Integrated
Annual Report
2018
2018
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Gold Fields is subject to external strategic dynamics that inform decision-making and influence our business performance. An analysis of the three key strategic themes - and how Gold Fields is responding to them - is set out below.
The price of gold continued its relatively static course during 2018, ending the year at US$1,280/oz, down just over US$30/oz from the 2018 opening price of US$1,313/oz. The average gold price received by Gold Fields, however, has barely changed from US$1,255/oz in 2017 to US$1,252/oz in 2018.
The traditional investment case for gold as a safe haven asset was called into question as many investors sold their physical gold holdings after the gold price collapsed in 2013. However, in late 2018 and early 2019 we have seen some shift to gold amid political and economic uncertainty in the US and the subsequent weakness in the US Dollar. While much of the gold price's short-term movement is driven by market sentiment and geopolitical developments, an analysis of gold's supply and demand fundamentals underpins our belief that the gold price could continue to improve over the next few years, though there will undoubtedly be periods of short-term volatility.
According to the CPM Group, total gold demand was steady at 127.4Moz in 2018 (2017:127Moz), with jewellery and industrial demand unchanged at 97Moz, and higher central bank purchases offsetting a decline in private investment in coins and bullion. Net purchases by central banks and other official institutions continued to grow steadily in 2018, improving by over 50% to 16.5Moz in 2018, after a similar rise in 2017 to 11Moz. Total stock demand by Exchange Traded Funds remained stable at 30.3Moz in 2018 (2017: 30Moz).
In the long term, gold supply issues will also support a recovery in the gold price, in our view. According to CPM data, mine production has plateaued between 90Moz - 92Moz since 2014. Mine supply in 2018 totalled 92.1Moz and secondary supply 30.1Moz, both unchanged from 2017, leaving total supply marginally higher at 127.4Moz in 2018 (2017: 127Moz). Many gold market analysts are of the view that the industry has reached peak production levels given the limited number of new gold discoveries since the mid-1990s, together with the decreased levels of exploration spend in recent years.
Gold Fields does not predict the gold price. We expect volatility and structure the business accordingly.
We seek to maximise value by:
The Group is therefore in a relatively strong state to weather a sustained lower gold price (at just over US$1,000/oz) and well positioned to capture future upside when the gold price recovers.
During 2017 and 2018, we invested in the future of our portfolio with a number of new projects, while at the same time continuing to invest in the ongoing development of ore bodies - through proactive near-mine exploration and development. Our mines avoid 'high-grading' - due to the obvious negative impact this would have on the sustainability of their ore bodies - by mining at or below their reserve grade. We are implementing these strategies despite the current price environment.
Global gold demand and supply versus the US$ gold price (average annual)
Source: WGC
Total mine supply
Source: CPM
The nature of the extractive sector means the industry must pay particular attention to its social licence to operate. Unlike other companies, mines are dependent on their mineral deposits and cannot relocate to new locations when facing deteriorating local or national operating environments. Furthermore, despite many mines' lives being finite, they can still span decades. Mines must be able to navigate complex social, economic and political dynamics over time to avoid conflicts with their host communities. As it is, conflicts between communities and mines in the industry globally have risen sharply over the last decade.
To manage the potential risks, mining companies need to maximise their positive impacts, minimise their negative impacts and make sure that this is communicated to - and recognised by - host community stakeholders. For many decades this was not the case and, apart from a limited number of community jobs and procurement offered by mining companies, these communities saw few benefits. Similarly, taxes and royalties went into the coffers of central governments for national benefit and rarely found their way back through investment in host communities. It is therefore not surprising that demands from host communities have become more vocal and strident in recent years. Amid widespread use of social media and activism in these communities their demands have also found a global audience.
At Gold Fields, a strong social licence to operate is embedded in our societal value proposition and is a prerequisite for long-term generation of value for stakeholders. This approach had to be underpinned by:
These initiatives are particularly important in the low gold price context, which has an impact on the Group's ability to invest in community development projects as well as raising the prospect of job cuts among employees, many of whom hail from host communities.
Conflicts between mines and communities on the rise
Source: ICMM
A sound and certain regulatory and fiscal environment should enable the global gold sector to ride out short-term fluctuations in gold prices and achieve sustained returns over the 15- to 20-year average life of a mining project. In many jurisdictions, however, the legal and tax environment has become less conducive to the long-term viability of the mining sector. Many governments view the industry as an easy target for higher taxes and other fiscal imposts, particularly during tough economic times. As a result, the governments' share of mining revenue has grown at the expense of other stakeholders, but at the same time miners and investors are shying away from more risky jurisdictions.
The question is how the trust gap between mining companies and governments can best be bridged. Gold Fields on its own and in conjunction with its peers in the wider global mining industry, has sought to address this trust gap in a number of ways: