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Difficult first quarter from South Deep hits Gold Fields – Mining MX

Tuesday, 2 May 2017

Just two months after Gold Fields unveiled the rebased mining plan and latest turnaround strategy for its South Deep mine, the “serial underperformer” has done it again and turned in a dismal performance in the quarter to end-March.

The group’s operational update released this morning reported a 43% slump in gold output as South Deep’s production plunged to 1,424kg in the March quarter ( December quarter 2016 – 2,516kg). The lower output resulted in a huge jump in South Deep’s production costs with all-in costs surging 56% to $1,821/oz ($1,112/oz).

Analyst reaction was cautious but generally favourable after February’s briefing on the “new look” South Deep although some warned that, even though the new plan looked promising, there could still be a few temporary setbacks.

Others – notably Johann Steyn of Citi – remained disbelieving. Steyn commented on February 16 that “we have seen this movie before” and cautioned investors to remain skeptical given Gold Fields “disappointing track record.”

Just about every analyst was concerned about the pending departure of Nico Muller – the executive who led the South Deep rebase team – who is leaving to become CEO of Impala Platinum (Implats).

Muller is the second high-profile executive to leave Gold Fields to run Implats as he is following in the footsteps of former COO Terence Goodlace who, ironically after his resignation as Implats CEO last year, is now a non-executive director of Gold Fields.

In reply to analysts’ questions at the February briefing both Muller and Gold Fields CEO Nick Holland stated they did not see Muller’s departure as a material issue for the future of South Deep.

In today’s operational update Holland commented that, “ at South Deep production was negatively impacted by two fatal accidents and three falls of ground in the higher grade section of the mine which has resulted in a deferral of mining higher grade areas.

He added, “the challenges during the quarter impacted tramming activities at the mine which resulted in a more severe impact on gold production than gold broken. Gold broken during the quarter was around 300kg lower than what it needed to be to track guidance for the year.

“The build-up of excess broken stocks underground is expected to be recovered in the next two quarters while access to the higher grade areas to recover the gold deferred is expected in the June quarter. Despite the slow start, the full year guidance for South Deep remains unchanged.”

At a presentation last year Holland showed some irritation with the overwhelming focus being paid to South Deep by analysts and commented, “there is a company beyond South Deep, believe it or not” . He pointed out that 85% of Gold Fields production and all of its cash had been generated outside South Africa in the six months to end-June 2016.

Reason for the scrutiny is that Gold Fields has so far poured some R28bn into buying and developing South Deep which contains some 75% of the group’s total ore reserves. A successful outcome at South Deep would be hugely beneficial for Gold Fields. This latest performance seems likely to intensify analyst skepticism and put more pressure on the already underperforming share price.

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