South Deep downgrades could send Gold Fields on project hunt

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South Deep mine

TRY as it might, Gold Fields is struggling to make ends meet at South Deep, its South African gold mine. Earlier this year, it downgraded forecast gold production by up to 10% after promising previously it could reach 90,000 ounces per quarter.

According to analysts, not even the downwards adjusted production performance can be maintained as recent production numbers have been driven – as it’s described in the mining industry – by ‘grade’. This is where parts of the orebody yields more grams per tonne than you’d expect to see on average, known as the reserve grade.

In the case of South Deep, the reserve grade is 5.8 grams of gold per tonne compared to recent grades of 6.3g/t. It adds up to a lack of sustainability.

South Deep is an interesting case study explaining why future supply of minerals is so fickle. It’s no easy matter switching on supply when a deficit develops, even when there are identified projects to be developed. South Deep is a case in point: the mine is premised on a hugely rich orebody, but extracting the gold profitably has been hard.

“We now think the FY18 [2018 financial year] target is challenging and [we] are also having reservations about our steady-state outlook of 380,000 oz/year,” said Adrian Hammond, an analyst for Standard Bank Group Securities.

This compares to Gold Fields’ own target of 500,000 oz/year which it said it would make after spending another R2.5bn on the mine (which has already absorbed more than R30bn in investment over the years).

The upshot is that Gold Fields’ is at risk of failing to maintain gold production falling to about two million ounces per year from the current 2.2 million oz/year target. As a result, Hammond believes Gold Fields needs to find another new project, notwithstanding spend  of R11.3bn unveiled in February in both new and replacement gold reserves, and described by Gold Fields CEO, Nick Holland, as ‘evolutionary’.

“In our view, a catalyst for change would need to come from a new good project. Group production can remain steady until 2023, hence management has time,” said Hammond who also commented finding the gold would be “not easy” and the balance sheet constraints would also be a factor.

16 COMMENTS

  1. Baas Neek, I have basically been begging you for years now. The target at South Deep should realistically be 350 kOz pa… At least give us afighting chance.

  2. It is interesting how the analysts pussyfoot around the real issue here. These days analysts are not allowed to say what they really think – even if they know what they’re talking about when it comes to mining, to be fair.

    Sure it’s a very difficult mine. But it has become increasingly clear to me that a key issue is also management. This asset needs to be moved out of Gold Fields, in my view. Maybe let Mr Froneman’s team have a go. Trouble is, Neal will only pay what the asset is worth. And it’s not, and never ever was worth R40bn (that’s more like the total exposure for GFI shareholders than the numbers mentioned above). Maybe 1/10th of that and, the risks are even then very high.

    It is obvious that to operate the asset successfully (it’s a high fixed costs unit) direct mining costs would have to be slashed and volumes substantially increased. Sorry to say, Gold Fields (and its succession of General Managers – I’ve lost count of how many) has demonstrated beyond any reasonable doubt, that it’s incapable of doing what is needed. Indeed how it ever agreed to pay R30bn to purchase it remains a mystery to me – at the time I and my colleagues came up with (and published) a number half that size (and we were woefully wrong).

  3. Excellent comment Steve, fully agree.
    I’d really value your views on the history of Western Areas vs. the present issues at South Deep.
    I’m specifically thinking about JCI’s failed attempt around 1988/1992 to implement trackless mining at WAGM. If memory serves, John Brownrigg was the manager at the time.

  4. Dear Fellow Readers,

    Unlike others, I have been consistent in my criticism of the CEO of GFI regarding South Deep . I believe its really long overdue that the GFI BoD become testicular and jettison Nick over the mess that is South Deep Mine. I feel he has overcapitalised this asset by throwing money at it , without pausing to analyse outcomes and there was never a credible mining plan that was founded in reality.

    I have previously wrote the following :

    “I remain a bullish about this company and hopeful that the CEO will depart soon”

    “This mine under his management, and prior involved , has swalllowed R35Billion of shareholder funds. The target production has been debased from 1200Koz/yr when acquired in 2006 to 800koz/yr (2009) which changed to 700koz/yr (2012) then metamorphosed into now 500koz (2017). IT IS A STAGGERING FAILURE BY THE CURRENT GFI MANAGEMENT. Nobody spends R35Billion for a 500Koz/yr mine at AISC = R600k/kg ( $1000/oz). And all of these targets have been always 3-5 yrs away when they were announced just like the new 500koz/yr .”

    There is across the board poor operating metrics are pointing to enduring underperformance , namely :
    1. Grade control is poor : It ranges from 3,2-5,5 g/t over 4 qrts.
    2. Longhole stoping: The % tonnage from this mining method areas should be >60% . This 3Q , is lower at 42%. So the high costs mining method tonnage is dominating the production profile thus increasing costs. Unacceptable.
    3. Throughput: This mine installed infrastructure is 330Kt/month. Its % utilisation is at 33% , despite all the development expenses YTD. Unbelievable.
    4. Face Length : If you are ever going to complain about face-length availability on a reef horizon with channel width = 15m, then you are ” by die verkeerde stasie” in mining. Its total incompetence!

    I can go-on-and-on….”

    Fellow miningmx.com readers, lets dig into the history of this mine so that newbies can appreciate the frustration that some of us feel about the BoD of GFI inaction. I hereby jot the numbers :

    Purchase Price = R22Bn in 2007
    CapEx (FY08 – FY16) = R13,3bn ( $1,6Bn)
    Actual Production (Moz) (FY08 – FY16) = 2,2Moz
    Acquisition Production Plan (FY08 – FY16) = 4,15Moz

    Then the story has evolved over the years since acquisition in 2007, here is the promises that have never come to pass , and when announced “full-production is always 5 yrs away” :

    2012 Fcast : Full year of 700koz/yr from 2015

    2013 Fcast : Change of Mind, now slow ramp-up. FY15 = 450Koz ; FY16 = 520Koz ; FY17 = 615koz ; FY18 = 673koz ; FY19 = 660Koz ;FY20 =670Koz

    2015 Fcast : Oops , we underestimated the mechanisation challenge. So we got Aussies to help from hereon. But the writing was on the wall given that production for FY14 = 200koz , with FY15 fcasted = 450Koz. Which indicated outright stupidity and with one of the steepest ramp-ups that i have ever seen in my mining career as follows : FY16 = 500koz ; FY17 = 600Koz ; FY18 = 700 ; post FY18 LOM = 700koz/yr

    2016 Fcast : They did NOT bother forecasting anymore, saying their re-evaluating the Mine afresh! UNBELIEVABLE

    2017 Fcast : South Deep Rebase Plan. Here it goes : FY17 = 315Koz ( they will miss this target !) ; FY18 = 358Koz ; FY19 =393Koz ; FY20 = 440Koz ; FY21 = 495Koz ; FY22 = 497Koz ; post FY22 avg LoM = 500koz

    CONCLUSIONS

    Clearly, every other plan post the 2011, has been utter hogwash. As of LoM to date, South Deep is 2 Moz ( TWO MILLION TROY OUNCES OF GOLD) behind plan in a mere 5 yrs since project completion, and has NOT been CF +ve in a single year. THIS IS CRIMAL GIVEN THE SUMS OF MONEY SPEND TO DATE. I am lost for words to describe in a sober & non-vulgar manner how i feel about this mine. It just makes my blood boil, yet the BoD of GFI lets this chap get away with it , and give him a fat bonus every year. UNFATHOMABLE!

    I have long suggested that Froneman must fix the SBGL balance sheet , and have a shot at this mine.

  5. Steve – ” why is it a difficult mine” ? Is it because the miners cannot mine according to the continually changing plan ? maybe the miners cannot move from a mindset (since 1886) of single narrow reef stoping to one of TM3 mining on massive stacked reefs.

    With this mindset no wonder mining is going nowhere very quickly in SA

  6. This is what happens when you put accountants in charge of mining companies. No idea of the practicalities/realities of mining this orebody. Holland just spouts mindless waffle. Didn’t he say recently that Big Data was going to solve South Deeps’s problems?
    Call me old fashioned, but I like to see mining companies run by miners.

    • Dear Benny,

      You are NOT old fashioned BUT realist.

      Nick has been frustratingly incompetent at managing South Deep Mine to full potential. I am on record indicating that there is NO WAY that 750Koz/yr gets delivered at AISC = $600/oz. But as per my earlier comment, the operational metrics are deteriorating AT THIS LOW PRODUCTION BASE.

      Maybe we miningmx.com readers must start a #NickHollandmustGO ….

    • Why would you like to see that? They are both egotistical a… Mark would not be able to do any better with South Deep. You cannot compare this monster (South Deep) to the shallow (mostly open cast) very high grade deposits of RandGold. Mark is very critical of other people who manage much more complex, specifically low grade deposits.
      I would like to see him manage one of these operations but then, he does not have to. He is sitting on some of the best orebodies in Africa and he is managing them well… He should maybe just cool it with the harsh commentary on those less fortunate. A debate would just show up how arrogant both of these guys are…

  7. Give Nick the credit he is due. He made excellent strategic decisions to dispose of most SA and buy Aus assets. In contrast, Mr. Cutifani, the great mining guru, nearly drove that company to dust- remember his 5.4moz/yr goal? He should of been shedding assets, raising cash and simplifying the portfolio – wrong decisions led by a “mining” CEO. Nick might not be a miner but he should be judged on all his strategic decisions, not just South Deep. But I do agree, the South Deep saga has been going on too long.

  8. THE TEAM needs to be changed.Shake the tree.
    Implementation of a decent bonus system,with buy-in from the crew’s.
    Longhole is not difficult,needs discipline when drilling and good fragmentation.
    Not necessary to reinvent the wheel.
    If you carry on doing the same thing’s everyday the outcome will be the same.
    Need to change the way you doing things to get a different outcome

Comments are closed.