Gold Fields warns on power price consequences

Allan Seccombe | Thu, 29 Oct 2009 09:35
[miningmx.com] -- GOLD FIELDS, which forecasts it will increase gold output to 925,000 oz in the December quarter, warns proposed electricity tariff increases will have a "significant impact" on its South African operations, bu it hopes the government will come up with a different strategy.

Power utility Eskom has increased its prices by nearly a third and has applied for further annual increases of 45% over the next three years. A decision whether to grant approval for those hikes to fund a massive capacity generation programme will be taken some months from now by the National Energy Regulator of South Africa.

The mining companies have reacted with some alarm. They are operating in an environment where labour and input costs have risen strongly and the rand has firmed against the dollar, wiping out any gains they might have made from higher commodity prices in dollar terms.

"It's too early to give the full impact on the business and we are evaluating it now because one doesn't really understand the flow-through effect on what it means for other input costs and pay limits," Gold Fields chief executive Nick Holland said.

"Suffice to say it will have a very significant impact on the business," he said, adding a study he commissioned two weeks ago into the effects of the hike would be completed by the end of the year.

Holland, stressing that the figure was an extremely rough calculation, estimated the tariff hike would result in a 17% cumulative increase in group cash costs.

Paul Schmidt, chief financial officer, said the 17% was a bare minimum and could be "substantially higher" than that when the knock-on effects were taken into account like steel, locally produced equipment and chemicals for example.

There could be sterilisation of parts of the company's reserves and resources at its marginal shafts. "Most of our shafts are pretty robust, but it's early days yet and we need to do more work to get a definitive view," he said.

While the group had power issues at its operations in Ghana, Australia and Peru, none came close to this. "We are not seeing anything as acute as this."

Gold Fields will participate in the public submissions on Eskom's request.

"We are hoping the government will come up with a different strategy. We are not alone in our concerns in terms of the overall impact, never mind on the mining industry but on the economy as a whole," Holland said.

He suggested the government might consider a broad-based tax rather than just loading the tariffs to ease Eskom's funding crisis.

"We've got to work out how best to provide affordable electricity to all over the medium to longer term without having this massive spike in costs, which will have consequences that I don't believe we all fully understand yet," he said.

Anglo American CEO Cynthia Carroll said this week the proposed tariff hikes were of "serious concern" to the company and as one of the largest suppliers of coal to Eskom it wanted to engage and work closely with the utility and the government to have reliable and competitively priced power so that it "can continue to invest in those businesses that are particularly energy intensive like platinum."

DRDGOLD chief executive Niel Pretorius warned that the proposed increase could force the closure of the group's remaining underground mine at Blyvoor unless there was an increase in the rand gold price.

Pretorius estimated the increase would add another R70,000 to underground operating costs to produce a kilogram of gold, which in the September quarter were a hefty to R346 068, well in excess of the received gold price of around R240,000.

Gold Fields September quarter gold output was flat at 906,000 oz, with total cash costs rising a modest five percent to 147,343/kg. In dollar terms, costs were up 14% at $586/oz quarter-on-quarter.

Gold Fields issues a number it calls notional cash expenditure, which is the all-in cost to produce an ounce of gold. This figure came in 12% higher at $826/oz in September.

NCE is forecast to rise five percent more in the December period to $870/oz. In rand terms, the NCE is seen falling slightly to R207,000/kg from R207,754.