[miningmx.com] – LAST year, it was widely speculated that Gold Fields CEO, Nick Holland, wouldn’t survive the scrutiny of the Securities and Exchange Commission (SEC), the US watchdog organisation that was so worried about corporate governance lapses at the South African gold producer that it launched its own investigation.
This is the investigation into an empowerment transaction at the firm’s South Deep mine in the west Rand which saw some of the BEE shares land in the pockets of surprising candidates, including the ANC’s chairperson, Baleka Mbete.
Former Gold Fields chairperson, Mamphela Ramphele, later said certain BEE candidates had been “forced down the throat” of Gold Fields by officials in the South African government in return for a new order mining permit. The SEC’s interest in the matter is that it wants to know why the deal was ratified by the Gold Fields board.
It’s so sensitive that journalists are told not to ask questions about it or risk an embarrassing hiatus while executives shift from foot to foot and Gold Fields spokesperson, Sven Lunsche, reads the riot act, politely. (We ask anyway).
An analyst, who posed questions about the SEC investigation, was given similar treatment. Holland read him the terse, one paragraph statement from Gold Fields’ December quarter presentation which basically said the matter was sub judicae.
Analysts, however, believe that if the SEC doesn’t get Holland, the technical shortfalls at the South Deep mine may. While the SEC investigation could take two to three years to complete, South Deep’s difficulties in delivering its production targets is a more short-term concern.
Once feted by the late Brett Kebble as a 850,000 ounce-a-year mine, South Deep was earlier this month reduced to a target level 650,000 to 700,000 ounces – and some 12 months later that promised. It produced 302,000 oz in Gold Fields’ 2013 financial year.
The net effect of this shortfall is to reduce the attractiveness of Gold Fields as a share in which investors would want to put their money.
For instance, South Deep will produce less gold at full tilt and take a year longer to ramp up which means that assumptions about its returns have already been dented, not in actual cash flow, but in revenue it should have earned.
And while South Deep’s capital cost won’t increase – most of the capital outlay has been spent with 90% of the skilled labour employed – the lower production means an increase in unit costs against initial assumptions.
Much of the attraction in Gold Fields is the uplift provided by South Deep which is promising 350,000 to 400,000 ounces more gold than the company is currently producing. That’s up to a 20% increase on current output.
An analyst says that if you look at what else is in Gold Fields – assets in Ghana, Australia, Peru – then investors really need South Deep to validate the current share price. If it fails, there’s only reason to sell.
Another ‘problem’ for Holland is that the assets he de-merged from the group – the Driefontein, Kloof and Beatrix mines of the west Rand and Free State provinces – are thriving under the management of Neal Froneman, CEO of Sibanye Gold.
“You’ve got to think when you see this that Nick could have done a better job, and whether he’s any good at running gold mines,’ said an analyst.
“Nick has made South Deep his project, and very much what Gold Fields is about. You can understand the balancing act he has to make by making small adjustments to projects so as to avoid a massive write-down, but eventually the market will come to believe the project will never work,’ he said.
