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In the news
Just over 11 months ago, I wrote on Gold Fields (NYSE:GFI), noting that while the stock had come off a solid year in FY2021, there was no margin of safety at US$13.20 per share, suggesting there was no way to justify paying up for the stock. While the stock briefly raced higher with momentum traders chasing its multi-year breakout, it was a 45% drawdown from its highs at US$13.20, underperforming the Gold Miners Index (GDX) into its September low. This was related to mixed feelings about the offer to acquire Yamana Gold (AUY), combined with worse-than-expected inflationary pressures and downside pressure on the gold price.
While the lost bid for Yamana was a negative development, given that the combination would have created a stronger company with an industry-leading development pipeline and higher margins, the company made the right move by not coming over the top of the competing offer. The consolation for its efforts in acquiring Yamana was that it pocketed a $300 million break fee in the process, a nice payout that equates to $0.34 per share. Meanwhile, although Gold Fields may not get a hold of Yamana's two most prized assets (50% of Malartic and Jacobina), it has its own high-margin project that's nearing completion, with Salares Norte set to begin production by June of this year. Let's take a closer look at the company after what's been a busy year:
Gold Fields released its Q3 results in November, reporting quarterly production of ~597,000 ounces at all-in-sustaining costs [AISC] of $1,061/oz. This translated to a 1% decline in production on a year-over-year basis and a 4% increase in unit costs, impacted by inflationary pressures that have hit the whole sector. Fortunately, the higher costs have been partially offset by the weaker Australian Dollar and softness in the South African (South Deep). Hence, the company is confident that it will deliver on its guidance of $1,140/oz - $1,180/oz AISC this year, even if inflationary pressures have been stickier than many predicted at the onset of 2022 and a tight labor market in prolific regions like Australia hasn't helped.
Digging into its operations, the company had another strong quarter at South Deeps (~84,800 ounces), which followed a robust H1 2022, where free cash flow nearly tripled year-over-year to $74 million (H1 2021: $28 million). Meanwhile, Gruyere also had a much better quarter vs. Q3 2021 due to higher grades and throughput (1.09 million tonnes at 1.2 grams per tonne of gold), and Agnew also put together a strong quarter in Q3 (~58,100 ounces). However, this was offset by lower production at Granny Smith and Tarkwa, which were up against difficult comps in the prior-year period, and Cerro Corona also had a softer quarter due to lower grades and throughput.
Based on year-to-date production of ~1.79 million ounces of gold, Gold Fields is well on track to meet its guidance of 2.30+ million ounces for 2022. Meanwhile, the company should be able to continue to improve its balance sheet (net debt: $997 million as of Q3), given the $300 million break fee from the terminated Yamana transaction, the recent strength in the gold price, and the fact that capital expenditures should begin to wind down as of Q2 at Salares Norte ($253 million spent year-to-date). So, while it has been a noisy year with regular news regarding the Yamana transaction and the departure of its previous CEO, Chris Griffith, the core business continues to perform well, with costs expected to come in below the FY2022 industry average ($1,170/oz vs. $1,270/oz+).
Moving over to recent developments, the most significant development was the company's choice to terminate the Yamana transaction after a counteroffer was launched by Agnico Eagle (AEM) and Pan American Silver (PAAS). As noted previously, I see the failure to acquire Yamana as a negative, given that this would have been transformational for Gold Fields. Still, I believe the company made the right move to not come over the top, given that it's not desperate. While Yamana made sense at the initial price offered ($6.70 billion), it would be very difficult to get shareholders' approval at an even higher price when this already appeared to be a bit of a sticking point.
The good news is that while Gold Fields may not benefit from combining with Yamana, the company had the foresight to launch a takeover offer for a company whose assets were clearly in very high demand, giving it a nice consolation prize when Agnico/Pan American came over the top with a significant break fee. In addition, although Gold Fields's Salares Norte Project may not be as attractive as the 1.0+ million ounces that it would have added at sub $1,025/oz AISC with the Yamana portfolio plus the 1.0+ million gold-equivalent ounces [GEOs] in the pipeline (Wasamac + MARA + Jacobina Expansion), this is still an incredible project (construction was 82% complete as of Q3).
As the chart above shows, Salares Norte is expected to produce over 450,000 GEOs in its first seven years on average, and while all-in-sustaining costs will be higher due to inflationary pressures, they're still likely to come in below $650/oz, which would place them approximately 50% below the industry average. This should result in a meaningful decline in Gold Fields' consolidated costs, with nearly 17% of annual production coming in at costs $400/oz below its current average. The only negative news is that Salares Norte appears to be up to three months behind schedule, suggesting we could see only ~100,000 GEOs this year vs. a previous outlook of closer to 200,000 GEOs. Hence, the margin inflection point will be 2024 and thereafter, not 2023, once the asset moves into commercial production. Let's take a look at Gold Fields' valuation:
Based on ~891 million shares and a share price of US$12.10, Gold Fields trades at a market cap of ~$10.8 billion and an enterprise value of ~$11.6 billion. This figure may be well below its peak valuation of ~$15.0 billion in Q1 2022, but it is still not what I consider cheap. In fact, as I noted at the time in my February 2022 update, there was absolutely no reason for the stock to be trading above $13.20, let alone $17.20, where it peaked. So, while some investors may believe that Gold Fields's stock is on sale, with it trading 27% below its 2022 highs, I don't see anywhere near enough margin of safety to justify going long here, and I would be shocked if the stock returned to these highs given that it was significantly overvalued at these levels.
Looking at the above chart, we can see that Gold Fields has traded at an average cash flow multiple of ~5.6 since the 2018 cyclical bear market low in the sector and just over 6.0x cash flow recently. Using what I believe to be a fair multiple of 6.5x cash flow with the addition of Salares Norte and FY2023 cash flow per share estimates of US$2.07, I see a fair value for Gold Fields of US$13.45. Meanwhile, on a P/NAV basis, I believe a fair multiple for the stock is 1.20x P/NAV, and the stock is already trading near these levels, currently at a share price of US$12.10. In summary, I see minimal upside from a P/NAV standpoint and just a 12% upside from a cash flow standpoint, suggesting there's limited margin of safety at current levels.
Moving to the technical picture, GFI's next strong support level doesn't come in until US$7.75, and the stock's next resistance level comes in at US$13.10. If we measure from a current share price of US$12.10, this translates to just $1.00 in potential upside to resistance and $4.35 in potential downside to support, translating to a reward/risk ratio of 0.23 to 1.0. This is well below the 5.0/1.0 reward/risk ratio that I require for starting new positions, which corroborates the view that this is not a low-risk buying opportunity for Gold Fields from either a fundamental to technical standpoint. So, while the stock could head higher if the gold price continues to find a strong bid, I don't see any way to justify paying up for the stock here above US$12.10.
Gold Fields has had a solid year, and with the timely bid for Yamana Gold, it had the potential path to a significant re-rating and multiple expansion. This is because it would have been one of the largest producers globally with industry-leading costs (integration of Yamana's assets and the high-margin Salares Norte Project), plus an impressive development pipeline (MARA, Jacobina Phase 4, Cerro Moro Expansion, and Wasamac). Unfortunately, even with the benefit of Salares Norte, Gold Fields doesn't stand out from its peer group, and it's hard to argue for the stock commanding a valuation north of US$12.5 billion [US$14.00], suggesting that much of the easy money has been made following the recent 65% rally in the stock.
While I think Gold Fields is a solid miner that checks many boxes for investors looking for gold exposure, I see Barrick (GOLD) as the more attractive bet. This is because it trades at a lower P/NAV multiple (~1.05x vs. ~1.20x for Gold Fields), it is slightly more diversified, and has one of the strongest balance sheets sector-wide. Meanwhile, Barrick is returning to growth after years of declining output, and this combination of production growth/margin expansion could move the stock more in favor vs. its smaller peers. Hence, I see Barrick as the much more attractive way to play the gold price, and I would need to see a decline below US$9.50 in GFI to become more interested in going long.
