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Gold Fields: Tracking in line with FY2021 guidance - Seeking Alpha

Thursday, 13 May 2021


We're more than two-thirds of the way through the Q1 Earnings Season for the Gold Miners Index (GDX), and one of the most recent companies to report its results is Gold Fields (GFI). Overall, the company had a solid quarter with production up 1% year-over-year to ~541,000 attributable gold-equivalent ounces [GEOs], though all-in costs were higher due to significant investment at Salares Norte. The quarter's highlight was the news that Salares Norte continues to track ahead of schedule, sitting at over 23% project completion as of March. Given Gold Fields' strong organic growth profile and improving costs once Salares Norte comes online, I would view pullbacks below US$9.40 as low-risk buying opportunities.

Gold Fields released its Q1 results last week and reported quarterly attributable production of ~541,000 GEOs at all-in costs of $1,249/oz. While production was up marginally in the period vs. ~537,000 GEOs produced in Q1 2020, all-in costs were also up sharply vs. $1,113/oz in the year-ago period. This is expected to be a much higher cost year for Gold Fields with construction ramping up at Salares Norte, so I don't see the cost increase as a huge issue. Gold Fields noted that if not for elevated capex at Salares Norte, all-in costs would be guided at $1,110/oz in FY2021, in line with FY2020 levels.

Production was lower at most of Gold Fields' mines on a sequential basis (Q1 2021 vs. Q4 2020), but several operations saw an improved performance on a year-over-year basis. Beginning with the West African operations, production came in at ~221,000 GEOs which was up 13% year-over-year, driven by a sharp increase in production at Damang. This was partially offset by lower production at Tarkwa and the Asanko Gold Mine Joint-Venture. At Damang, production nearly doubled to ~64,500 ounces, driven by much stronger grades of 1.90 grams per tonne gold vs. 1.0 grams per tonne and higher throughput. This helped pull costs down to $733/oz from $1,734/oz in Q1 2020.

Moving over to the company's Cerro Corona Mine in Peru, it was another soft quarter, with production down from ~62,300 GEOs to ~46,400 GEOs. This sharp decrease in production resulted from lower throughput, lower recovery rates, and materially lower grades (0.9 grams per tonne vs. 1.2 grams per tonne). This was related to a waste recovery plan to mitigate COVID-19 impacts with plans for 3 million tonnes of accelerated stripping per year for the next three years. Given the lower production and sales, costs increased to $1,382/oz, up from $1,180/oz in the year-ago period.

At Gold Fields' Australian operations, production was flat year-over-year at ~236,000 ounces at all-in sustaining costs of $1,115/oz. While production increased at St. Ives and Agnew due to higher grades, production fell at Granny Smith from ~66,600 GEOs to ~57,600 GEOs. Meanwhile, at Gold Fields' 50% owned Gruyere Mine, production was up 10%, though it didn't really move the needle with this being a very small operation relative to the company's other mines.

The highlight for the quarter was Salares Norte, where the company noted that the Chilean project is ahead of schedule at 23.3% completion vs. a planned 18.8%. Pre-stripping has begun on the Brocha Principal Pit as of January, with more than ~1.8 million tonnes moved vs. plans for ~1.35 million tonnes. In total, ~$87 million was spent in the quarter at Salares Norte, with detailed engineering completed in January as well.

As noted in previous articles, Salares Norte is a game-changer for Gold Fields and is one of the largest undeveloped gold projects globally to head into production. Assuming the mine performs according to estimates, Salares Norte should produce over ~500,000 ounces of gold per year at industry-leading costs below $600/oz. This should be a major boost to Gold Fields' production profile and also a nice boost for margins, with more than ~15% of the company's production profile coming in at costs below $600/oz. The mine is expected to begin production in FY2023 and ramp-up in FY2024 to over ~500,000 ounces. This should help Gold Fields to increase its production from ~2.32 million GEOs this year to just shy of ~2.9 million GEOs in FY2024 at costs below $925/oz.

So, was there any bad news?

While we're a month away from the run-off elections in Peru, things could be a little hairy here if far-left Presidential Candidate Pedro Castillo is elected. This is because his election could have negative ramifications for gold miners in Peru, given that he mentioned that he planned to keep 70% of profits in Peru after "foreign firms had plundered the country." With Gold Fields having ~10% of its GEO production coming from Cerro Corona in Peru, this is not ideal.

Right-wing candidate Keiko Fujimori has been gaining in the polls recently, but it looks like it could be a tight race, which may have negative consequences if Castillo goes through with his plans. It's worth noting that Gold Fields is in better shape than other miners like Hochschild Mining (OTCPK:HCHDF), with more than 70% of its revenue comes from Peru. It's also important to note that once Salares Norte is online, Cerro Corona's production as a percentage of global gold production will shrink to closer to 8% at a ~240,000-ounce run rate, so this isn't a deal-breaker for an investment in Gold Fields, even if Castillo does win.

As we can see above, Gold Fields had one of the most impressive earnings growth rates among its peers last year, with annual earnings per share [EPS] up 330% to $0.86. If we look ahead to FY2021, earnings estimates are currently sitting at $1.12, translating to another year of double-digit growth. Based on Gold Fields' current share price of $10.50, this leaves the stock trading at barely 9x FY2021 annual EPS estimates, which is a reasonable valuation for a senior gold producer with strong organic growth looking out to FY2024. If we assume a fair earnings multiple of 12 to account for Gold Fields, this would translate to a conservative fair value of $13.44, or more than 20% upside from current levels.

So, is the stock a Buy?

Generally, I prefer at least a 30% discount to fair value for senior gold producers, and at a current share price of $10.50, this doesn't quite meet my buying criteria. However, if the stock were to dip beneath $9.40, this would translate to a low-risk buying opportunity. Additionally, if the gold price were to head to new highs this year, the fair value would increase to closer to $15.00, which would make the stock a Buy at current levels. However, erring on the conservative side and assuming annual EPS comes in below $1.15, further weakness will be needed to present a low-risk buying opportunity.

Gold Fields had a solid start to the year and is tracking in line with guidance with ~541,000 attributable GEOs produced vs. guidance of ~2.32 million ounces. The company continues to be one of the few senior gold producers with strong organic growth potential over the next few years, with Salares Norte having the potential to be a game-changer if it operates according to plan. Having said that, the stock is now 30% off its lows and just outside its low-risk buy zone. So, while I see Gold Fields as a solid name for investors looking for organic growth, I would not be in a rush to add to positions unless the stock dips below $9.40.

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