‘We’re try­ing to put down some­thing re­al­is­tic’ – Gold Fields’ Hol­land

The gold miner will be fo­cus­ing on three mines in three dif­fer­ent coun­tries si­mul­ta­ne­ously, but this will not come with­out de­vel­op­ment risk.

Finweek English Edition - - IN THE NEWS - By David McKay ed­i­to­rial@fin­week.co.za

afea­tureof Gold Fields’ year-end re­sults pre­sen­ta­tion in Fe­bru­ary is the de­gree of de­vel­op­ment risk the group is tak­ing on in an ef­fort to re­plen­ish gold re­serves and keep pro­duc­tion steady at no less than 2m ounces for the next eight years.

In­cluded in these mines is South Deep, a mine that is around 20 years old, which Gold Fields has owned since 2006 when the miner bought it from Bar­rick Gold for $1.53bn. Some R29bn was spent de­vel­op­ing the mine in that time, ac­cord­ing to re­search by Noah Cap­i­tal’s René Hochre­iter.

The other as­sets are the Salares Norte gold project in Chile; and Gruyere, a project in Western Aus­tralia in which Gold Fields bought a 50% stake last year for about R3.5bn. That makes three new mines in three dif­fer­ent coun­tries that will be si­mul­ta­ne­ously man­aged and funded.

While South Deep is fa­mil­iar to Gold Fields in a way a nor­mal de­vel­op­ment as­set would not be, the re-base of the firm’s pro­duc­tion tar­gets – the fruit of more than 12 months’ re­assess­ing the ore­body – is still a leap into the un­known.

An­a­lysts are split on the task at hand. Jo­hann Steyn, an an­a­lyst for Citi, said he’d “seen this movie be­fore” in re­spect of South Deep, which was once slated to pro­duce as much as 800 000 ounces per an­num com­pared to the tar­get of about 490 000 ounces Gold Fields has now adopted.

Other an­a­lysts think the an­nual 490 000ounce tar­get is con­ser­va­tive. “On the face of it, this seems to be a con­ser­va­tive tar­get given the re­cent an­nual run rates the mine has achieved,” said Mac­quarie – ref­er­enc­ing the 47% year-on-year in­crease at South Deep al­ready, to some 290 000 ounces.

As for Gruyere and Salares Norte, an­a­lysts asked whether the projects could be phased in at dif­fer­ent times rather than be­ing un­der­taken si­mul­ta­ne­ously. The view of Gold Fields CEO, Nick Hol­land, how­ever, is that the com­pany doesn’t have op­tions in terms of the pre­vi­ously stated strat­egy of ac­quir­ing mines in op­er­a­tion, pro­duc­ing cash flow.

“Ev­ery­thing we have in pro­duc­tion now has been bought by Gold Fields,” said Hol­land. “But it is get­ting harder be­cause all the ma­jors CEO of Gold Fields [large gold com­pa­nies] see the de­cay in their medium-term re­serves,” he said.

Some 100m ounces in gold pro­duc­tion were mined last year so it is get­ting harder to re­place this pro­duc­tion given the paucity of ex­plo­ration dur­ing the last three to five years when the gold price was un­der pres­sure.

“We will have a dy­namic view of the port­fo­lio,” said Hol­land. “And we have to look at the pace at which we de­velop projects. I wouldn’t rule out slow­ing down our de­vel­op­ments if the price of gold went to $1 000/ounce,” he added.

The dif­fi­culty of buy­ing de­vel­op­ment as­sets rather than an op­er­at­ing mine is the harder task of un­der­stand­ing what value lies in the de­vel­op­ing as­set. Gold Fields has said, for in­stance, that Gruyere will have an in­ter­nal rate of re­turn of about 6% com­pared to the 28% re­turn of the ex­pan­sion of Da­mang, a mine in Ghana that Gold Fields is also ex­pand­ing.

Again, Hol­land thinks this is the cost of pre­par­ing for the fu­ture. Gruyere’s val­u­a­tion is based on a fairly nar­row 13-year life of mine and that the virtue of hav­ing bought into the project is fu­ture op­tion­al­ity; that is, the real prospect of dis­cov­er­ing bolt-on pro­duc­tion in fu­ture years.

There’s a sim­i­lar view of South Deep. Asked by Ned­bank an­a­lyst Leon Ester­huizen whether Gold Fields was crimp­ing the larger po­ten­tial of South Deep in fo­cus­ing neart­erm, mine­able re­sources, Hol­land replied: “This is not the end-game for South Deep.

“The first task at South Deep is to get some­thing sus­tain­ably mak­ing money; we are try­ing to put down some­thing that is re­al­is­tic in­stead of all the arm-wav­ing. This is a mine plan; not the mine,” he said.

Nick Hol­land

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