Capital allocation and sound balance sheet management
Gold Fields 2021 BSC KPIs
- Improve total shareholder return (TSR) through increased share price and dividend payouts
- Reduce debt to improve TSR, reduce risk and create financial flexibility
- Increase FCF per ounce at a set gold price
- Improve rate of return on capital invested
- Improve our process as it relates to allocating and managing capital
Trade-offs
Our trade-offs refer to the difficult decisions made during the year in the context of resource scarcity. Below are some of the significant actions taken during a difficult year to do so:
- Priority for capital allocation is given to debt reduction and shareholder payments before considering capital investments in our operations
- The finite nature of our mines requires consistent investment into the portfolio
- Even if gold prices are at high levels, hedging is only considered during periods of significant expenditure or servicing high debt levels
Overview
Given the cyclical nature of the gold industry, along with the lack of control we have over key revenue and cost drivers – such as the gold price, currencies and the oil price – Gold Fields has adopted a prudent approach to managing its balance sheet. Historically our target level for the net debt:EBITDA ratio has been around 1x. However, we have been opportunistically reducing our debt given the higher gold price of late and could well be at or close to net zero within 18 months.
Gold Fields' business strategy focuses on growing margin and FCF through the cycle, with our overriding aim of generating a FCF margin of at least 15% at a gold price of US$1,300/oz.
In 2020, Gold Fields generated a FCF margin of 28% at an average gold price of US$1,771/oz, compared with 21% in 2019 and an average gold price of US$1,399/oz, and 16% in 2018 with an average gold price of US$1,266/oz. When converted to a price of US$1,300/oz, our FCF margin in 2020 would have been 27%.
However, given the finite nature of our assets, reinvestment into the portfolio is essential and the business has had to endure periods of increased capex. This was the case from 2017 to 2019, when the Group spent approximately US$1bn on building two new mines (Gruyere and Damang), buying into two new JVs (Gruyere and Asanko), and continuing to advance the Salares Norte project in Chile. Despite this increased capex, relatively strong gold prices enabled us to limit the increase in the Group's net debt and ensure that we meet our target FCF margin. The 2021 financial year will again see a significant investment into the Group's portfolio by developing the Salares Norte project in Chile, which will cost US$860m to construct.
Financial performance
Despite the impact of the Covid-19 pandemic on our operations, the significant increase in the gold price provided a welcome tailwind to Gold Fields' financial results in 2020. The average gold price received increased across all relevant currencies during 2020, with the US Dollar gold price up by 27% to US$1,768/oz, (taking into account the realised revenue hedge losses, the actual realised gold price was US$1,581/oz), the Australian Dollar gold price up by 27% to A$2,551/oz, and the average Rand gold price up by 41% to R928,707/kg. With production levels stable, the higher gold price resulted in a 31% increase in Group revenue to US$3.89bn in 2020 from US$2.97bn in 2019.
During 2020, the Group decided to align the production month-end with the calendar month-end, which resulted in a once-off additional 10 production days in H1 2020. These added production days resulted in an extra 45koz in output, which was offset by lost production from Covid-19-related stoppages of c.78koz (32koz at South Deep and 46koz at Cerro Corona) during the year.
Cost of sales before amortisation and depreciation increased by 5% to US$1.49bn in 2020, while AIC and AISC were slightly above 2019 levels and in line with revised guidance. AIC of US$1,079/oz was marginally higher than the US$1,064/oz recorded in 2019, with US$12/oz relating to specific Covid-19-related costs and US$12/oz to higher royalties on the back of the increased gold price. AISC came in at US$977/oz in 2020 compared with US$897/oz in 2019, and was within the revised guidance range of US$960/oz – US$980/oz.
Other salient features during 2020 included the following:
- Royalty expenses increased by 42% to US$105m
- The Group's taxation charge increased to US$433m from US$176m in 2019, with normal taxation increasing to US$367m (2019: US$191m) in line with the higher profit before tax
- Total capex of US$584m was slightly lower than the US$613m spent during 2019
- Losses from financial instruments amounted to US$239m (2019: US$238m), largely due to losses on our gold hedges
Taking the above into account, earnings for 2020 totalled US$723m compared with US$162m in 2019, while normalised earnings more than doubled to US$879m (2019: US$343m).
We provide a detailed analysis of our financial performance in the management's discussion and analysis of the Group's Annual Financial Statements on the 2020 AFR. The consolidated income statement, statement of financial position and cash-flow statement – extracted from the 2020 AFR can be found here.
Capital allocation and managing debt
Gold Fields' capital allocation priorities during 2020 were to pay down a significant portion of debt while continuing to invest the necessary sustaining capex into our asset base and honouring our Dividend Policy. At the beginning of the year, we set a target of paying down up to US$400m of the Company's debt and reducing our net debt:EBITDA ratio to below 1.0x by the end of December 2020. We met this target, with the Group reducing its net debt by US$595m to US$1,069m and achieving a net debt:EBITDA ratio of 0.56x (under the new IFRS 16 definition). This compares with net debt of US$1,664m and a net debt:EBITDA ratio of 1.29x as at 31 December 2019. Excluding lease liabilities, core net debt amounted to US$640m at the end of 2020.
Throughout the cycle, Gold Fields has maintained the capex levels we believe are essential to ensure the longevity of our portfolio. Group capex amounted to US$584m in 2020 compared with US$613m in 2019, comprising sustaining capex of US$409m (2019: US$323m) and growth capex of US$175m (2019: US$290m).
Looking ahead, our 2021 capital allocation priorities will again be informed by our strategy to improve the quality of our asset base and extend the life-of-mine of our portfolio while balancing returns to shareholders. As such, we will allocate the FCF we generate to:
- Paying down more debt and strengthening the balance sheet: Although the Group significantly decreased its net debt and net debt:EBITDA ratio during 2020, management believes that decreasing our debt levels even further would be favourable to the Group
- Funding the Salares Norte project: Construction of Salares Norte began in earnest in December 2020, with US$508m budgeted for the project for 2021. Based on our internal planning prices, management believes that we will likely be able to fund a large portion of this capital from cash generated by our operations
- Returning dividends to shareholders: Gold Fields has a long and well-established policy of paying out between 25% and 35% of normalised earnings to shareholders as dividends. During 2020, Gold Fields declared a total dividend of R4.80/share, which translates to 30% of normalised earnings for the year – in line with the average pay-out over the past 10 years. We will continue to honour this policy in 2021
We budgeted total capital of US$1,177m for 2021, comprising sustaining capital of US$538m and growth capital of US$639m. The vast portion of the growth capital will be spent at Salares Norte, with US$508m in project capital budgeted for what is set to be its peak capital year. In 2020, we spent US$112m of the total capital allocation of US$860m for Salares Norte.
Other specific projects include the development of a second decline at the Wallaby Underground mine at Granny Smith, plant modifications and increased development at Agnew to enhance the longer-term outlook and, finally, increased new mine development at South Deep.
Debt profile
Over the past two years, Gold Fields undertook various transactions to improve the liquidity and maturity profile of the Group's debt.
During 2020, we focused on repaying and renewing our US Dollar, Australian Dollar and Rand debt. In H1 2020, we renewed our two R500m (US$34m) revolving credit facilities (RCF) with improved interest rates and three-year maturities. In October 2020, Gold Fields repaid the outstanding US$600m of the 2020 bond from a combination of cash resources and by drawing on our US Dollar debt facilities. In addition, we renewed our Australian Dollar facility during Q4 2020 and extended its maturity from December 2021 to December 2023. As a result, the first sizeable maturity for the Group is now in December 2023.
In July 2020, Gold Fields exercised a one-year extension for the US$1.2bn bank syndicated RCFs. Of the US$600m three-year RCF, which terminates in July 2022, US$485m has been extended to July 2023. Of the US$600m five-year RCF, which terminates in July 2024, US$485m has been extended to July 2025.
Wind turbines at Agnew, Australia
Hedging
Given the cyclical nature of our business, along with the volatility of the gold price, Gold Fields has implemented an active hedging programme over the past four years. We do not enter into long-term systematic hedges but rather regularly evaluate the Company's position and outlook to determine whether short-term hedging is appropriate. Our policy allows for hedging to protect cash-flows:
- During times of significant expenditure
- For specific debt servicing requirements
- To safeguard the viability of higher-cost operations
The hedges that were in place from 2017 to 2019 protected our cash-flows while capex levels were elevated during the Group's reinvestment programme. During 2020, the purpose of our hedge book was to service our debt and, ultimately, enable management to achieve its debt reduction target. With the balance sheet in a much stronger position, management does not intend to put in place any more hedges that exclude our shareholders from the upside to the gold price.
However, given the sizeable capital budget for the Salares Norte project, the Group purchased downside protection for 2021 in the form of put options on 1Moz of our Australian production at an average strike price of A$2,190/oz. In addition, we implemented a currency hedge on the Chilean Peso, as roughly two-thirds of the costs relating to the Salares Norte project are in the local currency. Finally, we hedged 24kt of copper using zero cost collars with a floor of US$6,525/Mt and a cap of US$7,382/Mt. For full details of our hedges, see the table below:
Table of hedges
| 2020 | ||||
| Hedge | Country | Quantity hedged | Hedging instrument and price | Hedge term |
| Gold hedge | Australia | 210koz (21% of guidance) | Swaps; Ave strike price of A$1,957/oz | Jan 2020 – Dec 2020 |
| Australia | 270koz (27% of guidance) | Zero-cost collars; Ave floor price of A$1,933/oz, Ave cap price of A$2,014/oz |
Jan 2020 – Dec 2020 | |
| Ghana | 175koz (21% of guidance) | Zero-cost collars; Ave floor price of US$1,364/oz, Ave cap price of US$1,449/oz |
Jan 2020 – Dec 2020 | |
| Ghana | 100koz (12% of guidance) | Swaps; Ave strike price of US$1,382/oz | Jan 2020 – Dec 2020 | |
| Ghana | 100koz (12% of guidance) | Zero-cost collars; Ave floor price of US$1,400/oz, Ave cap price of US$1,557/oz |
Jan 2020 – Dec 2020 | |
| South Africa | 100koz (39% of guidance) | Swaps; Ave strike price of R681,400/kg | Jan 2020 – Dec 2020 | |
| South Africa | 100koz (39% of guidance) | Zero-cost collars; Ave floor price of R660,000/kg, Ave cap price of R727,000/kg |
Jan 2020 – Dec 2020 | |
| Oil hedge | Ghana | 123Mℓ (50% of annual diesel consumption) | Swaps; Equivalent Brent crude swap price US$59.20/bbl | Jan 2020 – Dec 2022 |
| Australia | 75Mℓ (50% of annual diesel consumption) | Swaps; Equivalent Brent crude swap price US$57.40/bbl | Jan 2020 – Dec 2022 | |
| 2021 | ||||
| Hedge | Country | Quantity hedged | Hedging instrument and price | Hedge term |
| Gold hedge | Australia | 1,000koz (100% of guidance) | Put options; Ave strike price of A$2,190/oz | Jan 2021 – Dec 2021 |
| Copper hedge | Peru | 24kt (97% of guidance) | Zero-cost collars; Ave floor price of US$6,525/Mt; Ave cap price of US$7,382/Mt | Jan 2021 – Dec 2021 |
| Chilean peso hedge | Chile | US$546m | Exchange rate of 836.45 CLP per US$ | July 2020 – Dec 2022 |
| Oil hedge | Ghana | 123Mℓ (50% of annual diesel consumption) | Swaps; Equivalent Brent crude swap price US$75.80/bbl | Jan 2020 – Dec 2022 |
| Australia | 75Mℓ (50% of annual diesel consumption) | Swaps; Equivalent Brent crude swap price US$74.00/bbl | Jan 2020 – Dec 2022 | |