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South Deep downgrades could send Gold Fields on project hunt -

Friday, 24 November 2017

TRY as it might, Gold Fields is struggling to make ends meet at South Deep, its South African gold mine. Earlier this year, it downgraded forecast gold production by up to 10% after promising previously it could reach 90,000 ounces per quarter.

According to analysts, not even the downwards adjusted production performance can be maintained as recent production numbers have been driven – as it’s described in the mining industry – by ‘grade’. This is where parts of the orebody yields more grams per tonne than you’d expect to see on average, known as the reserve grade.

In the case of South Deep, the reserve grade is 5.8 grams of gold per tonne compared to recent grades of 6.3g/t. It adds up to a lack of sustainability.

South Deep is an interesting case study explaining why future supply of minerals is so fickle. It’s no easy matter switching on supply when a deficit develops, even when there are identified projects to be developed. South Deep is a case in point: the mine is premised on a hugely rich orebody, but extracting the gold profitably has been hard.

“We now think the FY18 [2018 financial year] target is challenging and [we] are also having reservations about our steady-state outlook of 380,000 oz/year,” said Adrian Hammond, an analyst for Standard Bank Group Securities.

This compares to Gold Fields’ own target of 500,000 oz/year which it said it would make after spending another R2.5bn on the mine (which has already absorbed more than R30bn in investment over the years).

The upshot is that Gold Fields’ is at risk of failing to maintain gold production falling to about two million ounces per year from the current 2.2 million oz/year target. As a result, Hammond believes Gold Fields needs to find another new project, notwithstanding spend  of R11.3bn unveiled in February in both new and replacement gold reserves, and described by Gold Fields CEO, Nick Holland, as ‘evolutionary’.

“In our view, a catalyst for change would need to come from a new good project. Group production can remain steady until 2023, hence management has time,” said Hammond who also commented finding the gold would be “not easy” and the balance sheet constraints would also be a factor.

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