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Gold Fields: Solid Reserve Replacement In FY2020
The Q4 Earnings Season for the Gold Miners Index (GDX) is finally over, which means that many miners are busy releasing their Reserve & Resource statements for FY2020. One of the most recent companies to release its results is Gold Fields (GFI), a multi-million-ounce producer with operations in Australia, South America, and Africa. Unlike most of the sector, Gold Fields managed to increase its reserves year-over-year, and this was even though no reserves were reported at the 45% owned Asanko Gold Mine [AGM] joint-venture. Given Gold Field's industry-leading reserve grade and organic growth potential from Salares Norte, the stock continues to look very reasonably valued on a valuation per reserve ounce basis.
Gold Fields released its FY2020 Reserve & Resource update last month and reported attributable gold (GLD) reserves of 50.3 million ounces, translating to a 2% increase in reserves year-over-year. This impressive result was driven by a sharp increase in reserves at the company's massive South Deep Mine, as well as a notable boost in reserves in Australia, despite the company drilling fewer meters than it did in FY2019 (~276,000 meters vs. ~367,000 meters). The one minor change worth noting was that Gold Fields did increase its metals price assumption to $1,300/oz (FY2019: $1,200/oz), which is in line with the industry average but slightly above the prices used by the largest million-ounce producers like Barrick (GOLD) and Newmont (NEM). Let's take a closer look at the results below:
If we look at Gold Fields' attributable mineral reserves from a mine by mine standpoint, we can see that Gold Fields actually increased reserves at most of its mines, which is exceptional given the sector-wide exploration struggle in FY2020. The challenge to aggressively explore was attributed to the global pandemic and most companies prioritizing production over drilling, with a goal to keep case counts as low as possible and protect workers. So, the fact that Gold Fields managed to boost reserves at most of its operations is quite impressive, even after offsetting for the higher gold price used to calculate reserves. The most significant increases in reserves came from St Ives, which added 382,000 ounces (+ 16%), South Deep which added ~2.67 million ounces (+ 6%), and Agnew, which added 145,000 ounces (+ 19%).
In terms of growth at South Deep, the increase in reserves was thanks to a decrease in the cut-off grade at the South African mine and an updated mine design, with the cut-off grade decreasing from 4.1 to 4.5 grams per tonne gold to 3.8 to 4.2 grams per tonne gold. This massive attributable reserve base of ~31.54 million ounces translates to a more than 100-year mine life, even if we assume increased annual gold production of ~300,000 ounces per year (FY2021 guidance: 289,000 ounces). This is one of the longest mine lives in the sector, with few mines having a mine life of 25 years or more, let alone 50+ years. Currently, the plan is to build a 40-megawatt solar power plant at the mine with the hope of reducing power outages and improving costs, with the solar plant expected to satisfy 20% of South Deep's electricity needs.
Moving over to Australia, Gold Fields reported exceptional reserve replacement, with ounces added at three of its assets (Granny Smith, Agnew & St Ives), offset by a minor decrease in reserves at the Gruyere joint-venture. At Granny Smith, Gold Fields has guided for ~265,000 ounces of gold production, which translates to 8 years of mine life at Granny Smith, assuming production stays in the ~240,000 to ~270,000 per annum range. At St Ives, guidance is for 360,000 ounces, translating to an 8-year mine life as well, assuming production stays in the ~330,000 to ~360,000-ounce range per annum.
Elsewhere in the Australian operating portfolio, Agnew's reserves are at the low end, with only a 4-year mine life based on FY2021 guidance levels. Having said that, Agnew added over 145,000 ounces net of mine depletion in FY2020 and has a ~3.2 million-ounce resource base, so there is significant room for resource conversion. Therefore, I don't see any reason to worry too much about the mine life here. Finally, at Gruyere, the mine life might look low at ~1.74 million ounces, but this represents only Gold Fields' 50% attributable ownership in the mine. Assuming gold production of between ~250,000 and ~290,000 ounces, the mine has a 10-year mine life on a 100% basis.
If we move over to the two mines that reported a material decrease in reserves, I don't see any reason to be overly concerned. Beginning with Cerro Corona, reserves fell from ~1.54 million ounces to ~1.36 million ounces, but this still translates to a more than 8-year mine life, assuming a long-term production profile of ~155,000 ounces per annum and a more than 9-year mine life relative to the three-year average production (~142,000 ounces). At the Asanko Gold Mine JV, reserves fell from ~1.07 million ounces to zero reported ounces, but this was solely due to Galiano Gold (GAU) missing the year-end cut-off for reporting reserves at AGM. Galiano expects to report reserves by summer, and I would expect attributable reserves to remain near ~1 million ounces of gold. If we adjust for the 'lost' ounces at the AGM, Gold Fields' reserves would have increased by more than 3 million ounces year-over-year net of depletion.
So, how does Gold Fields' reserve base stack up relative to peers?
As shown above, Gold Fields' has the 4th largest reserve base, with the miners sitting on larger reserve bases being Polyus (OTCPK:OPYGY), Barrick (NYSE:GOLD), and Newmont (NYSE:NEM). However, despite this significant reserve 50 million-ounce reserve base, the company trades at a deep discount to its peers, at a valuation per reserve ounce of less than $200.00. Obviously, part of this discounted multiple comes from the fact that half of the reserves are located at one mine in a Tier-3 jurisdiction and the fact that Gold Fields is a higher-cost producer. However, as pointed out in previous articles, Salares Norte has the potential to decrease Gold Fields consolidated costs while also increasing its production profile to nearly ~3.0 million gold-equivalent ounces per annum by FY2024. Based on the current timeline, the South American mine is expected to come online in Q1 2023.
If we look at Gold Fields' reserve base from a grade and size standpoint, Gold Fields is well ahead of its peers and ranked in 1st place among million-ounce producers from a grade standpoint. However, the company has the lowest valuation among million-ounce producers from a valuation standpoint. As noted previously, a significant discount is justified due to lower margins, the fact that Gold Fields' reserve base is sub-20-million ounces without South Deep, and quite a bit of reliance on Tier-3 jurisdictions (West & South Africa). However, I believe this discount is more than priced into the stock at a valuation per reserve ounce of below $200.00.
Gold Fields had an exceptional year for reserve replacement, with attributable reserves growing by 2% to ~50.3 million ounces or more than 4% after adjusting for the late reporting of reserves at the AGM joint venture. It's important to note, though, that Gold Fields did increase its metals price assumptions, and Barrick and Newmont would have also increased year-over-year if they chose to use more favorable gold prices. Instead, they chose to remain at $1,200/oz and still managed to replace most of their reserves. Having said that, even after factoring in reasons for a discounted valuation for Gold Fields highlighted in the article, the stock remains very reasonably valued. Therefore, if we were to see the stock dip back below US$9.00, I would view this as a low-risk buying opportunity.