Gold Fields restructures South Deep, affecting 1,560 staff

Nick Holland, CEO, Gold Fields/ Pic Martin Rhodes

NICK Holland’s hope that “green shoots” had appeared in respect of Gold Fields’ South Deep production plans came to nought today after the group announced a profound restructure of the West Rand operation, cutting 1,560 permanent and contractor jobs, potentially slashing gold output, and impairing the mine by R4.8bn.

Holland said only two weeks ago of South Deep: “We are seeing some green shoots in a number of areas, better performance in a number of our operators”. He was commenting in an interview with Bloomberg News.

Gold Fields said today that total impairments suffered by South Deep this year would total R8.3bn following a R3.5bn impairment that was taken out in February. A carrying value of some R20.7bn was inputed to the mine which is more than half of Gold Fields’ market capitalisation of R37bn signifying the group receives next to no credit for owning the mine.

Gold Fields was unable to give new production guidance for the remainder of the year or the 2019 financial year and said that previous production guidance for 2018 of 322,000 ounces could not be relied upon. Production in the second quarter totalled 49,000 oz – not much better than the 48,000 oz in the first quarter despite Gold Fields ringing in the changes by introducing shift changes.

“In addition, based on the current situation, detailed mine planning will be undertaken over the next few months,” said Gold Fields in an announcement today. “Once the full impact of the mine planning exercise and proposed restructuring is completed, we will provide guidance for 2019 and beyond,” he said.

Goldman Sachs commented that production guidance for 2018 would almost certainly be negatively affected. Shares in Gold Fields were duly hit hard falling some 9% on the Johannesburg Stock Exchange.

The cash burn at South Deep has been R756m alone this financial year – following a R295m outflow in the second quarter completed on June 30. Gold Fields has invested R32bn in South Deep since it acquired the mine for R22bn in 2006 from Barrick Gold.

The restructuring of South Deep is a major blow for Gold Fields which made no mention in its announcement today of perhaps selling the asset or shutting it down whilst it takes further measures. This is despite iteration after iteration in production plan intended to bring the mine round to sustainable profitability. At its zenith South Deep was earmarked for production of 800,000 oz a year, or more.

The mining plan now is that it will suspend mining activities at the mine’s Level 87 and redeploy mining crews elsewhere. It would also service the eastern part of the mine from the Twin Shafts and re-staff the South Shaft operations to a single shift per day. A further step is to reduce growth capital expenditure for the next 18 months to lower cash burn

Perhaps of greater importance, however, is that the restructuring delivers another hit to the South African government ahead of an election year in 2019.

Gwede Mantashe, mines minister, has already laid into Impala Platinum (Implats) whose CEO, Nico Muller, previously employed as COO of South Deep, announced on August 2 proposals to restructure the firm’s Rustenburg shafts affecting 13,000 jobs over two years.

Mantashe called the proposal “mindless” because Implats had opted to engage in a 60-day consultation process in terms of Section 189 of the Labour Relations Act – a step taken by Gold Fields today – instead of seeking mediation measures available under separate labour law in the Minerals and Petroleum Resources Development Act.

The response of the Department of Mineral Resources and unions affected by the South  Deep’s unions will be no doubt interesting to track. Lonmin has already announced its own plans to cut staff by 12,000 over four years. Gold Fields said Mantashe had been informed of its restructuring plans for South Deep.

The details of the potential labour reductions are that 1,100 permanent employees may be impacted and 460 contractors. South Deep currently employs 3,614 full-time employees and 1,940 contractors. Consultations with unions were being planned.

The second quarter impairment booked by Gold Fields would have an impact on the firm’s profitability for the first half of the year, according to a trading statement which was attached to the South Deep restructuring notice. As a result, a basic loss of $0.45 US cents/share – a drop of $0.52/share – would be registered which compares to a profit of $0,07/share in the first half of the 2017 financial year.

Gold Fields’ first half numbers would also be informed by a change of contractor at Gold Fields’ operations in Ghana which cost $96m related to $65m in retrenchments and a $31m impairment on fleet and inventory.

For the first half, attributable equivalent gold production is expected to be 994,000 oz, a touch lower than the 1.05 million oz reported in the first half of last year. But all-in sustaining costs would be $965/oz compared to $980/oz last year.