“We’re ahead at South Deep for first time since I can remember”

Nick Holland, CEO, Gold Fields. Pic: Martin Rhodes

NICK Holland has received a few knocks in his eight years as CEO of Gold Fields including an investigation by the US Securities Regulation Panel (SRP) and some eviscerating criticism after he was paid more than R45.3m in shares and cash during 2013 which made an emblem of executive excess.

A popular view in that year was that he wouldn’t survive many months in his position, a view that was also fed by the serial under-performance of South Deep, a fabulously rich but under-peforming mine west of Johannesburg.

Yet Holland is still standing; in fact, he’s the longest serving CEO in South Africa’s gold industry and among the most durable across the sector. Not bad for a former accountant who has decorated his reinvention with a ritzy array of suits, and orange hair a la media baron, Rupert Murdoch.

Now, halfway through 2016, the challenges keep coming.

One is addressing concerns among analysts that some of Gold Fields’ international assets are nearing the end of their economic lives and require a heap of exploration cash to keep them pumping.

Analysts fear Gold Fields’ production of about two million ounces a year could be a stretch if new reserves are not found. The other problem – an enduring one for Holland – is South Deep.

“I still have a lot of passion and I love what I do,” said Holland scotching the notion he could step down. “So what is still to be done? South Deep … we obviously need to get it into a sustainable cash positive situation – that for me is a big piece of business that’s outstanding.

“In addition, I think we’d like to see if we can find something else offshore, either a new project, or we buy something, possibly in one of the regions we’re in (West Africa or Australia],” he said.

There is scepticism among analysts for Gold Fields’ future. “Gold Fields remains structurally impaired as it struggles to ramp up South Deep and its Australian operations are reaching the end of mine life,” said Goldman Sachs in April.

It thinks Gold Fields is heading into a period of higher capital spending and that production from South Deep, currently undergoing another round of re-engineering, will never reach the previously forecast target of 650,000 oz to 700,000 oz.

“We believe final guidance for the mine will be significantly below the original level of 600,000 to 700,000 oz a year by 2018 which will result in much higher unit costs and as such lower cash generation,” Goldman Sachs added in its report.

According to Patrick Mann, an analyst at Deutsche Bank, it’s hard to get a fix on Gold Fields owing to the low transparency of South Deep’s final production numbers which Holland said would not be published until February.

“We believe Gold Fields’ investment case rests almost solely on its South Deep asset. After many years of variable performance, we believe there is low visibility into the asset’s potential,” said Mann. He put a hold on the stock seeing an equal chance of positive or negative catalysts affecting the firm’s performance.

Holland said shareholders and investors ought to forget previous production targets now that a new management team has been put in place. And he is willing to acknowledge progress of South Deep, under his management, has been topsy-turvey.

“I think our execution has gone through a number of twists and turns that we would have preferred to avoid,” said Holland. “The last two years have been fairly volatile for us. We’ve had changes in the management,” he added.

Gold Fields’ has bounced between extremes in trying to get the most out of South Deep, a process that has included cutting jobs and imposing a mechanised approach to mining which was, for a while, overseen by Australian expats – a decision that led to some resentment in South Africa.

According to Nico Muller, senior vice-president of Gold Fields’ South African operations [South Deep], the mine’s management and engineering were ‘dysfunctional’.

Speaking to analysts in February 2015, a few months following his appointment, Muller said: “I’m not sure how to say this softly: I think the team was largely dysfunctional, for many reasons.

“I think the team operated under a lot of pressure given the variance between the actual output and the corporate expectations and what had been communicated to the market,” he said. “So there was a lot of noise.”


Holland believes South Deep has turned the corner. The mine is due to be cash break-even by the end of the year and the production numbers have been heading northwards with year-on-year March quarter output 75% higher. “For the first time that I can ever remember, we’re ahead of plan at South Deep,” said Holland.

And he is more convinced by the South Deep orebody which previous owners including JCI, Placer Dome and Barrick Gold have fruitlessly attempted to hammer into place. “I was worried about the skill mix [at the mine] but I’ve never been worried about the orebody,” said Holland. “I think the orebody has always said: ‘come and mine me’.”

He won’t, however, comment on what new production numbers might be. “Wait for February,” he said. Asked for a hint, he replied: “Wait for February”. But analysts think South Deep’s output forecast will be heavily cut from previous levels.

“We maintain our view that South Deep’s ramp-up will remain slow and gradual towards a steady-state of 400,000 to 450,000 oz by 2020,” said Adrian Hammond, an analyst for Standard Equities.

“The restructuring at South Deep appears to be progressing well in terms of establishing a new mine method and effective management team. We think this is critical to allow for sustainable production growth,” he said.

“Early stages of the new mining method is working well and the rock mechanics don’t appear to be a concern, although we think it is still too early to tell. Development time using the new method is expected to be 40% faster with first ore expected in 2017. South Deep remains a unique, complex and technically challenging mine.”

For the first time that I can ever remember, we’re ahead of plan at South Deep

South Deep is slated to do about 257,000 oz in Gold Fields’ 2016 financial year, a 30% increase on 2015’s production figures. This is an important target for South Deep to reach because elsewhere in Gold Fields’ portfolio there are production declines.

This year’s production is forecast to be 2.1 million oz, down on the 2.16 million oz of the previous year owing to closures and lower grades which will affect operations in the international portfolio.

Australian output will fall to 905,000 oz (2015: 988,000 oz) while the negative impact of the lower copper price in Cerro Corona’s equivalent gold production would reduce its output to 260,000 oz (2015: 295,000 oz).

In West Africa, there would be lower production from Damang as its immediate future is under review – although now an expansion is likely to be approved at a cost of $100m.

Holland’s assessment is that there’s been an overreaction to the lower gold forecasts. “I’ll cast you back 15 years, 2001, we bought St Ives and Agnew from Western Mining [in Australia] and we had four years of reserve life.

“Guess what? 15 years later we’ve produced eight million ounces, four years of reserves life and still have lots and lots of opportunities for us on that front. It’s nothing different; nothing has really changed. So I think the over-reaction to a drop off in production in 2016 is what’s sparking this,” he said.


However, tackling the challenge of breathing fresh life into the company’s Australian assets has seen Holland return to the notion of greenfields exploration, a concept he dismissed as recently as 2013. He then said digging up moose pasture was for specialised exploration companies, not established producers.

The sudden improvement in the gold market seems to have changed that.

“Yes, I’ve said greenfields is off the table since 2013. What I’m now saying is that there are changes in the gold market; there’s a situation where gold is becoming scarce, and with merger and acquisition (M&A) becoming very expensive, the value curve is shifting again.

“The industry goes in cycles; it goes up and it goes down. When it goes down, it’s cheaper to buy [gold new ounces]; when it goes up, it’s actually cheaper to build it. And we’re probably starting to move into the quadrant of saying: ‘hang on a minute; don’t necessarily buy, and maybe build’. It’s early stages, but I think you’re going to find that theme is going to get more popular over the next year or so,” he said.

As for M&A activity, Holland is having to rein in some of the enthusiasm of his chairwoman, Cheryl Carolus, who told an investment conference earlier this year that when ‘the going gets tough, the tough go shopping’ – a reference to possible corporate action.

“In fairness, maybe that comment was taken a little bit out of context by some,” said Holland. “We’ve always said that M&A is a part of the strategy if we’re able to get it right. In fact, let’s be honest, everything in the portfolio has been ought. I don’t know whether you know that? Everything.”