Cost alarm at Gold Fields SA mines

Brendan Ryan | Fri, 07 May 2010 09:24

[miningmx.com] -- COST increases revealed in the March quarter results from Gold Fields bear out recent warnings from CEO Nick Holland over the dangerous situation facing the South African gold mines.

Holland told Miningmx on April 21 that, “2010 is crunch time for the industry. We need to do something within the next three months to start moving to a different strategy otherwise it’s not going to be good for anybody.”

The reasons include declining productivity levels and soaring costs on the SA mines during a period when revenues in rands have been capped by the strength of the rand against the US dollar.

That has robbed the SA gold mines of most of the benefit of the steady rise in the dollar price of gold over the past 18 months.

The March quarter numbers underscore the widening profitability gap between Gold Fields South African operations and the mines it has developed in other countries such as Ghana and Peru.

Gold Fields reported an overall drop in gold production for the March quarter of 11.7% to 24,690kg (December quarter – 27,981kg) all which is attributable to lower output from the South African mines.

That’s the result of the Christmas holiday period although there was also a negative impact from accelerated maintenance work at Kloof.

In marked contrast production by region from the group’s operations in Ghana, South America and Australia was all higher in the March quarter.

Net earnings fell to R316m (R1.4bn) equivalent to 44c a share (196c a share) while the group’s average cost – measured by notional cash expenditure (NCE) – rose 11% to $1,003/oz of gold produced ($900/oz).

The NCE measure is designed to provide an accurate assessment of the “all in” costs of producing an ounce of gold. It includes capital expenditure and money spent on brownfields exploration which are excluded from the usual “cash cost” statistics published by most gold producers.

The NCE measure is important because it reveals just how much free cash is available to pay dividends, taxation, interest charges and to invest in greenfields developments.

Gold Fields’ average NCE figure of $1,003/oz masks some poor performances from its SA mines which are operating deep in the red on this basis. By comparison, the group’s star operations are Tarkwa in Ghana and Cerro Cerona in Peru.

The average price received by Gold Fields in the March quarter was $1,102/oz . Keep in mind that gold has only moved back towards current levels of $1,200/oz over the past few days.

Against that background it’s sobering to see that Kloof recorded an NCE cost of $1,358/oz in the March quarter while South Deep weighed in at $1,914/oz although the South Deep number is heavily influenced by on-going development costs.

Flagship mine Driefontein barely broke even reporting an NCE cost of $1,074/oz.

By contrast the NCE cost at the Tarkwa and Damang mines in Ghana was $783/oz while at Cerro Cerona in Peru it was $532/oz.. In Australia, the Agnes mine came in at $766/oz but the St Ives operation just missed the cut reporting an NCE cost of $1,103/oz.

Holland has guided June quarter gold production at between 875,000oz and 900,000oz compared with the 793,000oz produced in the March quarter. That is based on the assumption of increased South African production although Holland pointed out the June quarter results will be affected by another string of public holidays falling into this period.

He has also predicted that the group NCE cost should remain flat at between $980 and $1,000 per ounce of gold produced compared with the level of $1,003 achieved in the March quarter.

The writer owns shares in Gold Fields.