Why Gold Fields IS LOSING ITS SHINE
Last year, it was widely speculated that Gold Fields CEO Nick Holland wouldn’t survive the scrutiny of the Securities and Exchange Commission (SEC), the US watchdog organisation that was so worried about corporate governance lapses at the SA gold producer that it launched its own investigation.
This is the investigation into an empowerment transaction at the firm’s South Deep mine on the West Rand, which saw some of the BEE shares land in the pockets of surprising candidates, including the ANC’s chairperson Baleka Mbete.
Former Gold Fields chairperson Mamphela Ramphele later said that certain BEE candidates had been forced down the throat of Gold Fields by Government in return for a new order mining permit. The SEC’s interest in the matter is that it wants to know why the deal was ratified by the Gold Fields board.
It’s so sensitive that journalists are told not to ask questions about it or risk an embarrassing hiatus while executives shift from foot to foot and Gold Fields spokesperson Sven Lunsche reads the riot act, politely. (We ask anyway.)
An analyst, who posed questions about the SEC investigation, was given similar treatment. Holland read him the terse one-paragraph statement from Gold Fields’ December quarter presentation, which basically said the matter was sub judice.
Analysts, however, believe that if the SEC doesn’t get Holland, the technical shortfalls at the mine that is the subject of the investigation will. While the SEC i nvestigation could take two to three years to complete, South Deep’s repeated difficulties on delivering its production targets is a more shortterm concern.
Once feted by the late Brett Kebble as a 850 000 ounce-a-year mine, South Deep was earlier this month reduced to a target level 650 000oz to 700 000oz – and some 12 months later that promised in 2012. It produced 302 000oz in Gold Fields’ 2013 financial year.
The net effect of this shortfall is to reduce the attractiveness of Gold Fields as a share in which investors would want to put their money. Here’s why.
South Deep will produce less gold at full tilt and take a year longer to ramp up, which means that assumptions about its returns have already been dented, not in actual cash f low, but in revenue it should have earned. It’s what’s known as an opportunity cost because that revenue is forgone, forever.
HIGHER UNIT COST
While South Deep’s capital cost won’t increase – most of the capital outlay has been spent with 90% of the skilled labour employed – the lower production means an increase in unit costs against initial assumptions, and a lower return.
THE RUMP (DOESN’T COMPENSATE)
Much of the attraction in Gold Fields is the uplift provided by South Deep, which i s promising 350 000oz to 400 000oz more gold than the company is currently producing. That’s up to a 20% increase on current output.
If you look at what else is in Gold Fields – assets i n Ghana (needs improvement), Australia (doing okay), Peru ( good asset) – then investors really need South Deep to validate the current share price. If it fails, there’s only reason to sell.
Another problem for Holland is that the assets which he demerged from the group – the Driefontein, Kloof and Beatrix mines of the West Rand and Free State – are thriving under the management of Neal Froneman, CEO of Sibanye Gold. “You’ve got to think when you see this that Nick could have done a better job, and whether he’s not any good at running gold mines.
“Nick has made South Deep his project, and very much what Gold Fields is about. You can understand the balan-cing act he has to make by making small adjustments to projects so as to avoid a massive write-down, but eventually the market will come to believe the project will never work,” said an analyst.