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Could Gold Fields sell unprofitable South Deep? - Moneyweb

Monday, 23 October 2017

NASTASSIA ARENDSE:  Good evening and welcome to the SAfm Market Update with Moneyweb. My name is Nastassia Arendse.

I’m joined on the line by Maudi Lentsoane, who is the CEO of Lehumo Investments, to take us through the day’s market performance. Maudi, thanks so much for your time.

MAUDI LENTSOANE:  Thank you for having me, Nastassia, and good evening to your listeners.

NASTASSIA ARENDSE:  What happened on the markets today?

MAUDI LENTSOANE:  We had a flat day. The all-share index was up about 50 points, that’s where we finished. So a bit of a lacklustre day, a bit of a mixed picture. You’ve got the industrials slightly down. I think a lot of the action was in the resources space, where we finished up 0.8%, primarily I think supported by the rand.

We continued to see a weaker rand and that’s helping the likes of Anglo American. AngloGold Ashanti was also up, and many of the resources. Kumba was also up. There was some positivity as well, the likes of Barclays Africa within the financial space. So the financials were also marginally up, but call it flat.

The gold mining index was also flat. Platinum slightly down. So it was one of those days, though we saw a good start .

It was a bit of a mixed picture in Asia this morning, Japan having a very good run though – over 1% up after the election, with Shinzo Abe getting a very strong running. He got a super majority. It looks like he will be in the driver’s seat as he continues to transform the economy, continuing Abeconomics. So a vote of confidence for him and a good victory. So the picture is looking very good there in Japan.

Overall we had a mixed picture.

NASTASSIA ARENDSE:  Any company news that you were keeping an eye on? I see Pioneer Foods had a trading statement, Adcorp as well. What do you think of those?

MAUDI LENTSOANE:  Pioneer Foods did not come up with a great trading update. Headline earnings per share were down 15%. It has been under a lot of pressure. There were a number of things they did wrong, especially in the previous year. The CEO also resigned a couple of months ago, so the company has been under a lot of pressure. Basically it speaks of the company making all the wrong decisions. They had some hedges on the maize side which, at the time when the maize prices were rising due to the drought, they thought it was the right thing to do. But subsequently the maize prices dropped and those hedges at the higher prices are certainly making them look terrible in terms of these numbers. Pressure there. Food prices are also on the decline. So a lot of problems for the company. Now that they say they are beginning to unwind those hedges and beginning to buy maize at lower prices. Hopefully there could be a turnaround in the near future.

The other company that had an operational update was Gold Fields. I think that’s an interesting one, especially when you look at what’s just been happening in the gold space. We know that AngloGold Ashanti announced that they are selling some of their assets. They sold those assets to Harmony. So when you look at Gold Fields it’s another interesting one. What I like about it is that the cash flow is much better, which is what you want to see, especially in the gold mining sector. You want to see a company that’s preserving its cash because there have been terrible trading conditions, with the gold price under pressure.

In terms of the South African operations, in particular South Deep, that remains very challenging. Something very interesting in terms of their costs, especially around South Deep, is that $1 257/oz is what they are currently getting gold out of South Deep at. So with the gold price what it is, they are running South Deep at a loss. So a big challenge. Now the question is, would they be getting rid of South Deep as well, because it’s definitely not profitable? If it remains unprofitable the only option for them could be to get rid of it. It’s a very difficult mine to mine. But when you look at the entire group, the picture looks much better. The average cost is around $1 030/oz of gold. So overall it looks good. But when you look at the South African operations, in particular South Deep, that’s one of the biggest mines and a very challenging one for South Africa.

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