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Gold Fields Limited: Ghana Cuts Reduce Royalty Rate - Seeking Alpha

Monday, 4 April 2016


Ghana's government has agreed to change to a sliding scale royalty rate based on the gold price from a flat 5%, effective starting 2017.

The decision of the Ghanaian government also includes a lower corporate tax.

Assessment of Gold Fields Ltd.'s present value.

Gold Fields (NYSE: GFI) says Ghana's government has agreed to change to a sliding scale royalty rate based on the gold price from a flat 5%, effective starting 2017.

The mines produced a respective 586K oz. and 177K oz. of gold in FY 2015:


The most important driving imperative of the company is to achieve a free cash flow margin at a gold price of US$1,100/oz and even lower.

To support an acceptable free cash flow margin to ensure that the mine plans are robust and resilient to lower metal prices in the short to medium term, the company uses a reserve gold price of US$1,200/oz in the short term (2016/2017)

I think that the Ghanaian decision is that change to a sliding scale royalty rate will allow the company to save between $21.75/oz and $24/oz in 2017.

Furthermore the decision of the Ghanaian government of reducing corporate tax from 35% to 32.5% could mean new life for Damang even though GFI has not yet decided whether to inject more cash into the operation or suspend operations there. The term of the tax cut is 11 years for the Tarkwa mine and nine years for the Damang mine, each renewable for an additional five years.

The approach to assess this stock is based on the free cash flow generated by the company in 2015, assuming that it will generate about the same FCF in 2016 and the FCF in 2017 will increase with 10% at a gold price of US$1,200/oz.

I am conservatively estimating 2016 and 2017 FCF because of the following reasons:

I don't believe that gold will trade at its abnormal high level in short-medium term again. This implies that the company will operate at higher grade mines to push all-in costs down and therefore reduce production and sales.

The company has operations in South Africa and Australia, so it is exposed to currency risks.

The company's target is to further improve the net debt to EBITDA ratio by continuing to reduce the net debt and therefore guaranteeing a comfortable balance sheet with flexibility.

The development of ore bodies and the valuation of value-accretive opportunities are critical to the company. These activities together will absorb cash generated from operating activities.

My valuation:

2015 FCF = Cash from operating activities - Capex = US$771m - US$634 = US$137m.

The company has 782.67M shares outstanding. The FCF per share is US$0.18.

As cost of capital I will use 8.40% that is an average of the entire industry. I will calculate the growth rate, g, as Return on Equity - 5 Yr. Avg. of the industry X Retaining

Ratio (RR) of the industry:

6.46% x (1 - Payout Ratio) = 6.46% x 91.33% = 5.90.

Discounted FCFgfi = $0.18 / (1 + 0.084)^1 + ($0.20 (1.059) / (0.084 - 0.059))/1.084^2 = $7.5.

From $7.2 I subtract $1.76 (net debt per share) and I will obtain the EV of GFI that is $5.44.

GFI is ranked as a hold by the analysts.

The mean target price of the week is $3.95 per share.

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