Why Gold Fields IS LOS­ING ITS SHINE

Finweek English Edition - - FRONT PAGE - BY DAVID MCKAY

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.

OP­POR­TU­NITY COST

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.

THE COM­PE­TI­TION

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.

Mam­phela Ram­phele

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