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Gold Fields impairs South Deep R3.5bn as fails to meet redesign

Thursday, 8 February 2018

A below forecast gold price and a slower ramp up of production at South Deep negatively affected Gold Fields’ profits for its 2017 financial year.

The group said in a trading update earlier today that headline share earnings could be up to 12% lower year-on-year while normalised earnings which excludes non-cash exceptional would be 21% to 33% lower in a range of 16 US cents 19c/share. Share earnings for the 2016 financial year came in at 24c. The outcome was a basic loss of per share for the year of 0.22 cents to 0.25 cents/share – some 110% to 125% year-on-year.

The headline grabber is likely to be South Deep, Gold Fields’ South African operation. It had not reached its gold output target for the year – which had been put at about 360,000 ounces with a longer term target of 500,000 oz. This followed an extensive redesign of the mine – one of many attempts to get the resource to yield up its riches over the years.

Failing this, however, Gold Fields decided to impair the asset $278m (R3.5bn) taking its carrying value on the firm’s books to $1.96bn or R24.7bn. It was enough to see Johann Steyn, an analyst at Citi, declare whether Gold Fields would ever hit the straps. “We maintain our negative view on this mine and doubt whether Gold Fields’s 500,000 oz steady state guidance will ever be achieved,” he said in a note.

Gold Fields said the 500,000 oz/year long term production target for South Deep would be maintained.

There were other notable items affecting Gold Fields’ trading statement. One positive development was an $39m reversal of an impairment at Arctic Platinum which the group said in January it would sell after some 18 years or so of ownership. It also sold its Darlot mine in Australia netting $17m in after tax profit.

There would also be a $38m after tax reversal of an impairment of mining assets at Cerro Corona following the extension of the mine’s life.

“We are pleased to announce the successful life extension of the Cerro Corona mine in Peru to 2030 from 2023. The life extension will be achieved through the creation of additional, cost-effective tailings capacity,” Gold Fields said in its trading statement. “As a result of the increased life, a previous impairment of $53m has been reversed,” it added.

“South Deep is a disappointment,” said Goldman Sachs in a note. “Market expectations for a smooth ramp-up had increased after the new mine plan was released last year.

“While the company has said that 2022 target remains the same, the path to that will be lower production than previously guided. This is likely to be negative sentiment wise and could lead to earnings downgrades,” it added.

The overall production picture is that attributable gold equivalent production was expected to be 2,16 million oz for the year compared to 2,15 million oz in the 2016 financial year. Notwithstanding the issues at South Deep, this exceeded the guidance range of 2.1 to 2.15 million oz.

All in sustaining costs of $955/oz for the year were also better than the forecast $1,010 to 1,030/oz range and better than the $1,006/oz registered in the previous financial year.

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