‘Standout’ South Deep repays faith

Gold Fields has lived through many disappointments at its sole remaining operation in SA, South Deep, but this week it described the mine as a “standout performer” during 2021 and forecast growth in production over the next four years.

Gold Fields acquired South Deep in 2006, only to endure a decade of bleeding cash, geological complexities and labour unrest.

Despite the headwinds at the troubled mine, Gold Fields persisted and under former CEO Nick Holland shrugged off mounting calls to sell it.

The mine has reported its third year of positive cash flows after a restructuring process in 2018 in which about 1,200 people, a third of the workforce, were retrenched to curb costs.

A productivity improvement programme was introduced a year later and has helped pave the way for strong output prospects for 2022 and beyond. The group has also mended relations with labour unions, the company said.

CEO Chris Griffith said South Deep’s output is anticipated to grow by a further 20%-30% over the next three to four years.

“I was asked a few times today, ‘Well can you see beyond that?’ and ‘What could the future number look like?’ I am pleased to be asked that question as opposed to ‘Are you ever going to make your guidance and are we ever going to make money out of South Deep?’

“The decision to retain South Deep has been justified, and the South Deep team is on the ramp-up curve,” Griffith said during a results presentation.

South Deep generated three times more cash in 2021 than a year earlier at R1.4bn, up 157% from the R558m generated in 2020, mainly due to an increased volume of gold sold, which was partially offset by higher cost of sales before amortisation and depreciation, as well as higher capital expenditure.

Gold Fields ploughed R1.3bn in capex into South Deep, including the construction of a R715m solar plant of 50MW, which is expected to provide the mine with about a quarter of its power needs and save more than R120m in power costs a year.

South Deep is expected to produce 312,000 ounces of gold this year, a 7% increase from 2021.

It beat guidance to produce 9.1t of gold (293,000 ounces) in 2021, up 29% on the 227,000 ounces recorded a year earlier on the back of improved volumes and lighter Covid-19 restrictions. South Deep was severely hit by the restrictions, which resulted in a loss of 9,600 ounces (300kg) during the year under review.

Commenting on the group, Chantal Marx, head of investment research at FNB Wealth & Investments, said given the higher costs and lower-than-expected production, the outlook for Gold Fields is grim.

She said Gold Fields’ 2022 production guidance is slightly below expectations, and the all-in sustaining costs are quite a bit higher than expected. Capital expenditure is expected to be higher than what the market was forecasting, said Marx.

“All this together translates to a grim outlook for this year despite potential nearterm support for the gold price. At the moment an economic slowdown, together with geopolitical risk, will be supportive,” she said.

Marx said South Deep is looking at a potential squeeze if gold prices remain steady or decline, given that sustaining costs are expected to increase 9.2% to $1,430 (R21,500) an ounce.

Financial highlights for 2021 were the cutting of debt by $100m, to end the year at debt of $969m. The group generated $913m of free cash flow, of which $713m was invested into the eight mines it operates, and $369m went to dividends. The group declared a final dividend of 260 SA cents per ordinary share.

Gold Fields, which spun off its ageing gold mines into Sibanye-Stillwater in 2012, generates most of its revenue from its international operations.

The group is focused on constructing the $800m Salares Norte project in Chile, which is expected to contribute 15% of Gold Fields’ production by 2023.

Gold Fields expects output of between

The decision to retain

South

Deep has been justified, and the South Deep team is on the ramp-up curve Chris Griffith

Gold Fields CEO

2.25-million ounces and 2.29-million ounces in 2022 at an all-in sustaining cost of between $1,140 an ounce and $1,180 an ounce.

Its total group capex for the year is expected to be between $1.050bn and $1.150bn, with the largest share of the budget for the year going to Salares Norte project capital, with $330m expected to be spent.

Investment analyst at Anchor Capital Stephan Erasmus said the increase in South Deep production is critical for Gold Fields to offset its Damang mine-life ending and Cerro Corona production ramping down to 150,000 ounces in 2025.

“Gold Fields’ three-year production guidance growth compound annual growth rate of 5.5% depends on the performance of South Deep, which has been a perennial underperformer in previous years,” said Erasmus.

“Given numerous macroeconomic uncertainties, it’s anybody’s guess where the gold price will go from here,” he said.