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Summary
It was a mediocre Q2 Earnings Season for the Gold Miners Index (GDX), with minimal margin expansion despite the record realized gold price. This was related to continued inflationary pressures felt sector-wide that offset the benefit of lower fuel prices, and while a few producers managed to buck this trend, Gold Fields (NYSE:GFI) was not immune. This was evidenced by minimal margin expansion in H1 2023 despite the higher gold price and a 16% decline in operating cash flow and adjusted free cash flow also slid to just ~$140 million in H1. In addition, guidance has been reeled in at South Deep and Gruyere (50%). Fortunately, Salares Norte is nearing completion, and the company has of a new world-class development project in Windfall which should help to claw back the persistent mining inflation. Let's take a closer look at the Q2 results below:
Q2 Production & Sales
Gold Fields released its Q2 and H1 results last month, reporting quarterly attributable gold production of ~577,000 ounces and H1 2023 production of ~1.15 million ounces. This translated to a 4% decline from the year-ago period (~1.20 million ounces), with 3% lower production from its Australian segment, 5% lower production from its South Deep Mine in South Africa, 6% lower production from its Ghanian segment, 28% lower production at its shared Asanko Mine, offset by a 4% increase in output from its Cerro Corona Mine in Peru. The primary contributors to the lower output were Damang (lower grades with completion of mining at the Damang Pit Cut Back), lower grades and tonnes at South Deep (ground related incidents and a shortage of skilled labor), lower underground grades at Agnew and Granny Smith, and lower grades at Asanko. The standout operations were Gruyere, Tarkwa, and Cerro Corona, which all saw higher production, but this wasn't able to offset the lower output across the rest of the portfolio.
Digging into the operations a little closer, Tarkwa produced ~297,700 ounces in H1 at all-in sustaining costs of $1,181/oz, with production up 12% year-over-year while costs dipped 10%. This helped the operation to generate $97.5 million in adjusted free cash flow despite higher capital expenditures, with higher grades (1.28 grams per tonne of gold) and a lower strip ratio. Unfortunately, the increased output and margin improvement was offset by its other African operations, with Damang seeing a 38% decline in grade and 37% decline in output and much higher costs ($1,193/oz vs. $884/oz) with the asset relying on lower grades from stockpiles and the Huni pit. Elsewhere, Asanko's grades were lower because of mining activities being halted last year (Asanko has relied on stockpiles in 2023) before a restart in mining before year-end. On a positive note, Damang is tracking ahead of initial guidance, a positive sign.
As for the company's South Deep Mine in South Africa, it was a tough H1, with production down 5% to ~155,700 ounces, all-in sustaining costs increasing to $1,387/oz. The culprit was fewer available stopes because of a fall of ground incident, unexpected scaling of the 2 West ramp, sidewalls stability, and deterioration of the 2 West Cut 1A access drive, limiting access to stoping areas. Making matters worse, the company reported a shortage of skilled operators for long-hole stoping drill rigs, and these issues earlier in the quarter continued into Q2. Fortunately, free cash flow was up 31% year-over-year to $96.6 million (benefiting from lower capex), but the production delays have forced Gold Fields to reel in its previous guidance of ~347,000 ounces, revising to 321,500 ounces. In addition, it now expects its steady state run rate of ~380,000 ounces to be reached in H2 2025 vs. year-end 2024 previously.
Finally, at its Australian operations, lower grades impacted production levels and while Gruyere (50%) and Granny Smith reported higher production, this was offset by lower output at two of its larger mines, Agnew and St. Ives. In addition, Gold Fields’ costs were up year-over-year to $1,169/oz ($1,117/oz), with the company calling out continued mining inflation in Australia. Gold Fields called out a shortage of skilled labor and turnover in key positions, resulting in an increase in mining costs as salaries increase. Finally, while Gruyere had a better H1 year-over-year, guidance has been revised lower from 355,000 ounces (100% basis) at the mid-point to 335,000 ounces, with cost expectations also higher. Notably, these cost increases were despite the softness in the Australian Dollar which was a tailwind during Q2 2023.
Costs & Margins
Moving over to costs and margins, Gold Fields reported company-wide AISC of $1,215/oz in H1 2023 (+ 6% year-over-year) and Q2 2023 AISC of $1,279/oz. These costs have continued to climb and resulted in limited margin improvement in Q2 ($676/oz vs. $674/oz) despite benefiting from a record average realized gold price of $1,955/oz. Given the weaker margins and lower production, revenue was up only marginally to ~$2.27 billion and operating cash flow slid to $735 million (down 16% year-over-year), with adjusted free cash flow more than halved to $140 million. That said, free cash flow was impacted by working capital movements and contribution to pre-construction activities at Windfall (50%), and the company still finished the quarter with a solid balance sheet (only $1.03 billion in net debt) given the period of elevated investment ($222 million Windfall payment, $34 million invested at Windfall and $202 million spent at Salares Norte in H1 as construction nears completion).
Overall, the cost performance was a little disappointing, but with the high-margin Salares Norte Mine set to come online by year-end, we should see some offsets once it ramps up to commercial production in H2 2024. Plus, Gold Fields noted that the Windfall EIA was submitted in March, pointing to a June 2024 approval assuming a 15-month timeline. This would place Windfall on track to reach commercial production by H2 2026 (~160,000 ounces at sub $800/oz AISC on 50% basis in first five years), adding another high-margin operation to Gold Fields’ stable to aid in clawing back lost margins after two years of near unprecedented inflationary pressures. Finally, Tarkwa could see some cost improvement if the marriage of Tarkwa and Iduapriem is approved, providing a third lever to pull down costs. So, while the continued cost pressures at Gold Fields’ mines are disappointing, the company is uniquely positioned to drive costs lower, and we should see the first of these levers kick in with Salares Norte next year (construction 95% complete).
Valuation
Based on ~894 million shares and a share price of US$12.65, Gold Fields trades at a market cap of ~$11.3 billion and an enterprise value of ~$12.3 billion. This makes it one of the largest-cap gold producers in the sector today, and leaves it trading at ~5.5x FY2024 cash flow per share estimates ($2.30) vs. a historical multiple of ~4.9x cash flow. At first glance, this would imply that the stock is overvalued (given that it's trading above its historical multiple on forward cash flow). However, with the improvements we've seen to the portfolio (working to create a lower-cost Tier-1 scale operation at Tarkwa/Iduapriem, and it's acquiring a 50% share of the Windfall development project), and having a soon-to-be Tier-1 scale mine in Salares Norte, I believe a fair multiple for the stock is 7.1x cash flow (45% premium to 10-year average). If we apply this multiple to conservative FY2024 cash flow estimates, we arrive at a fair value for GFI of US$16.35, pointing to a 30% upside from current levels.
That said, I am looking for a minimum 35% discount to fair value to justify starting new positions in large-cap producers, and especially those with less than 50% of their production coming from Tier-1 ranked jurisdictions. So, while I see upside in GFI from current levels and the company should look quite different by H2 2026 with a better jurisdictional profile (attributable ounces coming from Quebec) and a larger production profile, the ideal buy zone for the stock comes in at US$10.60 or lower after applying this discount. This doesn't mean that the stock can't go higher from current levels, but I still don't see enough of a margin of safety. Hence, I wouldn't rule out GFI revisiting the US$11.00 level before year-end, with a dampened outlook at South Deep (guidance revised lower), and continued cost pressures discussed by multiple producers (including Gold Fields which is forecasting 6.5% mining inflation in 2023 despite the benefit of a weaker Aussie Dollar).
Summary
Gold Fields reported satisfactory results in H1 2023, and while adjusted free cash flow was sharply lower year-over-year, the decline was partially related to higher investment in working capital, contributions to Windfall (a newly acquired 50% stake) and it's without the benefit of the massive Salares Norte Mine which will should commercial production by Q4 2024. However, FY2024 should be a better year from a free cash flow standpoint, with the benefit of production from Salares Norte combined with a decline in capex with construction nearly complete at this Chilean asset. So, while the H1 2023 financial results may have come in weaker than expected, this is temporary, and the company is doing all the right things to make the stock more attractive from an investment standpoint. In summary, if we were to see GFI decline below US$10.60 before year-end, I would view this as a low-risk buying opportunity.
