Cockerill recipe to be tested

[] — GOLD Fields has been the stand out stock of the South African gold sector lately, but it may now be facing more difficult times.

The group is exposed to cost inflation just like any other mining company. “It plagues us as it does everyone,’ said Ian Cockerill, Gold Fields CEO in a recent conference call. But Gold Fields also has some unique project risks to tackle including mine deepening on the west Rand, and new mines in an increasingly volatile Latin America.

In addition, it will also have to contend with the incorporation of the 30 million oz South Deep which it is hoping to buy from Western Areas and Barrick Gold.

Its Driefontein mine in South Africa, a stalwart asset, is also showing signs of age. Grades continue to slip. “It’s like the old lady with a terminal sickness. You have to keep make sure it’s comfortable,’ said one analyst.

Meanwhile, there’s some $1.2bn (R9bn to R10bn) that will soon crowd on the balance sheet when the South Deep purchase is consummated. Set against keeping the operations straight, this could provide some unwanted background noise.

Nick Holland, Gold Fields CFO, has said in the past the group was comfortable with up to $750m in debt. The approach now is slightly more watchful. “If the gold price continues, we’ll be comfortable,’ says Holland.

“The basic engine of Gold Fields is in good shape,’ says Cockerill. He’s basically right. Analysts believe that, fundamentally, the story is positive for Gold Fields. Buy recommendations continue to be made (though the target price has been lowered).

The test for management, however, is how well its relatively small team copes given that there are more moving parts in the company than three years ago.

Take the uprising near Gold Fields’ Cerro Corona mining project in Peru, attributed to spillover from national elections in that country. That’s the kind of force majeure, quite unattached to core skills of mining, management could do without. Says Cockerill of what’s happening: “We are concerned about conflict developing between our workers and protestors. We’re taking it very carefully”.

Certainly, management was concerned enough to suspend work at the mine. Sensibly, it’s not taking risks given Newmont Mining’s experience at Yanacocha in Peru in which two workers were kidnapped, another killed.

One final point is whether Gold Fields can be completely at ease should it fail to takeout all of Western Areas with its share-based offer. Dissenting minority shareholders include 29% holder, Harmony Gold. Its CEO, Bernard Swanepoel, says he wants a higher, cash offer for his shares. Gold Fields is not dealing.

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The fundamental cause of South Deep’s mismanagement in the past was the inefficient nature of the ownership structure between Placer Dome and Western Areas. The mine needs a single focus on management where decisions can be taken quickly and without fuss.

There’s also the clause in the original joint venture of 1998, when Western Areas agreed to sell half of the South Deep mine to Placer Dome, that the Canadians would pay $235m in cash and a 1.75% per year royalty on its 50% share of gold production up to 1 million oz. This is small beer economically, but it’s an untidy legacy if Western Areas remains in existence.