Erratic South Deep divides analysts on Gold Fields shares

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INVESTORS clearly liked the Gold Fields interim results published today along with CEO Nick Holland’s bullish five-year outlook and pushed the share price up nearly 7% to trade as high as R55.57, but analyst opinion remains as divided as ever.

Reaction from Citi analyst Johann Steyn was blunt and unequivocal: “Reiterate sell – target price R33”. According to Steyn, Gold Fields is “back on the mining treadmill – i.e. running to stand still. This is bad news for free cash flow in our view”.

Yet JP Morgan Cazenove analyst, Dominic Kane, remained upbeat in his assessment, commenting: “Gold Fields shares have risen 37% since March this year yet remain cheap in our view”. He calculated Gold Fields shares stood at a discount of 55% to the average of its North American gold peers. “We remain overweight with a target price of R74,07.”

Key factors in assessing Gold Fields’ future are expectations on future cost trends and the likelihood of management eventually turning around operations at South Deep which is the only mine the group has retained in South Africa.

According to Holland, South Deep is a core asset which the group will keep because of the huge size of its gold resources. He believes management will get it to perform profitably. A number of analysts remain cynical pointing to South Deep’s miserable track record of previous failures over the past five years. They would like to see it sold or split out into a separate company.

The reason is the glaring performance gap between South Deep and Gold Fields’ other operations in Australia, Ghana and South America which contribute around 85% of the group’s gold production, and have consistently outperformed expectations over the past four years.

Overall, Holland expects the group’s positive trend to continue stating that investment initiatives underway will enable Gold Fields to “… maintain the current production profile for the next eight to 10 years and upgrade the quality of the portfolio through lowering AIC (all-in costs)”.

The specific projects cited are the re-investment in the Damang mine in Ghana; development of the new Gruyere mine in Australia, the “rebase” of South Deep, and additional brownfields exploration in Australia where Gold Fields has been consistently successful in extending the economic lives of its existing mines through new discoveries.

Holland expects these projects to drop Gold Fields’ all-in costs (AIC) from $1,103/oz of gold produced in the six months to end-June to below $900/oz in 2022.

Steyn points out that his calculation of Gold Fields real AIC for the six months to end-June is $1,323/oz – not the $1,103 reported by the group – because he includes the reported net cash outflow of $102m. In fact, he pushes that to a real real AIC figure of $1,427/oz by matching the reported figure to the $205m increase in net debt during the first half of 2017.

He commented that this sharp increase is due to Gold Fields “… re-investment programme to sustain production following years of unsustainable low capital expenditure”.

Holland said the net cash outflow was temporary and resulted from Gold Fields investment in the new mines at Damang and Gruyere which will soon pay back the investment. He remained positive on South Deep: “Despite the slow start the integrity of the rebase plan is still intact and largely on track. We believe there is no knock-on impact into future years”.

1 COMMENT

  1. Dear Fellow Readers,

    There is no reason to be divided over GFI if we conduct due analysis. I believe GFI has potential but lacks the necessary leadership to take it forward. Herewith is my take on GFI H1 results :

    SALIENT POINTS

    1. GFI has underperformed its stated 15% FCF Margin due to poor operational performance of its assets
    2. South Deep comprises 34Moz of its 48Moz reserves, so its performance to orebody potential is a significant catalyst going forward
    3. At MCap of ±$3,3Bn and prod = ±2,2Moz/yr, GFI seems undervalued compared to Peers ( Newcrest, Polyus, Agnico etc). Its Achilles heels is its management team.
    4. Strategic choices of disposing promising South American growth projects 3-5 yrs ago was a blunder of epic proportions.

    ANALYSIS

    The 1H FY17 were released , and the same old issues have reared their heads AGAIN…Poor costs control & South Deep underperformance!

    The aggregated AISC of $1401/oz ( (Rev-(OCF+CAPEX))/Prod)) is really meaningless. AISC analysis needs to be analysed on per asset basis NOT aggregated as this will lead to failure to hone in on problematic assets. This is more important for a geographically diversified asset base portfolio. But true potential still sits with South Deep and getting it right.

    The Australian Ops seems to be encountering lack of mining flexibility due to limited reserves of 5,4Moz. The target of 1Moz at AIC = $1050/oz seems to be slipping out of reach at annualised 650koz/yr ( 2014 : 1014 Koz/yr) which is below Fcast of 940koz. So more Reserves are required in this region to sustain it and will certainly NOT deliver the 15% FCF with increase Capex and AISC= $924/oz at the current gold price ± $1285. Gruyere is underwhelming and has poor returns for its billed 270 koz/yr at current gold price.

    The West Africa Region is a region with exceptional potential given the 7Moz reserves, but I continue to be amazed at GFI high costs. The AIC = $1142/oz is just not acceptable with the Damang reinvestment project considered. Net Cash Flow of $150M/yr is unlikely for this year on a estimated production of 700koz/yr for FY17 at current gold prices. I don’t have confidence in the future potential of Damang , more so if oil prices recover to > $80/bbl.

    Americas Region could really have been different had GFI made sensible strategic choices regarding its portfolio of advanced exploration projects with Resource estimates then of 7Moz. But here we are with Reserves of 1,3Moz and production of 250koz/yr. In a region of generally low AISC , I still struggle to rationalise and understand GFI decisions of 2012/2013. So now whats left is to just divest the Cerro Corona for a tidy sum ( I estimate $300M-$500M). It was a lousy management decision which got GFI into this mess and its irreversible.

    SOUTH DEEP (The problem child)

    There has been so many changes of management at this mine and the only decision left is to change the CEO of GFI. This mine under his management, and prior involved , has swalllowed R35Billion of shareholder funds. The target production has been debased from 1200Koz/yr when acquired in 2006 to 800koz/yr (2009) which changed to 700koz/yr (2012) then metamorphosed into now 500koz (2017). IT IS A STAGGERING FAILURE BY THE CURRENT GFI MANAGEMENT. Nobody spends R35Billion for a 500Koz/yr mine at AISC = R600k/kg ( $1000/oz). And all of these targets have been always 3-5 yrs away when they were announced just like the new 500koz/yr. I have stopped estimating or proposing solutions to this mess until the current management depart the stage. Its shambolic and diabolical nonsense what is happening at South Deep. Its blatant criminality disguised as incompetence. So the mess will continue so long as Nick is the CEO. This asset requires fresh eyes on issues ( and they are many!) bedevilling it so that we outsiders can interpret them and make reasoned judgement.

    CONCLUSIONS

    GFI requires a new capable CEO to take it forward and deliver on its potential , which is inextricably tied to getting South Deep to deliver on its orebody potential. The South Deep orebody production potential is >1Moz/yr nothing less.

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