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Hard for Gold Fields to walk from South Deep whilst it is making losses - MiningMX

Wednesday, 17 October 2018

GOLD Fields CEO, Nick Holland’s call on shareholders last week to exercise “patience” in respect of the firm’s South Deep mine may be a precursor to eventually exiting from the operation and, in so doing, finally bringing the curtain down on the firm’s long-standing exposure to South African gold mining.

“They are now very impatient, and one can understand it but I think we need to calmly look where we are and evaluate the best way forward,” said Holland in an interview with Bloomberg News regarding ongoing losses at South Deep. “There is a large resource base there, it’s well-drilled and we have spent a lot on infrastructure development costs. We are not far away, we just need more time,” he said.

In August, Gold Fields announced a restructure of South Deep, cutting 1,560 permanent and contractor jobs, potentially slashing gold output, and impairing the mine by R4.8bn. It would unveil a fresh plan for the mine in February.

Gold Fields has invested a total of R32bn, roughly the same as its market capitalisation, since 2006. In the last four years, the mine has incurred cumulative losses of R4bn. It has no value in the firm’s share price, carries a negative net present value, and represents a massive stain on the reputation of Gold Fields’s management.

However, Holland may not be able to exit from the mine until it is profitable, according to Patrick Mann, an analyst for Bank of American Merrill Lynch.

Whilst observing that an exit from South African gold mining was “an inevitability” for Gold Fields, as well as AngloGold which also has one underground asset left in the country, Mann believed that: “Gold Fields in particular has invested significant capital, management time, and reputation into South Deep and it may find it difficult to walk away without delivering a profitable South Deep”.

South Deep is a rich resource but after applying conventional mining methods to the orebody, Gold Fields decided to mechanise the mine and improve skills underground as well as altering shift programmes. The changes, a function of several rescuing exercises, have not delivered results, however.

In August, Gold Fields was unable to give new production guidance for the remainder of the year or the 2019 financial year and said that previous production guidance for 2018 of 322,000 ounces could not be relied upon. Production in the second quarter totalled 49,000 oz – not much better than the 48,000 oz in the first quarter despite Gold Fields ringing in the changes by introducing shift changes.

Writing in September, Goldman Sachs said a decision regarding South Deep was imminent if it continued to bleed cash.

“Guidance for South Deep has been lowered on five occasions and the mine has never contributed to the group’s free cash flow generation, dragging down overall returns. As such, the key question regarding South Deep, in our view, is whether the asset merits further capex, if it continues to disappoint operationally,” it said in a note.

“In the context of continued disappointments at the mine, we would expect the company to take a final decision on it over the next couple of years, if the new targets (to be set out with the FY18 results in February 2019) are not met,” it added.

Although not referring to South Deep, the bulk mining techniques applied to traditional South African orebodies was criticised by Ian Cockerill recently who was CEO of Gold Fields at the time it bought South Deep for R22bn from Barrick Gold in 2006.

“If you look at the nature of the orebodies that we have, which are huge sources of employment, they are not circumducive to bulk mining,” he said during a panel session at the Joburg Indaba mining conference. “We are at a competitive disadvantage that while blessed with the Wits [gold orebody] and Merensky [platinum group metal fields] it is quicker to get opencast mining elsewhere in Africa operating. Our narrow stopes with flat-lying orebodies are not conducive to bulk mining,” he said.

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