Gold Fields Limited
Q2 2011 Earnings Call Transcript

Published: 11 Aug 2011

[Zakira Amra:]

Interim Results Presentation this morning. My name is Zakira Amra. We will be taking you through a revised format of the presentation, and you will notice it is a much shorter presentation than previous years. Nick Holland, our CEO, will be taking you through the overview and going into growth projects, and we will then follow on to the question-and-answer section. Just in terms of safety, in the event that we do have an emergency, could you kindly evacuate to your right. The exits are to the north of the building, and I would please ask you to congregate on the lawn. I will now hand over to Nick Holland.

[Nicholas Holland:]

Thank you very much, Zakira, and good morning, everyone. Welcome today. I think before I go into the presentation itself, I'd like to take you through a couple of management changes that have taken place, and I'm delighted that Peter Turner is with me today. Peter, I think most of you know, has been in the mining industry for over 30 years, in the gold mining industry in particular. And he has taken over responsibility for the South African operations with effect from this last Monday. As you will remember, Tim Rowland had acted in that role for around about 8 months, and Peter previously, very successfully, I must add, ran the West Africa region for Gold Fields for almost 3 years. So he's returned from West Africa and has now taken over the role of East African operations. Tim Rowland is going to head up Group Technical Services for Gold Fields. One of the things I've decided to do is to put together a group technical function for Gold Fields, which will be a small nucleus of highly qualified, highly skilled technical people, particularly given the fact that as you'll see later on, we not only have a whole series of operations across the globe, but we have around about 5 or 6 major projects coming down the track at a hell of a speed at us and felt that we needed to get a group technical function together. Peter's replacement is imminent, and I expect to be able to finalize that, all being well, within the next week or 2, certainly very soon. The other change we've made is given the genesis of our projects throughout the group over the last year or so and given that most of these projects, in fact, are an ingredient, if you like, or an output of the exploration effort, the other thing that I've done is to combine capital projects with exploration. So we put that all under Tommy McKeith, who couldn't be with us today because of a personal matter that he's had to deal with. But he is now going to be responsible for running both exploration and capital projects, which we think is going to create a much more seamless process as projects graduate from initial drilling to advance drilling, through to initial scoping studies, through to concept studies and of course, through pre-feasibility and ultimately feasibility and construction. And having all of that housed under one area, having that skills base under one area is going to make, I believe, the process much easier for us to manage. And Tommy already has quite a lot of skills that are compatible with project delivery in his area. So those are the principal changes, and last but not least, Zakira Amra, who introduced the presentation today, has joined us around 2, 3 months ago as Head of Investor Relations and Corporate Affairs. So you'll get to see a lot of her. And she's taken over that job from Willie Jacobsz, who, thankfully, is still going to be with the group. In fact, Willie's here with us today. He'll be going back to the U.S. tonight because he looks after the U.S. shareholder base. But thankfully, Willie will still be in the group and together with Nikki Catrakilis-Wagner, who's also here today, Zakira and Willie, and I think we've got a knockout team here that will take help us take our Investor Relations to a new level. So I think it's useful that we just highlight these changes, and some of them you'll see are actually described in the book. Now the other thing we've done is change this format because one of the things that I've seen in having done the last 12 quarters or so like this, I think a detailed presentation that goes on for an hour or so, I find that people start fidgeting and get restless after a while. And having too many speakers talking I think takes too much time. So what we'd rather do is I'll just give a presentation of the highlights. Paul, of course, our CFO, is with me today. Peter is here today. Unfortunately, Richard Weston, Head of Australasia, could not be with us today, and also Juancho Kruger from Peru could not be with us today. But this afternoon, as we do our conference call, we do a 4

[Zakira Amra:]

Thank you, Nick. We'll now go to questions.

[Allan Cooke:]

It's Allan Cooke from JPMorgan Cazenove. Just a few questions on KDC to start with, if I may. Could you let us know what the safety stoppages cost in terms of ounces or tons or shifts lost in the first 2 quarters of this year? I noticed that some of the incidents, in some of the safety stoppages, the whole complex had been stopped. For example, you had a tramming issue and tramming across Kloof and Driefontein was stopped. Is that something that you're experiencing post the restructuring that you did there? That whole complex -- all shafts are shut when you have a Section 54, for example, and is that an unintended consequence? What are the losses and the trend there, if you like, now that you've changed the way you report and manage that complex? And then also the BPR has been on the go there, Kloof and Driefontein for some 12 months now. Could you give us some color on the changes that have been made and how things are progressing there? I noticed that the underground yield you said is temporary and localized, but the reduction is some 10% nearly, to 6 gram a ton across the complex. What is the outlook for underground yields at KDC?

[Nicholas Holland:]

Well, I think first of all, yes, first of all, if I may say that on 54s, we haven't had 54s imposed across the entire property in all cases. Yes, there have been occasions when there has been a 54 imposed across the whole of KDC. But most times, it's been localized to the area involved or particularly the shaft involved. And in fact, with one accident that we had recently, in fact, I made a decision with the management that we would shut KDC ourselves and actually go back and reassess some of the safety standards. So in fact, we took a decision internally to shut down the whole mine and go and redeploy all of the crews to go and recheck certain areas, given what happened during the quarter. If we talk about what we've lost in terms of -- I wouldn't say safety stoppages. Let's call it accidents because safety stoppages are by and large consequences of the accidents. We've lost about 750 kilos in the June quarter, and we've probably lost around about 500 kilos in the March quarter. That's been the impact on our production. So it's not insignificant and is another key reason why if we're going to sustain these operations, besides the very important moral issue of safety, it's a business imperative to improve safety. In terms of the underground yields, as you can see, we've had a dip in the overall yield for KDC. And unfortunately, part of the problem with accidents is they often happen in the high-grade areas. And you tend to have to then fill your mills with lower-grade material as a consequence of that. But we've also not been getting the right volumes that we should be getting in the high-grade areas, and that's another big focus. Since quarter end, we're already seeing a good improvement in those underground yields, so I do expect those underground yields will improve. But I don't see any reason why we can't get the underground yields at or around 7 grams per ton. I think that's certainly a target we should shoot for. And if you look at the ore reserve, the ore reserve is telling us that if we mine at the right rate in the right areas and we get the right mine core factors, that we can certainly do better. And that's a big focus of the team right now. Business Process Re-engineering, Paul, I don't know if you want to talk to that.

[Paul Schmidt:]

They look at about ZAR 294 million since we started in June. A lot of it revolves around labor reductions, control of overtime and the total cost of ownership looking at the purchasing of some of our equipment, as well as some of our goodwill. And sometimes the cheapest thing is not necessarily the best thing if it you look at it over the life cycle of the products. So I think it's going well. I think ZAR 294 million basically in the year is a good start to the project, and we're well on track to achieving our target.

[Allan Cooke:]

Sorry. Just a follow up. You mentioned mine core factor at KDC. What is the mine core factor running at now, and where would you like it to be?

[Nicholas Holland:]

Well, this last quarter, we've got the mine core factor up to around about 81%, 82%. We believe if we look at the long-term averages, which is what we generally use -- the 5-year averages, we think there's scope for another 4% or 5% on that. So I'm sure that, that's one of the things Peter will be focusing on. And Peter, I know it's only been one week. I don't know if you want to add anything to these responses.

[Peter Turner:]

[indiscernible] No, sure. I mean, mine core factor's really about quality and getting the basics right. And certainly, Nick, that will be one of mine core first, going in really. I mean, what can you -- to improve productivity, cleaning out all the areas and really doing the basics of mining right.

[Steve Shepherd:]

Steve Shepherd with JPMorgan. Nick, you've highlighted the attractive opportunities you've got in Peru, and I'm sorry to ask you the question, but could you give us your take on the politics and how that might affect your decisions going forward?

[Nicholas Holland:]

Well, certainly, I think if you look at the cabinet that's been appointed in Peru, the signs are very positive. Now the people that have been appointed are certainly people that we know and we understand and are people who are very keen for business to prosper in the country. And the other thing is one has look at the total constitution of the Congress and who else is in there. And I think that gives you a reasonable idea of what's going to go on. But also I would point you to the inaugural speech of President Humala, where he's reiterated again what he said in his acceptance speech is -- that he's not looking to interfere with any international bilateral investment agreements. He's going to respect law as it stands today and the order of law. He wants the mining industry to prosper, and we have to remember that this is a country that has been the fastest-growing economy in South America for the last couple of years, and mining has played quite a significant role in that. And in particular, as we've worked out, there's about a $40 billion of mining investments waiting to go in Peru, and it's right up there in terms of copper production, right up there in silver production and important in terms of gold. So our view is that we think a sensible solution will be found to this, and we're certainly, both as a company and as part of the local mining industry, are playing a key role in collaborating proactively with government to find out how we can help them solve their issues. So I'm reasonably comfortable that we're going to work through this without any particular issue. The impact on our operations right now, no impact. Cerro Corona is in full production already, so that continues to operate. We've had no interruption at all. We've had no disruption during the elections at Cerro Corona. And Chucapaca, which is in the south of Peru, which was an area that was largely dominated by Humala supporters, we took a proactive decision to suspend operations at the project for 30 days just as an abundance of caution, if you like, to make sure that our people were not placed in any jeopardy. As it so happens, there were no real issues around there, and we're back in. And our relationship with the communities is good, and people are keen for the project to go. So we'll continue with our feasibility study in our in-fill drilling campaign. And that will take us through to June next year. And before we make a final decision on whether we go ahead with the project, we will have had another 9 months, 10 months or so to digest whatever's coming down the track. So I think for us we don't have any particular key decisions to make right now. But obviously, we'd like to try and get a lot of the uncertainty out of the air because it is a concern that we're hearing on the road.

[Johann Steyn:]

Just a quick question -- sorry, Johann Steyn from Citigroup. You maintained your guidance for the year at 3.5 million to 3.7 million ounces. If we look forward to 2012, '13 and '14, what are you guys thinking about? I know we've got the 5 million ounce on the production development. But if we can just look further than this year, how does it stack up for this?

[Nicholas Holland:]

Come to the Analyst Day on December 5, and then we will reveal all.

[Johann Steyn:]

So at this stage no additional guidance?

[Nicholas Holland:]

I'm not going to give anything new at this stage. What we want to do is give you a much better profile over the next 5 years. At that time, we want to give you a better indication as to when the projects might come in, what they might look like. So if you could bear with us. But I mean, to give you some idea, going forward, obviously, you can now rebase your estimates on the assumption of 100% of Peru, 90% of Ghana. I've given you an indication as to what KDC is going to look like. You've got the buildup in production at South Deep. Beatrix should be able to continue where it is, and the rest of the international operations I don't see much change over there. So I think using the information that we've given you, I think you can take that data, Johann, and you should be able to assimilate it. And if you want us to look at it before you go, we would be glad to.

[Johann Steyn:]

You've done already, so I'm not going to send it again. Just quickly also on Beatrix, what's your strategy with Beatrix at this stage? Isn't it a good opportunity to get rid of it at this stage?

[Nicholas Holland:]

Well, I think at this stage, we're very happy with a mine that's making ZAR 200 million of free cash flow a quarter. So right now, I'm happy to continue having that in our portfolio. It's pretty good. As of right now, 5 million to 6 million ounces at a gold price of ZAR 400,000 a kilogram, it's one of the most leveraged mines in the country to the gold price. And unless someone was going to pay me for that, then I'm very happy to keep it in our stable and generate nice cash flow for shareholders and for the group.

[Johann Steyn:]

Okay. And what do they need to pay you before you...

[Nicholas Holland:]

A lot of 0s on the check.

[Johann Steyn:]

Okay. And just one last question on Cerro Corona. Obviously, it's a fantastic mine. Long-term, what further potential is there at Cerro Corona? I know that tailing is the key bottleneck for the foreseeable future, but what is the potential that you guys are hoping you're going to find?

[Nicholas Holland:]

Well, as I said earlier, all the long-term grades are going to be the grades that we expect to see, based on the positive metal reconciliations we're seeing right now. It may be a little bit better. Who knows? It's early days, but that's one of the reasons we're doing more drilling on that. There may be potential to extend the mineralization out to the sides. It may extend laterally, and so we are looking at opportunities around that property. But I think the big thing is if we can get the extra tails capacity, whether it be looking at trying to increase the level of the dam, whether it be looking at dry tailings, which would give you typically 6 to 7x more capacity. A critical component over the next 12 months is to find a way of converting potentially another 30 million tons. And that would give us 5 years of life extra to the already 14 years of life that we have. So let's see how we go on those and then take it from there.

[Unknown Analyst -:]

I am going to refer to the cash flow statement, please and also the balance sheet. The cash flow statement shows 2 payouts, ZAR 1.24 billion for La Cima noncontrolling and ZAR 4.52 billion in Ghana. Incidentally why do you call it noncontrolling when before the payouts you were holding, respectively, 80.7% and 71%? I don't quite follow what is meant by noncontrolling, given those percentages that you were holding. In any event, the total paid out is ZAR 5.762 billion, which accounts for 90% of your total increase in net debt. Now it's rather intriguing to look at the ratios between these 2 payouts. In each case, there was an additional 19% in West Africa and 18% shareholding in South America. The ratio of the payouts, 4.52 and 1.243 is 3.64x. Now by itself, that's meaningless. But when we have a look at the same ratio for EBITDA contributions, the ratio comes to 2.1. Now when you were discussing the buyout for South America, you stated clearly that you were very, very pleased with the additional shareholding that you were able to obtain. You weren't as enthusiastic in describing that same buyout in Ghana, suggesting that possibly you may have overpaid, given the much higher price you paid measured against what you paid in South America. Now would that be a fair conclusion to reach or can you contribute something else to what I might have missed?

[Paul Schmidt:]

Let me answer. Let me go through all your questions, first of all. The one on the noncontrolling interest, when you have a company that you don't own 100%, the percentage that's owned by outsiders is called a noncontrolling interest. So when we bought out the minorities in Peru and in Ghana, they are called noncontrolling interest and hence, we call it purchase of noncontrolling interest. That's the name. It doesn't refer to the stake we already owned. It refers to the stake that we bought out. When you go to your calculation, you need to look at the cash flow. You need to look at the 2 quarters for the purchase in Peru. The 1.2, we split it over the quarter because it was a process where we bought some of them in the March quarter and some of them in the June quarter. If you add the 2 together, you get to ZAR 2.8 billion, which then comes back to -- and if you compare that to be 4.5, it's closer to your ratio of 2.21, not to the 3.21 that you talked of initially that you get to, but it ties up to the EBITDA ratio. So I don't know if that answers your question.

[Unknown Analyst -:]

It certainly does.

[Nicholas Holland:]

In terms of did we overpay, we are very comfortable with the price we paid for the Ghana assets. If you look at it, we effectively, on a reserve ounce basis, we paid around about $300 an ounce. On a resource ounce basis, we paid $200 an ounce. If you look at what ounces are trading -- before this big jump up in the gold price, resource ounces were trading at around an average of $200 an ounce, resource ounces. That's often a deposit with a few drill holes in, if you're not too sure that it extends, whether it's going to be a mine. Those kind of things are trading at $200 an ounce. And we can give you the data if you want it. And it's not our data, it's external data that we've used. So to buy in-production ounces at $300 an ounce with all of the upside that we have on Damang -- and there is upside on top, as well, that we'll talk to you about later on, maybe on Analyst Day. Even before the big run-up in the gold prices, it was a great deal for us, and I'm very pleased that we've done it. So if I didn't sound enthusiastic on the second deal, let me now sound enthusiastic for you.

[Unknown Analyst -:]

Okay, and lastly, one more question, please. The current portion of long-term debt's at ZAR 3.72 billion. The description suggests that you intend repaying that within the next 12 months. Is that correct or is it not correct?

[Paul Schmidt:]

That is just the current portion of debt. A lot of the debt is rolled over -- we have a $500 million facility that needs to be terminated in March next year, and that's basically the number that you are seeing. That will be rolled with the new facility.

[Unknown Analyst -:]

[indiscernible] I just wanted to find out how the recent wage strikes will affect production figures for the next quarter? And if you can just give us how much you lost production-wise sort of per day and then overall the whole period, please.

[Nicholas Holland:]

Well, the strike lasted around about 4 days overall. But the strike notice was received 3 days beforehand. And one of the things you need to do when you know you're going to shut down operations is like the Christmas break, we need to actually make safe and make sure that we're supporting. And the guys start ramping down. It's a natural consequence, I'm afraid. And similarly, when you skip back into production, it takes some time before you get back to steady state. You just don't get the crews in, and they start producing again, like they were. So I would think for us, the strike is going to cost us between 1 ton and 1.2 tons of gold. When I say cost us, we haven't lost the gold, and the gold is still there. We'll mine it. But we're not going to see the benefit of that 1.2 tons this particular quarter. Paradoxically, maybe we'll see it in a subsequent quarter at a high price. But the bottom line is it's about 1.2 tons of gold. And notwithstanding that we have reiterated our guidance at the back end of the book, taking that into account. But I guess we should be grateful that it's behind us. And we've got a 2-year arrangement, and I think for the union, for the workers and for us, it's a relief that we have 2 years where we can get on and all do our business.

[Zakira Amra:]

There are no further questions on the floor. Can we open up the questions to the people on the telephone and the webcast, please?

[Operator:]

Your first question from the webcast comes from Jonathan Burroughco [ph]. Based on the initial drill results for the [indiscernible] project, how many million ounces of gold reserves can we produce out of this project? Also what is the probability of producing 500,000 to 1 million ounces annually from this project?

[Nicholas Holland:]

Okay. Well, my answer is it's too early to tell you. And again, once we've put together an initial resource statement, we should have a better idea of the potential size of this ore body together with the potential grades and also the potential mining profile. So it's early days, but we're showing you these drill results today to give you an indication of the work that's been done over the last 6 months. And obviously, the next time that we all get together here, which we hope will be in 6 months' time, we hope to be able to give you more information, if not before, in the Analyst Day.

[Zakira Amra:]

Any further questions?

[Operator:]

No further questions.

[Zakira Amra:]

And any further questions from the floor before we end the morning?

[Unknown Analyst -:]

Quick one, technical [ph] impact of the wage settlement actions.

[Paul Schmidt:]

For the group, it's about 2.7%, about $22. For the SA offices, it's about 4.5%, about $46. So for the group, 2.7%. Not a massive impact.

[Zakira Amra:]

Okay. Well, thank you very much, ladies and gentlemen, for joining us this morning. Refreshments will be served in the room to the back, and we will kindly ask the media to join us in the roundtable at 11