indicates there is still hope for South Deep, which is a critical factor in Gold Fields’ future.
Significant progress has been made in Ghana, where a development agreement for Tarkwa and Damang was concluded with government.
The agreement includes a reduction in the corporate tax rate from 35.0% to 32.5% and a change in the royalty rate (from January 2017) from a flat 5% of revenue to a sliding scale based on the gold price amounting to 3% of revenue up to a gold price of $1,300/oz.
Managed production in Ghana of 181koz, was up 4% year-on-year and down 3% quarter-on-quarter. A decision on the Damang mine, where Gold Fields has previously delayed a decision to mothball the operation, will be made by mid-year.
Overall, group gold production decreased by 7% to 1,978 kilograms (63,600 ounces) in the March quarter from 2,119 kilograms (68,100 ounces) in the December quarter – reflecting seasonal lower volumes mined partially offset by increased grades.
Production guidance for 2016 remains unchanged at between 2.05Moz and 2.10Moz, with sustainable all-in costs of between $1,000/oz and $1,010/oz and all-in costs of between $1,035/oz and $1,045/oz.
A Goldman Sachs note said the results were “slightly positive”, with gold production slightly above its estimates and all-in sustaining costs below. South Deep’s results were significantly better than expected, and Goldman Sachs expected the share to trade up following the announcement, which it did, but only marginally. After rising from R59.04 to R61 soon after trading opened, the share was pretty much where it had started by midday.
