Positive signals from serial industry laggard Gold Fields

But it’s too early to declare victory, says company’s CEO

A WEAK rand and a resilient gold price that has held up much better than more industrialised metals such as iron ore have propped up the performance of gold mining companies, with the stock prices of long-struggling companies such as Harmony more than doubling over the first quarter of this year.

The laggard among the majors has been Gold Fields, which is led by Nick Holland. At the height of the country’s labour tensions, Gold Fields managed to significantly derisk itself from the South African discount it had created. At the time of its sale of the bulk of its local assets to Sibanye Gold, the market and the company expected a rerating of the stock, given that its main asset would be South Deep, the pearl of South Africa’s gold mining industry because of its mechanised nature.

Most of the country’s gold mines — which are among the deepest in the world — are predisposed to labour-intensive mining. South Deep is an exception.

A positive re-rating, however, has not come to pass. And in a period of a weak rand and stable gold price, Gold Fields has fallen further behind its rivals.

Harmony has been the leading light, with its share price almost quadrupling. Sibanye has risen 124% and the stock price of AngloGold, Africa’s biggest gold mining company, has doubled.

Gold Fields has gained less than 30% and has been outperformed by the 76% climb of the TURNAROUND PLAN: Nick Holland, CEO of Gold Fields JSE gold mining index.

Over the same period, the dollar price of gold has averaged $1 180.67 an ounce and its rand price has been at record highs.

Despite the relative underperformance, Holland said demerging from its more troublesome South African assets was the best decision the company could have made.

“It’s been a fantastic outcome so I’m very pleased with what’s happened. Shareholder value is being created and that’s what we are here for as managers,” he said.

The decision to demerge the assets had nothing to do with not liking the mines: the assets had different mining methods — conventional and mechanised — and were at different points in their lifespan curve at the time.

MECHANISED OUTLIER: A miner at Gold Fields’ South Deep mine operates machinery via remote control

Holland said that in 2012 — at the height of labour tensions — he told shareholders that to get the best possible value from their shares he was going to put the conventional mines under a focused management team “to create a high-dividend stock”.

In 2012, the mining industry experienced its deadliest strike, with 44 people losing their lives at Marikana. On top of the labour unrest was continuing regula- tory uncertainty. The decision to escape investing in South African mines was not far from investors’ minds.

Gold Fields is expecting its mechanised South Deep mine to provide about 30% of its revenue for its full year. But the company’s ability to successfully run its crown jewel has long been criticised, with Gold Fields replacing its South Deep manager twice in three years.

In 2013, it was headed by Australian Garry Mills and 25 of his countrymen. However, the mine continued to miss its production targets. Subsequent to the appointment of South Africans Nico Muller in 2014 and Adriaan de Beer last year, there has been an improvement.

Holland said he had not encountered any investor who had concerns about South Deep or any of the company’s operations elsewhere.

“The share price has actually doubled in the past couple of months. I think that gives you an idea of how investors feel,” he said.

“Our problems have been getting the right skills in place and getting the right culture in place. So we have spent a lot of time last year and this year getting the right team in place.”

Holland said he did not know when South Deep would reach full capacity, and research was under way to determine what could be achieved under the new management team. The announcement of South Deep’s full capacity target would be made in February next year.

Daniel Sacks, head of resources at Investec Asset Management, said: “They are not giving up any guidance, which maybe is good because they have disappointed so much in the past.

“The new mine manager seems a lot more prudent and a lot more cautious. I guess he will be a lot more realistic [with production targets], but it is important for them to get it right because their other operations have much shorter lives.”

Sacks said taking into consideration share price turnaround, other gold companies appeared more attractive to investors in the gold sector.

The companies most exposed to South Africa’s gold industry are Sibanye, the entire production of which is sourced locally, and Harmony, which has 95% exposure.

Gold Fields “shareholders received the Sibanye share, it’s not like they sold it because they receive the cash amount and now the shares are much more. I don’t think they [Gold Fields] have any regrets, but [with not receiving the big benefit] I think for quite a while the regret was hanging on to South Deep,” said Sacks.

Since the start of the year Sibanye's share price has rallied to about R55.73 a share. In the same period, Gold Fields reached about R55.46.

Gold Fields has spent about R28-billion on South Deep.

Holland said not much more would be expended “because the main infrastructure development has been complete over the period that we’ve owned it, which is seven years. The bulk of the major growth capital has been invested over the period of 2009 to 2015.”

For now the company is cutting production in its international operations.

“In Australia, the mines are in their particular life cycles. These mines are very dynamic and sometimes you go through

The share price has doubled . . . That gives you an idea of how investors feel

low grades depending on where you are around the ore body. The production drop is about where we are in the ore bodies,” said Holland.

The company produced about two million ounces at about $944 (R14 500) an ounce outside South Africa.

Sacks said Gold Fields’ Ghana operations were not doing so well. And with copper prices down, it was more expensive to mine gold at the Cerro Corona mine in Peru — which is mostly copper.

Holland said: “There is still a lot of work ahead of us, make no mistake. We’re in the second year of a three- to four-year turnaround plan. It’s far too early for us to declare victory and we’re not. What I am saying is the lead indicators are pointing in the right direction.” Comment on this: write to letters@businesstimes.co.za or SMS us at 33971 www.sundaytimes.co.za