Gold Fields’ South Deep to beat output guidance after second successive cash positive quarter

South Deep: lightning rod no more?

GOLD Fields was on course to exceed full-year production guidance at South Deep its South African mine which generated cash for a second successive quarter.

For a group producing about two million ounces of gold a year, South Deep’s expected contribution in 2019 of around 200,000 oz – potentially 10% more than the 193,000 oz production guidance set in February – is relatively small beer.

But a drop in all in costs (AIC) suggests the group has found an appropriate level for the mine that has provided financial and operational headaches for management completely out of whack with its role in Gold Fields’ overall investment offering.

The positive news on South Deep was disclosed in Gold Fields’ third quarter operating and financial results, published today, in which attributable gold production fell 2% quarter-on-quarter to 523,000 oz owing to lower grades at its Ghana mines, and Cerro Corona, a mine in Peru, and a circuit lock-up at two of the firm’s Australian mines.

Lower production resulted in a 4% increase in all-in sustaining costs (AISC) of $947/oz based on the new interpretation of the metric. Gold Fields reduced net debt $97m which was $1.4bn as of the day of the period-end. Gold Fields benefited from having sold shares in Gold Road and Hummingbird Resources but there were also outflows for the interim dividend announced mid-year and $10m paid to Asanko Gold, the Canadian miner with which it is in joint venture in Ghana.

Other remarkable features of the third quarter is that Gold Fields had embarked on a process to potentially attract a partner to its Salares Norte venture, an $834m project set in Chile. It is also considering additional hedging in order “to underwrite the payback for the project”, adding however that additional group-wide hedging was not anticipated.

Gold Fields’ hedging strategy fell under the microscope earlier this year after it registered an interim mark-to-market non-cash loss on its hedge book of $120m. The group was caught out by the continued improvement in the local currency price of gold after having written contracts on a gold price assumption of $1,200/oz.

The assumptions in local currency were at some A$1,600/oz and about R555,000/kg for Australian and South African production respectively. The rand gold price is currently at about R698,891/kg. “We do not plan to undertake any other hedging activity for 2020 or beyond,” Gold Fields said today.

3 COMMENTS

  1. Again – care for some hedging anyone…?

    “Gold Fields’ hedging strategy fell under the microscope earlier this year after it registered an interim mark-to-market non-cash loss on its hedge book of $120m. The group was caught out by the continued improvement in the local currency price of gold after having written contracts on a gold price assumption of $1,200/oz.”

    The ZAR gold price is on a multi-year upward trend.
    2004 – R 3,000 per ounce
    2019 – R 20,000 per ounce
    A steady 600% increase in 15 years.
    Ignore this trend when you are running a gold mining company?

    Induced hedging is good for business when costs are capped and profits are open ended.
    Cui bono?

    Debt and credit agreements?
    Induced debt is good for business when profits translate nicely into interest payments.
    Cui bono?

    Massive hedging damaged the mining industry’s shareholders almost twenty years ago, to the benefit of those who held the hedging agreements. The yoke of debt burdens draws profits away from shareholders and into the hands of perhaps the very same parties who benefit from hedging itself.

    Hoping that these actions will be quickly forgot and relegated to the past is not going to work.

    History is visible and history is repeating itself, again…

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