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Gold Fields: Still full of promise - Financial Mail

Thursday, 25 February 2016

GOLD Fields CE Nick Holland says that from the number of questions he gets at presentations on the South Deep mine in SA, it would seem that the group had no other mines.

In the year to December, South Deep contributed only 198 000oz to the group’s attributable gold equivalent (which converts copper to gold units) production total of 2.16moz from all its mines in SA, Australia, Ghana and Peru. South Deep’s all-in costs for the fourth quarter fell to US$1 156/oz but averaged $1 559/oz for the year. For the group as a whole, all-in costs were $942/oz in the fourth quarter and $1 026/oz for the year, a 2% reduction on 2014.

Holland says though the depreciation of the rand against the dollar has assisted in keeping costs down, his experience in the gold industry over 25 years is that rand depreciation initially widens margins but they shrink again as cost inflation creeps upwards.

Gold Fields declared a dividend of 25c/share for the full year, down from 40c/share in 2014, as it moved from a headline profit of $0.273/share in 2014 to a headline loss of $0.282/share last year. The shares reacted sharply, falling over 20% to R50.05 before recovering some ground to R57.27 this week.

The market’s fascination with South Deep stems from its long history. Nearly 25 years since it was begun, it has never fulfilled even half its potential.

Only five years ago, the production target for the mine was 750 000oz/year by end-2014.

Cadiz Corporate Solutions mining analyst Peter Major says the mine has had too many plans, too many managers and too many owners over the years. The original plan, for a conventional mine, was drawn up in the early 1960s and it would have been a second phase development for Western Areas, then part of JCI. In the late 1990s Western Areas (at the time controlled by the Kebble family) sold half its stake in the mine to Canadian company Placer Dome, which was taken over by Barrick Gold, and in 2006 Gold Fields bought the mine.

Major says there’s a view among some miners, which he shares, that the mine would have been producing far more gold now, and at lower cost, if it had been developed as a conventional Witwatersrand gold mine. But SA’s gold industry is attempting to move away from labour-intensive mines in favour of mechanisation and it is highly unlikely that another large-scale, labour-intensive gold mine will ever be built in SA again, he says.

Deep-level mechanised mining is still rare in SA and the mining method devised for South Deep in 2005, low-profile de-stressing, proved inefficient because of a lack of skills, difficulties in bringing equipment in to support the hanging and side walls and narrowing of stopes because of the extreme rock pressures at these depths.

Last year Gold Fields introduced a new mining method at South Deep, high-profile de-stress stoping, to tackle some of the problems. This entails opening stopes in a sequence that diverts the rock stresses away from the working area, making stope access drives wider to accommodate equipment, managing pillar support and continuous backfilling.

Holland says in the first months of introducing high-profile de-stressing the results were already evident. South Deep’s fourth-quarter production was 24% higher than in the third quarter, which brought down unit costs. Safety improved, with no deaths in the second half of the year, and so did morale. A staff survey showed about 80% of South Deep’s staff were satisfied or strongly satisfied.

Gold Fields has also focused on improving skills among engineers and artisans. Out of 146 core positions, 143 have now been filled. An underground workshop the size of two rugby fields is now complete. With the new mining method, the size of the fleet will be reduced to 87 from 95.

Holland expects South Deep will produce about 257 000oz of gold this year and will be at cash breakeven point by December. Asked about the potential to ramp up production to 300 000oz more quickly, Gold Fields executive vice-president for SA Nico Muller says there is no single answer to increasing production; it requires a combination of investment in infrastructure and skills and will be incremental, over time.

Gold Fields has so far spent R28bn on buying and developing the mine, Holland says. Gold Fields’ latest mineral reserves and resources statement, for 2014, shows South Deep has 76moz of gold in resources and 38moz in reserves, both of which represent 73% of the group total. The 2015 reserves and resources statement will be published in March.

Gold Fields expects group production this year will be flat at between 2.5moz and 2.10moz, as its focus is on profits rather than volumes. It expects lower production from the international mines will be offset by higher output from South Deep.

But given previous disappointments, the market will not be counting on delivery.

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