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Shares in Gold Fields Surge as Q3 Earnings Advance--2nd Update - Morningstar

Thursday, 19 November 2015

JOHANNESBURG--Shares of South African mining company Gold Fields Ltd. (GFI.JO) surged Thursday after the company reported better-than-expected headline earnings for the third quarter.

Headline earnings, which strip out certain exceptional and one-off items, were up 46% at $21 million in the July to September period compared with a year earlier, beating expectations for a 33% increase. Shares on the Johannesburg Stock Exchange were up 25% at 38.82 South African rand in afternoon trade.

Still, the world's seventh-largest producer of the precious metal reported net profit of $18 million, down 5.8% from a year earlier, as weak gold prices continued to hit the company's bottom line. Even taking into account Thursday's rally, the company's stock is still down 26% in the year to date. Its revenue fell 9.2% to $635.1 million during the three months ended Sept. 30 from the same period a year earlier, beating expectations for an 11% drop.

Gold Fields--which mines gold in South Africa, Ghana, Peru and Australia--reported a 0.4% fall in gold production to 557,000 ounces from the third quarter last year, though output rose 4.1% from the previous quarter. The company recorded a 13% drop in the average gold price received from the same quarter last year to $1,103 an ounce.

"I think maybe there's another couple of years of pain," Gold Fields Chief Executive Officer Nick Holland said Thursday at a media briefing in Johannesburg. That could include a gold price of $1,000 an ounce, he said. Bullion is trading around $1,070 an ounce, down more than 40% from 2011 highs of more than $1,900 an ounce.

The company said that languishing gold prices are forcing it to continuously review its portfolio, with a particular focus on Damang, a Ghanaian gold mine.

"Damang is challenged in the current environment and as such, we are considering various options... which include a recapitalization of the mine to expose the higher grade ore or whether it would be more appropriate to preserve the inherent value of Damang until gold prices recover," Mr. Holland said. "We should be in a position to announce a decision in early 2016."

The stakes are high for South Africa's gold-mining companies at a time of upheaval in the commodity-dependent economy. Gold Fields restructured in 2012 and 2013 to cope with lower metal prices, spinning off three aging, higher-cost South African mines to create Sibanye Gold Ltd. in 2013.

South Africa's mining industry, which relies heavily on unskilled labor, needs to modernize, or it will disappear, Mr. Holland said. "If we continue doing what we're doing we are just digging a bigger hole for ourselves, literally," he said. "If wages are going up with no matching increase in productivity, we're going out of business."

Mr. Holland said weaker currencies, including the Australian dollar and rand, as well as lower oil prices have provided some respite. The company's gold revenue is denominated in dollars while many costs, such as wages, are in local currencies. All-in costs fell 12% to $961 an ounce from the previous year.

The company's fully-mechanized South Deep mine, its remaining South African asset, reported a 42% increase in output from the previous quarter to 54,900 ounces. Gold Fields said production in the second half of 2015 is expected to rise about 50% from the first half, and that output in 2016 should be "significantly better."

Gold Fields expects South Deep, which accounts for 70% of the company's gold reserves, to start making money sometime in 2016. A major obstacle has been sourcing the skilled laborers needed to operate the more complicated machinery used there.

"The journey on South Deep to get to where we want to is still a multi year journey," Mr. Holland said.

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