A FEATURE of Gold Fields’ year-end results presentation last month was the degree of development risk the group is taking on in an effort to replenish gold reserves and keep production steady at no less than two million ounces for the next eight years.
Included in these mines is South Deep, the 20-odd year old mine that Gold Fields has owned since 2006 when it bought it from Barrick Gold for $1.53bn. Some R29bn has been spent developing the mine in that time, according to research by Noah Capital’s René Hochreiter.
The other assets are the Salares Norte gold project in Chile, and Gruyere, a project in western Australia in which Gold Fields bought a 50% stake last year for about R3.5bn. That makes three new mines in three different countries that will be simultaneously managed and funded.
While South Deep is familiar to Gold Fields in a way a normal development asset would not be, the re-base of the firm’s production targets – the fruit of more than 12 months reassessing the orebody – is still a leap into the unknown.
Analysts are split on the task at hand.
Johann Steyn, an analyst for Citi, said he’d “seen this movie before” in respect of South Deep which was once slated to produce as much as 800,000 oz/year compared to the 490,000 oz target Gold Fields has now adopted.
Other analysts think the 480,000 oz/year target is conservative. “On the face of it this seems to be a conservative target given the recent annual run rates the mine has achieved,” said Macquarie – referencing the 47% year-on-year increase at South Deep already, to some 290,000 oz.
As for Grueyere and Salares Norte, analysts asked whether the projects could be phased in at different times rather than being undertaken simultaneously.
The view of Gold Fields CEO, Nick Holland, however is that the company doesn’t have quite the same options in terms of the previously stated strategy of acquiring cash flow positive mines already in operation.
“Everything we have in production now has been bought by Gold Fields,” said Holland. “But it is getting harder because all the majors [large gold companies] see the decay in their medium-term reserves,” he said, commenting on the competition for new ounces.
Some 100 million ounces in gold production was mined last year so it is getting harder to replace this production given the paucity of exploration during the last three to five years when the gold price was under pressure.
“We will have a dynamic view of the portfolio,” said Holland. “And we have to look at the pace at which we develop projects. I wouldn’t rule out slowing down our developments if the price of gold went to $1,000/oz,” he added.
The difficulty of buying development assets rather than an operating mine is the harder task of understanding what value lies in the developing asset. Gold Fields has said, for instance, that Gruyere will have an internal rate of return of about 6% compared to the 28% return of the expansion of Damang, a mine in Ghana that Gold Fields is also expanding.
Again, Holland thinks this is the cost of preparing for the future. Gruyere’s valuation is based on a fairly narrow 13-year life of mine and that the virtue of having bought into the project is future optionality; that is, the real prospect of discovering bolt-on production in future years.
There’s a similar view of South Deep.
Asked by Nedbank analyst Leon Esterhuizen whether Gold Fields was crimping the larger potential of South Deep in focusing near-term, mineable resources, Holland replied: “This is not the end-game for South Deep.
“The first task at South Deep is to get something sustainably making money; we are trying to put down something that is realistic instead of all the arm-waving. This is a mine plan; not the mine,” he said.