Blowout in costs at South Deep
Strike prompts Gold Fields to again cut output target
Gold Fields’ struggle with its South Deep mine in SA continued in the third quarter of 2018, forcing another downward revision of the operation’s full-year target, cutting output by a full quarter because of a strike.
Gold Fields’ struggle with its South Deep mine in SA continued in the third quarter of 2018, forcing another downward revision of the operation’s full-year target, cutting output by a full quarter because of a strike.
Gold Fields, which has mines in Australia, Ghana and Peru, has invested R32bn in South Deep and has struggled since taking ownership of the mine in 2006 to make it a sustainably profitable operation.
The latest setback is a protected strike by the National Union of Mineworkers (NUM) against the cutting of 1,500 jobs, or one-third of the mine’s workforce, to lower costs in line with subdued production.
“What I’ve done is assume the strike will continue to the end of December, so in essence we lose a whole quarter. We had a go-slow before then of six to seven weeks because there were rumours that something might happen on retrenchments,” CEO Nick Holland said in a Friday interview.
“It’s bit of a write-off year for South Deep as we try to get through the strike and reset the cost base for next year, focus on current operations, cut lossmaking areas and slash capital for now, getting rid of the big spend in the future. That’s what we’d like to do in 2019 to get to breakeven,” he said.
Holland unequivocally ruled out closing the mine, but he was far less clear when it came to the question of whether the company would sell the mine.
The capital to build and sustain the mine was R1bn a year, but the new plan would halve that number, he said.
The latest news in Gold Fields’ September quarterly production update made for grim reading as South Deep’s production target for the year was lowered to 154,600oz — basically half of what management had expected at the start of the year when it guided the market to 321,000oz.
South Deep produced 49,500oz of gold for the September quarter, little changed from the June quarter, while all-in costs, which include development capital, shot up to R804,998/kg from R755,930/ kg, making the mine deeply unprofitable.
The restructuring exercise is designed to get costs closer to the gold price of R560,000/kg and bring the mine to breakeven, but Holland declined to give a timeline or production level. He described earlier targets of 750,000oz or 800,000oz of gold from South Deep as “fanciful” now.
The reason for the blowout in September quarter costs was the lower number of ounces sold, higher operating costs and increased levels of sustaining capital. Gold Fields is in the process of laying off 1,102 employees and 460 contractors at South Deep. The mine is a focus for investors and analysts because of the large amount of money spent, the missed production targets, and running losses as management grappled to ramp up to steady-state output and achieve either breakeven or profitable status.
As a result of the downward revision of South Deep’s fullyear production, which was offset by the inclusion of gold production from the new investment in Asanko Gold in Ghana since July, Gold Fields pegged its full-year output at 2-million ounces. Gold Fields began the year advising the market to expect up to 2.1-million ounces.