Gold Fields warns of capital overrun at $860m Salares Norte as inflation exceeds forecast

Gold Fields CEO, Chris Griffiths

GOLD Fields’ project in Chile, Salares Norte is facing a capital expenditure overrun of up seven per cent owing to inflation, said Chris Griffith, CEO of the gold producer.

Commenting in Gold Fields’ first quarter production update, Griffith said inflation had been a greater factor in the company’s accounts than expected.

“Given the elevated level of inflation, the contingency that was built into the capex forecast has started to be eroded,” said Griffith of the Salares Norte project. “Should inflation continue at current levels, we expect the overall project capex to be 5-7% higher than expected,” he said.

Salares Norte carries a capital expenditure bill of some $860m which could increase to $903m to $920m if Gold Fields’ inflation concerns are borne out. Once developed, the mine will produce average annual production of 450,000 ounces of gold equivalent over the first seven years.

As of Gold Fields’ April estimates, inflation was now forecast to be 8.9% in Chile compared to the group’s February forecast of 2.7%.

A similar picture emerged at some of the other regions in which Gold Fields operates such as Peru where inflation as of April was forecast to be 10.5% compared to a previous forecast of 6.8%. For Ghana, inflation is now forecast at 12.2% compared to a forecast of 10.9% in February.

“As we finally seemed to have overcome the worst of Covid-19 around the world, the invasion of Ukraine by Russia has had a material impact,” said Griffith in his first quarter commentary. “Despite the devastation caused by any form of war, the world is being plagued with heightened inflation, driven by high oil and gas prices and more broadly, higher commodity prices.”

“While we expected the mining sector to be challenged by high inflation at the start of the year, the impact has been worse than initially expected,” said Griffith. “High commodity prices have driven inflation in energy costs; logistics and consumables,” he said.

From a group perspective, all in sustaining costs (AISC) for the quarter totalled $1,150/oz, an increase of seven percent year on year but nine percent compared to the fourth quarter. All in costs were 6% higher year on year as project capital at Salares Norte continued. The mine is roughly 70% complete as of end-quarter.

Gold Fields said about $77.5m was spent on the project during the quarter, comprising $63.0m in capex, $9.2m in exploration, $4.3m in investment in working capital and $2.8m in other cost, partially offset by a realised gain of $1.8m on a foreign exchange hedge.

The first quarter was generally a good one for Gold Fields. Production came in at 580,000 oz, an increase of seven per cent year-on-year but 8% down quarter-on-quarter.

In terms of guidance for the remainder of the financial year, Gold Fields said the higher-than-expected copper by-production credit had partially offset the higher cost inflation. “Consequently, we leave our cost guidance for the year unchanged,” said Griffith. Gold Fields has forecast AISC of between $1,140 to $1,180/oz.

For 2022, attributable gold equivalent production – excluding Asanko Gold Mines, a joint venture Gold Fields shares in Ghana with Galiano Gold – is expected to be between 2.25 to 2.29 million oz. This compares to production of 2.25 million oz in the 2021 financial year. Including production from Asanko, attributable gold equivalent production is expected to be between 2.29 and 2.34 million oz.