INVESTORS AND MEDIA 
In the news
Summary
We're over three-quarters of the way through the Q1 Earnings Season for the Gold Miners Index (GDX) and one of the first companies to report its results was Gold Fields (NYSE:GFI). The company had a decent quarter overall with relatively flat production at similar costs and despite a capex-heavy period, Gold Fields has maintained a strong balance sheet with just ~$880 million in net debt. And while it's been a quiet start to the year at its operations, it's been a busy quarter for its portfolio, with two major recent developments that have upgraded what was already a solid investment thesis. Let's dig into the Q1 results and recent developments below.
Q1 Production & Sales
Gold Fields released its Q1 results earlier this month, reporting quarterly production of ~577,000 gold-equivalent ounces [GEOs], a slight decrease from the ~580,000 GEOs produced in the year-ago period. The decline in production vs. Q1 2022 was related to lower output at one of its largest assets (St. Ives), significantly lower production at Damang, and lower production at its two smaller Australian assets, Granny Smith and Agnew. This was partially offset by another strong quarter from its South Deep Mine in South Africa, with a slight lift in production from Cerro Corona which was coming up against easy comps on a year-over-year basis (~74,700 GEOs produced in Q1 2023 vs. ~56,100 GEOs in Q1 2022).
Digging into its largest operations a little closer, its St. Ives Mine in Australia had a solid start to the year, with ~92,700 ounces of gold produced in Q1, a marginal decline from the ~93,900 ounces produced in Q1 2022. St. Ives' lower production was related to a decline in throughput (~990,000 tonnes vs. ~1.02 million tonnes) at similar grades. However, while output was down, costs improved materially due to lower sustaining capital in the period, with all-in sustaining costs coming in at $999/oz (Q1 2022: $1,217/oz). However, total production from its Australian assets was down on a consolidated basis, with lower grades at Agnew and Granny Smith, contributing to lower production in the period, and the increase in production at Gruyere (~41,300 ounces vs. ~35,600 ounces) not able to pick up all the slack.
Moving over to the South Deep Mine in South Africa, Gold Fields had another strong quarter, despite a fall of ground incident in Q4 that impacted Q1 grades (5.56 grams per tonne of gold mined vs. 6.19 grams per tonne of gold in Q4 2022). However, production was still up meaningfully on a year-over-year basis to ~84,800 ounces (Q1 2022: ~75,200 ounces), benefiting from higher average grades and a slight increase in throughput. Given the increase in sales volumes and the lower sustaining capital spend, all-in sustaining costs [AISC] improved to $1,317/oz (down 4% year-over-year). The company noted that the fall of ground area should be rehabilitated by Q3 and that the 2 West Main Ramp was rehabilitated as of April.
Moving northwest to Ghana, Gold Fields' largest operation at Tarkwa had a decent quarter, with ~124,900 attributable ounces produced and ~3.44 million tonnes processed at a grade of 1.26 grams per tonne of gold. This represented an increase from the year-ago period because of higher grades and throughput and all-in sustaining costs improved ($1,131/oz vs. $1,269/oz) because of reduced sustaining capital in the period. Unfortunately, lower output at Damang offset the increased production at Tarkwa, with Damang's production declining from ~55,800 ounces to ~35,500 ounces due to much lower grades in the period (1.0 grams per tonne of gold vs. 1.60 grams per tonne of gold).
In South America at the company's Cerro Corona Mine (Peru), it was a much better quarter here, with higher production that was grade-driven, with an average processed grade of 1.40 grams per tonne gold-equivalent. Finally, in Chile, at its Salares Norte Project, the company noted that construction progress is at 90.3% completion, and ~420,000 tonnes of ore were mined in Q1 at an average grade of 7.18 grams per tonne of gold, with ~176,000 ounces now in stockpiles ahead of the expected Q4 gold pour. Just as importantly, the project is tracking in line with its ~$1.02 billion updated capex budget.
Costs & Margins
Moving over to costs and margins, Gold Fields' all-in sustaining costs came in below my estimates at $1,152/oz (Q1 2022: $1,150/oz), which were flat year-over-year and well below its FY2023 guidance range of $1,305/oz to $1,340/oz. As noted earlier, more back-end weighted sustaining capital can explain the lower costs relative to guidance, with just $161 million of a planned $850 million spent in Q1. While some investors might be optimistic that costs will come in below its guidance range, the commentary on the call wasn't that encouraging, with Gold Fields noting that it's seeing ~7% inflation for the year, in line with its expectations. And while the company is seeing some relief on fuel costs and freight, labor costs have remained sticky, especially with contractors and in Australia, a more prolific mining region.
As shown in the chart above, margins improved slightly on a year-over-year basis ($749/oz vs. $734/oz), with the help of a higher average realized gold price. However, with similar production levels but higher sustaining capital as the year progresses, I would expect the gold price strength that we're seeing relative to Q1 levels to be offset by higher AISC. Hence, I would not expect to see margin improvement year-over-year unless we see gold prices average at least $2,000/oz. That said, Gold Fields' cost profile should improve materially by 2025 once Salares Norte benefits from a full year of commercial production, and could improve further by 2026 with a proposed joint venture in Ghana, and the recent acquisition of 50% of the high-grade Windfall Project in Quebec, Canada.
Recent Developments
Digging into recent developments, the most significant development was the news that Gold Fields had acquired a 50% stake in Osisko Mining's (OTCPK:OBNNF) Windfall Project and Urban Carry Camp for ~$900 million when including expected construction costs, upfront payments, and regional exploration commitments. This is not a cheap price to pay for exposure to this asset, with the company paying ~$444/oz on measured & indicated resources, but this is an incredible asset that could see resources ultimately double, and the price paid was a much more reasonable ~$244/oz on total ounces (measured, indicated, and inferred). Plus, for those familiar with Windfall, this is transformational for Gold Fields, with this potentially being a ~160,000-ounce asset (attributable basis) at sub $750/oz all-in sustaining costs.
Given that Osisko Mining and Gold Fields will share the estimated ~$650 million (adjusted for inflation) in upfront capex, this is a very modest capex bill for Gold Fields which just generated ~$80 million in adjusted free cash flow in its most recent quarter. To put this capex in perspective, its 50% of construction will cost just one-third of Salares Norte but offer similar margins, with Gold Fields set to have two world-class assets in its portfolio that are in production post-2025, assuming the timely receipt of permits for Windfall. These two assets will be Salares Norte and Windfall, and with average all-in sustaining costs at both projects likely to come in below $800/oz with attributable production of ~550,000 ounces, it will make a major difference in Gold Fields' cost profile (FY2023 AISC guidance mid-point: $1,320/oz).
Elsewhere in the portfolio, Gold Fields and AngloGold Ashanti (AU) are looking to team up in Ghana, with a planned joint venture to combine Tarkwa and Iduapriem into a single Tier-1 scale asset, with an ownership of 60% Gold Fields, and 30% AngloGold. The combined operation is expected to have lower costs, an 18+ year mine life and will produce 900,000 ounces over the first five years at sub $1,000/oz costs if the joint venture is approved. This is a significant improvement from the $1,250/oz - $1,300/oz FY2022 AISC at Iduapriem and Tarkwa, respectively, and is like what Nevada Gold Mines did in Nevada, taking the borders off assets to allow for synergies and make them more sustainable long-term.
I see these two developments as quite positive, and I think they've upgraded the Gold Fields thesis. This is because the Windfall deal adds high-margin ounces to the portfolio post-2025 with modest upfront capex and half of what's arguably a top-5 development asset in the gold sector to Gold Fields' portfolio plus 50% of a Tier-1 jurisdiction asset which could help the stock command a higher multiple once in production.
Valuation
Based on ~894 million shares and a share price of US$15.30, Gold Fields trades at a market cap of ~$13.7 billion, and an enterprise value of ~$14.6 billion. This is well below that of the price paid for Newcrest (OTCPK:NCMGF) by Newmont (NEM) earlier this month despite Gold Fields being a similar-sized producer. That said, the company has an inferior jurisdictional profile to Newcrest with South African exposure and less than 60% of production from Tier-1 jurisdictions, and much higher costs than Newcrest (~$1,300/oz vs. ~$1,000/oz), even if they are in line with the industry average. As the chart below shows, this less favorable jurisdictional profile has contributed to a lower cash flow multiple than its peer group (5-year average: ~5.6x).
That said, we've seen several positive developments over the past few months that should help to reduce its operating costs. For starters, Salares Norte is just six months away from its first gold pour and is one of the best undeveloped assets sector-wide from a scale and margin standpoint (~360,000 GEOs at sub $800/oz AISC over the life of mine). Second, the company is looking to partner with AngloGold Ashanti, combining their two Ghanaian assets (Tarkwa and Iduapriem) to create a lower-cost and longer-life Tier-1 scale operation. And finally, the company has secured 50% ownership of Windfall, another top-10 undeveloped asset that will lift production at lower costs and improve its jurisdictional profile.
Given these positive developments, I believe that Gold Fields can command a 30% premium to its 5-year average cash flow multiple (which is more in line with its long-term average), suggesting a more fair multiple for the stock is 7.3x cash flow. If we multiply this figure by FY2024 estimates of $2.30 per share, this translates to a fair value for the stock of US$16.80. And while this fair value estimate points to an upside from current levels, I prefer a minimum 35% discount to fair value for large-cap producers without at least 50% of production coming from Tier-1 jurisdictions. After applying this discount, Gold Fields' ideal buy zone would come in at US$11.00 or lower.
Finally, from a technical standpoint, Gold Fields remains short-term extended despite its recent pullback, with a ~90% rally in less than 50 days from its February lows. Plus, sentiment sector-wide headed in the caution zone in early May, with significantly more optimism than pessimism for gold miners. This doesn't mean that Gold Fields can't put together a rally after a 16% decline over the past two weeks, but I would view any rallies above US$17.00 as an opportunity to book some profits, given that the stock remains in the upper portion of its support/resistance range with no real margin of safety at current levels.
Summary
While the failed Yamana Gold bid was disappointing for Gold Fields, it may have actually worked out positively given that we've seen significantly less share dilution and the company has got its hands on half of a high-margin Tier-1 jurisdiction asset (Windfall). Plus, the cost to secure half of Windfall/ Urban Barry Camp was much lower if we factor in the proceeds from the Yamana deal break fee, with a cost of barely $600 million when including commitments for the construction, regional exploration, and payments to Osisko. That said, with Gold Fields massively outperforming its peer group, I don't see any margin of safety at current levels. So, while I see recent developments upgrading the investment thesis, I remain on the sidelines for now.
