A MISPLACED perception that Gold Fields was significantly exposed to South African regulatory and operational risk had led to an under-performance of the company’s share relative to its peer group, said JP Morgan Cazenove.
The bank recommends investors buy the share owing to the current strong gold price and the potential cash flow that is anticipated to flow from its Salares Norte project in Chile.
“In our experience, Gold Fields’ deep discount versus global peers reflects a misplaced perception of its exposure to South African mining and regulatory risks,” said JP Morgan Cazenove analysts, including Dominic O’Kane.
South Africa represents about 10% of Gold Fields’ total production and about five percent of its earnings before interest, tax, depreciation and amortisation (EBITDA). Compared to this, Gold Fields’ mining in Australia is more than 40% of its total output and EBITDA, JP Morgan Cazenove said.
Salares Norte is an $840m project slated to produce 450,000 ounces of gold annually. In February, Gold Fields sold shares totalling $269m in order to part finance the project after first investigating a possible joint venture.
Salares Norte would have an initial life of mine of 11.5 years and life of mine production of 3.7 million gold equivalent ounces at an all-in sustaining cost of $465/oz.
The project would contribute towards a 700% increase in share earnings by 2023 compared to 2019. Assuming a $1,700 per ounce gold price, Gold Fields would reduce net debt to EBITDA from about 0.9x to a net cash position in about three years.
“Despite a $6.7bn market capitalisation, Gold Fields’ multiples remain at a deep discount to global gold peers,” said JP Morgan Cazenove in the report which was published on June 19.
However, in a report on June 22, RMB Morgan Stanley analysts said that an inflection in free cash flow for Gold Fields, a function of its investment between 2017 to 2019 and the higher gold price, was offset by its hedge book.
The finance required to develop Salares Norte single-handedly would also weigh on the share, according to RMB Morgan Stanley which said investors should remain “equal weight” in the stock.
Gold Fields hedged 47% of its 2020 production at an average gold price of $1,365/oz. Initially intended to underpin a de-gearing of the balance sheet the hedges coincided with elevated gold prices which had “tempered” this year’s free cash flow, the bank said.