Gold Fields Limited
Q4 2013 Earnings Call Transcript

Published: 14 Feb 2014

[Jan Willie Jacobsz:]

Good morning, ladies and gentlemen. Thank you very much for joining us here this morning for the December Quarterly and Year-End Results. Just a few administrative things, could I please ask you to all switch off your phones because it interferes with the electronic equipment and the webcast? And just some emergency arrangements, if it becomes necessary for us -- I should say, in the highly unlikely event that it's necessary for us to evacuate the room, you can use both of the back exits out and downstairs, where they'll show you outside and congregate at the far end of the property away from the buildings. The way that we'll handle the presentation this morning is that Nick will make a presentation, and after that, we will have a time for questions and answers. And then immediately following that, we will have the regular roundtable with the media people in the boardroom downstairs. We also have participants on the webcast as well as on the teleconference call, and we will also give them the opportunity to raise questions should they wish to do so. Thank you very much. I'll now hand over to Nick.

[Nicholas John Holland:]

Thank you very much, Willie, and good morning, everyone. A special welcome to the executives who've joined us today, along with Paul Schmidt on the stage, our Chief Financial Officer. We have Alfred Baku, who is the EVP in charge of Ghana, who's joined us today. I also see his South African colleague over there, Kgabo Moabelo. Thanks for joining us, Kgabo. Should be ladies first, really, but Lee-Ann Samuel, Group HR; Brett Mattison, Corporate Development. And also special thanks to our Audit Committee Chair for joining us today, Gayle Wilson, who is a regular at these events. Thanks for coming. All right, there's quite a bit to get through, so let's get straight into it. So looking at the quarter, we've achieved 598,000 ounces of gold equivalent for the quarter, that's up 21% against the previous quarter, principally because of the Yilgarn South acquisition, and I'll show you some details of that in a moment. That's the main reason for the increase. If you strip that out, we're pretty flat really across that [ph], but it was a good performance from those operations in the last quarter, we believe. There's a lot of confusion in people's minds about all-in costs and all-in sustaining costs. But this is the new metric that we will be reporting going into quarter 1. And the good news maybe for some, and maybe it's bad news for others, these are the only metrics that we are only going to report in 2014. Because it really gives a true reflection of what it costs to produce an ounce in the business. So all-in costs, we've come down to $1,095, and all-in sustainable, if you strip out what we classify as growth capital, and that's really up to South Deep, that's come down to $1,054. Net cash generated from the core business before financing and any acquisitions, $38 million. That has been a key consideration for us, is to turn this business back to cash positive in the face of an unprecedented decline in the gold price during the course of 2013. And it's a start to where we want to get to, but importantly, it's a big turnaround from where we've come from. Normalized earnings of $14 million. We've paid a dividend in line with our policy, and let me just confirm again our policy has not changed. Our policy is still 25% to 35% of earnings that we'll use as a basis for dividend payout. We're paying ZAR 0.22, and that comes to around about 30% of normalized earnings for the quarter. We strip out the nonrecurring items for that basis. As we flagged [ph] back in August when we presented here, we would be doing some impairments at year end. We have to run all of our economic models at $1,300 per ounce to do that. That took us a number of months because we had to rerun our reserves. And so that means that we're impairing around about $672 million at year end, and that's principally in Ghana at Damang; $173 million of that is at Damang given the drop in the gold price, in particular, and also in St. Ives in Australia. Those are the 2 big ticket items that we've got. So it's really Ghana and Australia. And these impairments are really on the back of the lower gold price. Given that we were using $1,500 an ounce in the previous year, we're now using $1,300. So it's really gold price related. It doesn't have any bearing on the technical nature of the ore bodies. There hasn't been any material modeling changes in the ore bodies as such, and also we've used higher discount rates and that's a function of a change in the risk-free rates across the world, the risk premiums we apply and also the beater [ph] that applies to the gold industry, so we put those through. We've also been analyzing. How do we look relative to everybody else? Well, the industry, so far, has impaired over $25 billion over the last year in asset impairments. So there are much bigger ticket items being impaired elsewhere than what we've done. And this means that at $1,300, we're very comfortable with the carrying value of our assets. Highlights in the quarter. Clearly, the acquisition of the Yilgarn South assets that we got on the 1st of October has been a highlight. That come in at 114,000 ounces at an all-in cost of $940 per ounce. And just to remind to us, that all-in includes everything except income taxes

[Jan Willie Jacobsz:]

Excellent, thank you. If you could just indicate if you want to ask a question, we will send the microphone around to you. Let's start here in the front with Allan. And then after, we will go down the line. Thanks, Allan. Can you just switch on the microphone for us, please? And just say your name as well, please.

[Allan J. Cooke:]

It's Allan Cooke from JPMorgan. Just going back to what you said about planning at $1,300 an ounce and the impairment testing and the new mine plans that were done over the last little while. Could you let us know what the discount rate was, specifically, that you used? You said you changed gold price from $1,500 to $1,300 and also discount rates. What is the discount rate that you're using? And it goes to hurdle rates -- I'm sorry, if this is a long question. And how are you evaluating your pipeline of projects -- I'm not sure what's left in the pipeline -- and make decisions, like at Cerro Corona, not to do the lift that there are a number of other decisions being made? What is the hurdle rate, and what is the discount rate? How are you evaluating new growth projects and existing expansions within the group? And I ask that question with reserve replacement in mind. How are you going to go about replacing reserves in your project pipeline at your existing assets within the framework of that basis? And then, the next question is kind of a bearish question, I guess. You're planning at $1,300 an ounce. If gold goes to $1,100 or $1,000, how will those plans change? And what will the group do further to maintain profitability, to maintain your positive free cash flow margin that you currently enjoy?

[Nicholas John Holland:]

Okay. I'll -- let me deal with the 2 parts of your question, and then I'll ask Paul to deal with the impairments specifically. One of the important things that's implicit in our planning for 2014 is not to plan our business at a breakeven $1,300 price. It's to plan our business to make a margin at $1,300. So we've looked at each of our assets, and we've said, now we would like to try and make a 15% margin if we can, cash margin, after everything -- taxes, the lot -- if we can at $1,300. Now some of the assets get there, and some need to get there. But the point is, everyone is being looked at. Australia is basically there, we believe. Peru is basically there. Tarkwa's there. Damang is in transition. And South Deep, as we know, we're trying to get it to breakeven as a start. So if gold goes back to, say, $1,100, then, and I was sitting here in front of you, I'd being saying to you, "Well, at this stage, we're going to be probably breakeven." I think we're going to be hanging on like everybody else. And I would want to keep developing the mines underground and in the open pits to make sure that we could have a future. But I think if the gold price goes to $1,100, the industry won't be making any money. I think we'll all be treading ground as we were -- or treading water, rather, as we were in 1999. How long will it be at $1,100? Your guess is as good as mine. But certainly, it will shake out a whole bunch of the industry. So we got an in-built protection factor at $1,300 because we thought about that, too. Some people say gold could go lower before it goes higher. We're prepared for that. So we don't need to build an emergency plan. It's in -- built into our numbers. In terms of looking at whether we spend money or don't spend money on expansions, acquisitions, developments, typically, I think we want to get a double-digit return at robust technical parameters. In other words, valuing what we see and not valuing all of the blue sky and upside potential. And a good case in point, a good case study, if you like, is the Yilgarn South acquisition. Where essentially, it's a 4-year reserve life on average for those assets. We valued the reserves. We didn't value the upside. But in order to motivate this to our board, we had to have upside. And frankly, if we didn't have any upside, I wouldn't want to waste our time. I wouldn't want to waste time buying mines with a 4-year life. I think we can do better with our money. We see these mines going for significantly longer than that. But we only valued the reserves. We used a conservative gold price, $1,300 price tick. We used a conservative exchange rate in Australia, and we used the double-digit returns. So that's how we look to that. And I don't see us looking at other things fundamentally different to that. And that's why we've made the decisions on some of the brownfield projects, and why they're not going anymore because they just don't get over the hurdle rate. I'll hand over to Paul to talk about the impairment, specifically.

[Paul A. Schmidt:]

Allan, the -- we use our WACC model to calculate the discount rate, but we use different WACCs for each region. And that has to take into account, obviously, country risk, the risk-free rate in that country, country risk, as well as the detail of the industry that we applied. For South Africa, we'd used a pretax rate and the reason why we did a pretax rate in South Africa is because of the massive unredeemed capital that we have. We used 11.5% pretax rate for South Africa. For the rest of the group, we used an after-tax rate, 8% in Ghana, 5.2% in Australia and 6% in Cerro Corona.

[Steve A. Shepherd:]

Are those real?

[Paul A. Schmidt:]

Those are real.

[Nicholas John Holland:]

And all of these are agreed -- have to be agreed with our auditors.

[Paul A. Schmidt:]

Except -- Steve, South Africa is nominal; 11.5% is nominal. The rest are real.

[Jan Willie Jacobsz:]

Good. Can we move on to Andrew Byrne, please?

[Andrew Byrne:]

Andrew Byrne from Barclays. Two questions, if I may. First of all, with this -- with the impairment that we've seen this quarter, what would that have been if we'd have used, say, $1,200 per ounce gold price? How sensitive is this? And are there other assets that were then fallen into the impairments? That's the first one. And then secondly, is it possible you could give us an update with regards the SEC investigation just in terms of the potential timeline and exactly what's included in the investigation, please?

[Nicholas John Holland:]

I'll do number two.

[Paul A. Schmidt:]

So you want to do number two? We ran some sensitivities from $1,250 to $1,350 on the impairment, but we didn't come to a total for the -- $1,300 was our number. But sometimes, it's not gold price that they're sensitive to. It could be discount rates in some other countries, sensitive to exchange rates. Australia is very, very sensitive to the Aussie dollar-U.S. dollar exchange rate when you run your model. So I can't give you exact numbers at $1,200. We only ran from $1,250 to $1,350 in our sensitivity analysis as we were doing it for the board. But we didn't total that up; $1,300 was our number, and those were the answers that we've come out with.

[Nicholas John Holland:]

Okay. I think there's -- the best way to deal with your second question is there's a paragraph in the book on Page 19, but I'll read the important paragraph to you. Obviously, we know that there's an SEC investigation. Given the early stage of this investigation, it is not possible to determine what the ultimate outcome of this investigation, any regulatory findings and any related developments may have on the Company. So that's all we can tell you at this stage.

[Andrew Byrne:]

Do you have any idea on timing [indiscernible]?

[Nicholas John Holland:]

We have no idea on timing.

[Patrick Mann:]

It's Patrick Mann from Deutsche Bank. Two quick questions. The first one really just a clarification. South Deep at steady state by the end of 2017, do you mean that the first year of your full steady-state production would be 2018 then? And then, just secondly, on your CapEx rationalization program and talking about not compromising on development and stripping. Could you please just reconcile that with your revised plans at Damang and stopping the stripping and focusing on the higher-grade areas, please?

[Nicholas John Holland:]

Yes, so in terms of the second question on Damang, the reason we're stopping is that we weren't sure that we were going to make a return at $1,300 an ounce. When we looked at Damang earlier, we were assessing Damang at $1,500. And it makes a big difference when you look at the $1,300. So that's really price-related. And we decided, therefore, that the ore body may actually be better than what we thought it was at $1,500. But we don't want to tackle this as one big project to start with. So we go stage by stage. We do it incrementally. But the important thing is, it's not an option on the gold price. It has to actually fly at $1,300. Because the problem with the gold price going up is that regrettably, other things go up with it. And there is a high correlation with oil. There is a high correlation with steel and cement and other imports. So our view today is that whatever long-term strategy we adopt at Damang has got to fly at $1,300. We're confident that we've got 5 years that works at $1,300. And I think, over time, as we learn more, we'll be able to engineer a lot of the resource into reserve at $1,300 as well. But the danger is, and it's back to the point about marginal production that we've been talking about previously, the danger of pushing up your production and lowering your grade at higher prices is that it tends to destroy value, and we don't want to get to that scenario. So that's how we reconcile that. You're correct. The run rate I've given is at the end of 2017. So therefore, 2018 would be the first full year at those levels of production.

[Christopher Nicholson:]

It's Chris Nicholson from RMB Morgan Stanley. Two questions. I guess, the first question is if we could just step back on South Deep, I remember maybe you said this a couple of years ago, total CapEx budget, I think, in real terms was about ZAR 8 billion for the South Deep expansion in real terms. How much of that have we spent to date? With the timelines getting pushed out, how much remains? That's the first question. Second question, I know you've given [indiscernible] for Damang. Could you give us an indication of what the total reserve write-down would be across the international assets because there's no impairments at South Deep from what I can see?

[Nicholas John Holland:]

Yes. The second question is going to be easy to answer. Those numbers are not yet finalized. So we'll put them out in the annual report, which will go in next month. So those figures will go in there, and you'll see the numbers in there. I think on South Deep, if you look at the website, we've given you the future capital that we expect to spend. And you can reconcile that against what we've spent to date. But we're tracking very well on the capital. The capital has not been the issue. And certainly, all of the money we spent on the fixed infrastructure projects, the vent shaft, the plant expansion, the full plant -- tailings plant, refrigeration capacity [ph] has all tracked very well. So it's not that we have spent more to get the infrastructure. I think our issue on South Deep has been just taking longer to do the destress and longer to open up the haulages into the future. But if you look at the last 4 years, we have tracked very well against what we've said we're going to spend, and we're within around about 12%. And there was no contingency put into those numbers to start with, so we tracked very well. So I think the key thing is going to be, for us, to ensure that we get the capital spend going forward, and that will deliver the mine. But we're probably around about 3/4 of the way through to what we need to be on the South Deep capital. So the resolution there has been pretty good. But I think to help you, if you look at the historic spend, which is -- it's out there, and you look at what we put on the website, you can get a feel for what the capital has been and what it will be over the next 5, 6 years.

[Paul A. Schmidt:]

Yes, just to add to that, we've said that the sustaining capital is about $1.3 billion going forward. So effectively, from the schedule that's on the web, from 2015 onwards, if you take $1.3 billion off that number, that is basically still part of the regional capital project. But from there onwards, that is standing numbers. So we view the delta, and that's how we've split South Deep into growth capital and sustaining; $1.3 billion is deemed to be sustaining. The difference is growth.

[Nicholas John Holland:]

But the total numbers are there. So you can you see, well, we've decided not to try and split those out. We've just given you the complete profile, but that would obviously include the ongoing capital.

[Jan Willie Jacobsz:]

Okay. Thank you, Chris. We go to Derryn.

[Derryn Maade:]

It's Derryn Maade from HSBC. Sorry, but we seem to be doing South Deep to death today. I've got just another question on that. Behind the delays to the destress plan, what are the key factors that have impacted on these delays? And do you see the -- how are you mitigating these factors going forward? And what is the confidence that you have in the new plan? Because over the last few years, it seems to have been somewhat of a moving and diminishing feast.

[Nicholas John Holland:]

Yes, as I said in the presentation, if I take you back to the slide, the key issues were to make sure that we have the ore-handling infrastructure in place. Now things like ore passes, making sure that the haulages are supported, that we have extra ramps to debottleneck the operation. We've done a lot of that work already. In fact, we commissioned 2 new ore passes before Christmas, and there's 2 more new ore passes coming through in the first half of this year. The second thing was equipment availability and utilization. We're in the process of debottlenecking our 5 underground workshops. We're doing that. We've got a brand new workshop that we've essentially finished blasting up, which is, imagine 2 football fields underground and, in fact, I walked into one corridor in December. It's about 200 meters' walk across and walked that way, perpendicular. That will be commissioned this time next year at the very latest, and we're trying to fast-track that as well. So that will help us to make sure we can split out the different components of the equipment maintenance. We're trying to do everything in a confined space, from tire change, oil change, major long-life services. We're going to split those all out. So that will make a big difference as well. And then we are training our operators and re-skilling our operators, coaching them. We got a new Trackless Training Center. If you come on a visit on Tuesday, you'll see it. New trackless mining training center, that's already been commissioned. So we're going to be upgrading the skills of the operators and the artisans and technicians. So we got very good projects underway to make sure all of that happens, and we're already seeing some of the benefits of that so -- the other thing is the productivity rates that we're factoring in are still quite modest by benches but -- now we want to try and put a plan down that we're confident of delivering on, and we're confident of delivering on this plan.

[Derryn Maade:]

And can you just update us on the land claims in Western Australia?

[Nicholas John Holland:]

There's nothing new to tell you other than the press release we went out with. Essentially, it's not a land claim, as such. It's not that land is at risk. It's a question mark on the process followed on the award of tenements, which predates the time that we earned St. Ives. We don't believe these claims are based on any foundation, and we've got legal advice that supports our view on that. This has to go to the Federal Court of Australia. I think it's slated to go at the end of next month. But it is subject to an appeal process. And obviously, both sides will be giving their own views of things, and there'll be time for deliberation. So we don't know the timeframe. It's not within our control. And as I say, with an appeal process, it's likely that it could go on for even longer than that.

[Jan Willie Jacobsz:]

Thanks, Derryn. Benjamin, are there any questions from the webcast?

[Operator:]

The first question comes from Kane Slutzkin from UBS.

[Kane Slutzkin:]

Just touching on your exploration projects, you disposed of Talas in December 2013. You still have several others that are up for sale. Can you provide some color on as to how that's progressing, whether you're seeing advertising in the market? And has anything changed, in your mind? Would you make -- what would make you want to retain any specific project for its optionality?

[Nicholas John Holland:]

Now all I can say is we continue to test the market and have tested the market on a number of these opportunities. Talas, we disposed of, as you've indicated. But right now, we don't have anything new to say other than if we can't secure reasonable deals for these assets, we won't give them away. And we will, therefore, keep the holding costs to a minimum during the period we have to hold them. And there's some very, very substantial assets, 15 million ounces of 2 PGE plus gold at APP alone with significant copper and nickel credits. It's certainly worth a lot of money to someone into the future. So if we have to bide our time, we're quite happy to be patient. So we don't -- haven't changed any views on them. But the key consideration for us is how we can extract the best value and whether we have to wait longer for them. If we have to, we will.

[Jan Willie Jacobsz:]

Time for one more question here. We will just see if somebody else needs one. Okay. We'll come to you.

[Adrian Hammond:]

It's Adrian Hammond with BNP Cadiz. I have 2 questions on South Deep. Firstly, what sort of phase time are you getting up to phase relative to your targets? And I'll wait for the second one.

[Nicholas John Holland:]

Yes. Phase time, we know we're probably around about 14 hours a day. We're not quite where we want to be yet. It's still taking us quite a bit of time to get people to the phase. It's taking time to get people through the muster room and through the safety process before the shift. And so there is work we've got to do to improve that. So yes, we've improved by around about 25% from where we were. And that's evidenced in the fact that the reef tonnes in 2013 were 26% higher than the reef tonnes in 2012. But we think there's more that we can get. So it's an optimization process. We certainly didn't think that it was all going to happen at once. It would take to deliver, but we're making good progress. But yes, we're not where we want to be yet.

[Adrian Hammond:]

Just on working costs quickly. You're targeting 360,000 ounces this year. Just talk to us about how you get there and impact on the working cost. Are you going to deploy more -- or employ more stoping teams? And I guess that talks a bit to the development you're expecting to ramp up to as well.

[Nicholas John Holland:]

We've got more than enough people right now and more than enough gear to mine a lot more than what we're mining, okay? So we got more than enough people. We got more than enough fleet. So there's no issue with that. The key, again, to all of this is for us to ensure that we get our equipment availabilities up, that we get the mining cycle improved. We enhance the operator skills. We've got good initiatives underway to deal with all of that. And that's the key ingredients for us to get this. We don't need more people. We don't need more gear. We just need to improve what we're doing.

[Jan Willie Jacobsz:]

Thank you very much, Adrian. We'll take the last question from the conference call. Do you have one, Benjamin?

[Paul A. Schmidt:]

Can we just check on the conference call if there's a question?

[Operator:]

There are no questions in the conference call.

[Jan Willie Jacobsz:]

Super. Thank you very much, ladies and gentlemen. That brings to an end this part of the proceedings. We invite you to have some refreshments with us downstairs. And the media, if you could join us in the boardroom downstairs, for the roundtable. Thank you very much.