No nationalisation, says Gold Fields

[] — GOLD Fields CEO Nick Holland remains confident nationalisation of the mines would not happen in South Africa, but has conceded the intensifying debate was increasingly worrying international investors.

He said: “I get that feedback from investors on road shows all the time. Investors do not like uncertainty and the continuing uncertainty around nationalisation is not good.

“I still remain of the view that I do not think nationalisation will happen in South Africa.

“The government has made its position very clear and you have to ask what more it would get in addition to the current taxes and royalties being paid on the mineral rights that the state now owns, were it to nationalise the mines.’

Gold Fields executive vice-president Michael Fleischer added “we believe that sense will prevail because the economics are clear. Nationalisation will not resolve the fundamental underlying problems.’

Holland defended his position that government’s stance on nationalisation remained clear when challenged on this in the light Susan Shabangu.

He said: “My stance is based on my interaction with government officials and a variety of people across the political spectrum. I can only go on what I get told and this is where we stand at this point in time.

“I believe we will find a solution to the nationalisation debate. If you look at our history this is a country that has successfully found solutions to such major issues before and will find them again.’

Gold Fields increased its gold production 5% to 872,000oz during the June quarter (March quarter: 830,000oz) and kept a tight rein on costs which in rand terms were up 5% quarter-on-quarter and just 1% year-on-year.

Holland said the rein on cost was despite big hikes in the underlying cost base, such as the 27% jump in power costs and 10% rise in labour costs in South Africa and the surge in oil prices which had hit the group’s open cast mining operations outside South Africa.

The group’s notional cash expenditure (NCE or the total production cost including capital expenditure) margin remained unchanged at 21%.

If current gold prices of around $1,780/oz (R410,000/kg) are sustained compared with the averages reported of $1,496/oz (R326,206/kg) for the June quarter, then Gold Fields is looking at excellent September quarter results.


Despite this, the Gold Fields share price at current levels around R114 remains below its 12-month high of R128 and is lower than levels that ruled five and ten years ago.

That underperformance applies to all the major SA gold stocks while many international gold producers have shown a similar pattern over the past 18 months.

Holland attributed this to the popularity of gold exchange traded funds (ETFs) and the global surge in mining costs, which has held profit margins largely unchanged despite the rising gold price.

He said: “Look at the gold ETF monster that has been created and into which a total of some $100bn has been invested so far.

“You have to ask how much of that investment might have come to gold stocks if the ETFs did not exist.

“That’s an impossible question to answer but it’s clear the people who have been piling into gold ETFs are mainly high net worth individuals. Institutions so far have not taken big positions there.

“Then you have seen costs go up along with the gold price with the end that the same profit margins were being earned. That’s another concern because unless you can bank a profit from demonstrably lower costs, then it’s tough to show leverage to the gold price.’

Holland said improving profit margins and increasing dividend payouts were ways in which gold companies could look to rectify the current situation in which gold mining stocks were trading at levels significantly below five to ten year averages.

Asked for his views on where gold was going and what the group’s response would be in terms of new projects Holland replied “we are not going to get carried away.

“We will keep our feet on the ground and ensure that all our projects are sustainable on robust gold price assumptions.

“We have to make sure we don’t give it all away. We have to manage our costs and expand our profit margins and perhaps then investors will start to believe that the stock is worth buying.’

Holland ruled out any possibility of hedging by Gold Fields, despite the current sky-high gold prices describing it as “the H word’.

“I am anti-hedging. You cannot beat the spot market over the long run. When you look at those who have hedged you will see that you can be ahead of the game for up to ten years and then lose it all in the space of the next two.

“It’s possible you will see people starting to hedge again but it won’t be us.’

– The writer owns shares in Gold Fields.