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Summary
South African mining company Gold Fields Limited (NYSE:GFI) (OTCPK:GFIOF) is the topic of conversation in this article as we aim to delineate the company's latest production cut and what it could mean for its stock.
We last covered the stock in January, when we raised concerns about the miner's valuation. Although our previous article focused on Gold Fields' valuation, we now turn our attention to Its fundamental outlook, given the materiality of its renewed production guidance.
Without further ado, here are our latest findings.
Production Cut News
Gold Fields announced last week that it anticipated its full-year production to settle between 2.2 and 2.3 million ounces, down from its previous estimate of between 2.33 and 2.43 million ounces.
Gold Fields' production downgrade is due to setbacks at its Salares Norte asset in Chile caused by unfavorable weather. According to Gold Field's management, "These weather events resulted in the freezing of material in the piping of the process plant, causing temporary shutdown of the plant. These impacts have been greater than planned owing to the early onset and extended duration of winter conditions during the commissioning and ramp-up phase."
We covered Salares Norte in March 2023 before the mine reached commercial production. Our findings then revealed that Salares Norte is an exciting prospect with an initial ten-year mine life and an annual production capacity of 450,000 ounces.
Gold Field started production since then. In fact, Gold Fields' management guided toward a midpoint of 230,000 this year. However, the weather-induced incidents slashed the mine's guidance to a midpoint of 130,000 ounces.
Besides downgrading its production guidance, Gold Fields' management raised its all-in-sustaining (AISC) cost guidance. The firm anticipates AISC to rise to a midpoint of around $1500 per ounce from a previously guided midpoint of $1625 per ounce.
What Does This Mean For Gold Fields?
Gold Fields announced its guidance update on June 13th, which ultimately led to a plummet in its stock price. More specifically, Gold Fields' stock dropped from the $14.20 handle to below the $13.55 handle. Moreover, Gold Fields suffered a week-over-week loss of 12.62%, reflecting a tumultuous week overall.
In isolation, we think the market overreacted to the Salares Norte event. Although it was a material event bearing negatives, Salares Norte is merely a piece of the puzzle at this multi-asset gold miner. Moreover, Salares Norte's operations aren't completely abolished. Instead, Salares Norte is forecasted to be back up and running again by September this year.
With that said, let's look at a few of Gold Fields' other operations.
South Africa
Gold Fields operates the South Deep mine in South Africa, which forms part of the Wits Basin.
As illustrated in the previous diagram, the South Deep mine has a lower AISC than the group's average, given lower regional labor costs and high-grade recoveries. Nevertheless, South Africa's frequent energy problems must be considered as they can bolster South Deep's AISC, despite Gold Fields' attempt to operate the mine off-the-grid.
According to Gold Fields' Q1 results, the mine was impacted by two fatality stoppages and structural issues such as unforeseen drilling obstacles. However, as displayed earlier, the mine still delivered 56,000 ounces during Q1.
We think South Deep will end the year strongly. South Africa's national election just concluded, which is probably why the nation experienced lower load-shedding hours this year. Moreover, winter is approaching, making for a more conducive mining environment due to lower rainfall.
Australia
Gold Fields operates in Australia via the following mines: Gruyere, Granny Smith, St Ives, and Agnew.
Australian amalgamated production settled at 216,000 ounces at an AISC of $1671 (not a weighted average). Although Gold Fields' regional operations remained robust, its mines suffered from summer rainfall; however, changing to the winter season will likely result in a changed mining environment.
Here are some of the key events that occurred in Gold Fields' Australian assets during Q1.
Gruyere experienced operational delays in Q1 due to a weather-induced road access restriction. Operations were delayed between April 5th and March 12th. However, Gold Fields maintained its full-year guidance, and we believe the event can be considered a non-core occurrence.
Furthermore, St Ives experienced lower volumes and grades, therefore, back-ending production. Some might disagree, but we think it is impossible to forecast a mining company's output quality unless you have access to the mine and/or a magic wand. Nonetheless, we don't think there are any core obstacles at St Ives for now.
To close, we didn't take note of substantial structural issues relating to Gold Fields' Australian operations. Moreover, we think the area provides diversification away from the firm's operations in Africa. However, we fear the skills shortage in Australia, which could lead to higher normalized AISC.
West Africa
Gold Fields mines in Ghana via its Damang and Tarkwa mines. The Group's Q1 Ghana results settled at 150,000 ounces, with an average AISC (not a weighted average) of $1,907 per ounce.
Although Gold Fields experienced lower production at both its Ghanaian mines during Q1, its all-in-cost (AIC) receded as Damang slid by 35% year-over-year to $2,063 per ounce, while Tarkwa's AIC dipped by 34% to $1,751 per ounce.
We remain optimistic about Gold Fields' operations in Ghana. Moreover, the firm's regional cost base has declined after a lengthy battle with regional inflation issues.
Other Considerations: CapEx and Balance Sheet
Gold Fields incurred between $1.13 and $1.19 billion in capital expenditures (CapEx) during 2023. Given the repairments required at Salares Norte, we believe this figure could increase by the end of 2024. Additionally, given its quest to get South Deep off the grid, renewable energy ramp-ups at the firm's South Deep mine might be likely.
Furthermore, Gold Fields retains a solid balance sheet, with a net debt-to-EBITDA ratio of merely 0.51x, which we deem impressive, given that a net debt-to-EBITDA ratio below 3x is usually considered healthy.
Herewith is a diagram that includes some of Gold Fields' key solvency ratios. We usually like seeing a good balance of debt and equity, without debt dominating the balance sheet. In our opinion, this provides Gold Fields with the necessary latitude to generate leveraged returns for its shareholders while staying on good terms with creditors.
Gold Pricing Environment
Gold Fields is a gold miner, which trivially means that gold prices cannot be neglected, as commodity prices often overshadow production results.
The gold futures curve is sloped upward, suggesting that prices could reach $2455 in June next year, much higher than the current gold spot price, which is around the $2332 handle.
Although a noteworthy indicator, the futures curve doesn't mean that spot prices will coalesce, as incremental events might change the curve's outcome. However, we are bullish about gold as it is a tail-hedging instrument.
Why are we bullish about a tail hedging instrument? Our optimistic outlook stems from the possibility that the U.S. economy is reaching the peak of its short-term cycle, which we base on rising unemployment rates, stagflation, and flimsy U.S. business inventory demand.
Valuation and Dividends
We decided to look at Gold Fields' valuation prospects from a peer-based vantage point, including a relative comparison of Harmony Gold (HMY), Royal Gold (RGLD), Kinross Gold (KGC), and Endeavour Mining (OTCQX:EDVMF). Although these companies and their stocks possess slight differences, we think their central tendencies are determined by similar systematic variables, adding validity to a peer-based analysis.
The next diagram communicates each company's key characteristics; a discussion follows.
We wanted to emphasize Gold Fields' price-to-book ratio, as it has a large tangible asset base with publicly quoted inventory values. A glance at Gold Fields' price-to-book ratio of 2.66x shows that it is in line with most of its peers, suggesting the stock is fairly valued on that basis alone.
Furthermore, Gold Fields' forward EV/EBITDA of 4.3x isn't significantly different from its peers, affirming our fairly valued opinion. We added in an outlook of the company's EV/EBITDA ratio as a substitute for the price-to-earnings multiple, as mining companies often exhibit large amounts of depreciation prone to subjective accounting methodologies.
Dividends
Seeking Alpha's data shows that Gold Fields has a trailing dividend yield of 2.9% and a five-year dividend yield on cost of 7.46%. Although we like the latter, we think the stock's forward yield is tame, given its price volatility (shown later).
What constitutes a good dividend stock isn't homogenous among investors. However, we believe a stock's volatility must always be considered when investing for dividend accumulation, as the benefits of the asset's income yield could evaporate with price volatility.
We think Gold Fields' dividend yield is low in isolation and when compared to its price swings.
Final Word
Our analysis of Gold Fields Limited illustrates that the market showed dismay after the company downgraded its production guidance. However, Gold Fields' lower guidance is due to an isolated incident, which, although material, isn't as bad as many might believe.
We see some positives in Gold Fields. For example, winter seasons in South Africa and Australia could introduce a more conducive mining environment. Moreover, we hold a firm view of gold prices.
Although we are more positive than most investors about Gold Fields' operations, we think the stock's valuation shows no relative value. Therefore, we stand by our previous coverage of the stock and maintain our Hold rating.
