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It's been a volatile 12-month stretch for the Gold Miners Index (NYSEARCA:GDX), and one senior producer that's been hit especially hard by the sector-wide carnage is Gold Fields (NYSE:GFI). The good news is that this ~40% decline in the share price has had little to do with the fundamental story, with the company making steady progress at Salares Norte [SN] and tracking slightly above its cost guidance range. However, much of this cost pressure is currency-related, and the company should see a slight improvement in costs as output ramps up in H2. Based on Gold Fields' improving cost and jurisdictional profile once SN comes online, I would view pullbacks below $8.70 as low-risk buying opportunities.
Gold Fields released its Q2 and H1 results just over a week ago and reported attributable production of ~1.1 million gold-equivalent ounces [GEOs], a 2% increase from the year-ago period. This was driven by a solid H1 from South Deep, Damang, and Agnew, where production was up on a year-over-year basis. The increased output at these operations was offset by much lower production at Asanko (45% interest) and Cerro Corona in Peru, related to slope instability due to abnormally high rainfall, which changes the company's mine sequencing deferring higher-grade ore. Given the slight increase in production and sales and the higher gold (NYSEARCA:GLD) price, revenue improved 13% to ~$1.98 billion in H2, with H1 earnings per share up 33% to $0.49. Let's take a closer look at the quarter below:
As shown above, South Deep has continued to perform well, with over 65,000 ounces produced in Q2 and ~127,600 ounces produced in H1 2021. This was driven by higher throughput and offset by slightly lower grades. As it stands, the mine is well on its way to meeting its guidance of 280,000 ounces at $1,410/oz, with output tracking at ~46%, and costs just below guidance at $1,368/oz in H1. Notably, the mine continues to see productivity improvements, and free cash flow remains well in positive territory despite COVID-19 related headwinds. As shown below, kilograms of gold produced per employee (2.03 vs. 1.37) continues to trend higher from FY2017 levels, and tons per rig per month is up 109% from FY2017 to H1 2021. During H1, South Deep generated $28 million in net cash flow, up 480% from H1 2020 despite significantly higher capex.
Moving over to Australia, output was down on a year-over-year basis by 3%, with lower production at Granny Smith and Gruyere (50%) offsetting the higher production from Agnew and flat output from St. Ives. Meanwhile, costs were much higher at $1,116/oz vs. $919/oz, though a significant portion of this cost increase was related to Australian Dollar strength. During H1, the Australian assets generated net cash flow of $160.1 million, a 23% decline year-over-year. This was related to much higher capex at all assets, as well as fewer ounces sold at Gruyere, Granny Smith, and St. Ives. It's important to note that this was partially related to 5% fewer production days due to a shift in the reporting period.
On the environmental front in Australia, Gold Fields is now increasing its reliance on renewable energy at these operations, with a combined 36 MW of solar at Granny Smith, Agnew, and Gruyere. Notably, at Agnew, more than 50% of the site's powering needs are running off renewables, and Gruyere will benefit from solar energy by 2021, with the 12 MW plant in construction. This significantly improves the company's environmental footprint. Shifting to South Africa, South Deep is also in the progress of building a 40 MW solar plant, shifting a significant portion of energy usage to solar at this operation as well. With worries about [E]SG ratings as the focus turns to decarbonization globally, this continued progress by Gold Fields to reduce its carbon footprint is great news.
Turning to South America, there have been challenges, though the vaccination rate at Salares Norte has improved considerably, with 99% of permanent staff vaccinated and 80% of contractors. This de-risks the construction timeline, which is currently scheduled for a Q1 2023 completion, with $75 million spent in Q2 and $230 million to date. Gold Fields noted that total progress was at 41.9% at the end of June vs. planned progress of 41.4%. Most importantly, it expects to meet its ~$860 million capex estimate despite material inflation, which has affected other names like IAMGOLD (NYSE:IAG).
On the negative side, Cerro Corona guidance was lowered due to the deferral of mining high-grade ore due to the mine re-sequencing due to slope instability at the pit. This led to a 9% decline in H1 production despite easy year-over-year comps due to COVID-19 impacts and increased all-in sustaining costs to $1,041/oz. The silver lining is that the company noted it is not a long-term stability issue and that they've cut back the whole area to more solid bedrock, with the loss of just 20,000 ounces of gold based on the discussion in the Q2 2021 conference call.
While mining is known for being tricky with lots that can go wrong even with proper planning, one unexpected issue for Gold Fields in Q2 stemmed from an endangered rodent: the chinchilla. The plan at Salares Norte was to move the 25-strong chinchilla colony that inhabits Salares Norte ground three miles away, and progress is not tracking well here. To date, four animals have been live-trapped and moved to temporary enclosures, but two have died. Chilean authorities have halted the relocation exercise, and Gold Fields is now awaiting the direction of the government. While seemingly insignificant, this is one risk to the project, partially offsetting the otherwise solid progress on the construction front. Gold Fields noted that Operation Chinchilla shouldn't disrupt the start of mining, but future plans will need to be adjusted if relocation efforts are not successful.
Moving over to the financial results, we can see that Gold Fields earnings estimates have slid considerably since the end of last year, with FY2021 annual EPS down more than 10% to $1.02. This can be attributed to higher costs than expected due to currency headwinds. However, even based on the new estimates, Gold Fields trades at a P/E ratio of 9.2 at a share price of US$9.30. Notably, these earnings estimates do not include Salares Norte, which will contribute more than 470,000 gold-equivalent ounces per annum (first 5 years) at projected all-in sustaining costs of less than $600/oz. This will lead to a dramatic improvement in Gold Fields' cost profile (~$1,060/oz) and an improved jurisdictional profile, with less ounces relied upon from its Tier-3 jurisdictions (West Africa & South Africa). SS, with Gold Fields trading at 9.2x earnings ex-Salares Norte, the stock looks very reasonably valued.
Based on what I believe to be a fair earnings multiple of 12 and FY2022 annual EPS estimates of $1.03, I see a conservative fair value for Gold Fields of $12.36, translating to more than 30% upside from current levels. However, to bake in a margin of safety, I prefer to buy Tier-2 jurisdiction producers at a minimum 30% discount to fair value. Applying this 30% discount translates to a low-risk buy zone of $8.65 for Gold Fields, with the stock trading just above this buy zone currently. Obviously, a higher gold price would lead to a much higher fair value, as will the start of commercial production at Salares Norte. Still, with it being difficult to rely on the gold price due to its volatility and Gold Fields still more than 24 months from commercial production at SN, I believe it's best to err on the side of caution. For this reason, I believe the optimal low-risk buy point is at $8.70 or lower.
Gold Fields had a solid H1 performance and is tracking in line with guidance, with good cost controls after adjusting for the currency headwinds that are outside of the company's control. With Salares Norte just over two years away from commercial production, Gold Fields' future continues to look very bright, and it's great to see that construction remains on schedule. As discussed previously, this asset is a game-changer with a boost in production, an improvement in the jurisdictional profile, and a sharp increase in margins on a consolidated basis due to the low-cost output. Given this bright outlook as we look ahead to H2 2023, I see Gold Fields as a solid buy-the-dip candidate, and I would view any pullbacks below US$8.70 as low-risk buying opportunities.