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Message from the Chair

Message from the Chair

"I am pleased with the way in which we have repositioned Gold Fields. The company now offers investors a vehicle that they can confidently use to diversify their investment risk, and to participate in the real upside of the gold price. Few gold companies can do the same."

Dear shareholders

During another year of significant turmoil on the global economic landscape, the performance of gold has been reassuring. Gold has extended its 10-year bull run by again establishing an all-time record price at US$1,265 per ounce, as investors everywhere, large and small, continued to seek protection against the ever-present threat of financial volatility and economic dislocation.

The contagion, which first affected global banks and insurance companies in mid-2008, grew into a full-blown economic crisis in 2009. It was met with a concerted stimulus response by governments and multi-lateral financial organisations, ensuring that the worst effects of the crisis were mitigated. As a result economic growth, albeit subdued, has returned to most developed and emerging markets this year.

(R million)

But despite the best efforts of the custodians of the global economy, it will take considerable time for these excesses to work their way out of the system. Whatever the remedies prescribed, it is likely that global inflationary pressures will reemerge over time and for major global currencies to be at significant risk of devaluation while the world moves falteringly towards what we all hope is an eventual universal economic recovery.

What is clear is that gold has over the past year further consolidated its position as an important “new” asset class, offering investors relative security at a time when many other asset classes did not. Given this environment, combined with the well-documented constraints in new global mine supplies, the positive outlook for gold is unlikely to change in the foreseeable future.

It is against this backdrop that I am pleased with the way in which we have repositioned Gold Fields. The company now offers investors a vehicle that they can use with confidence to diversify their investment risk, and to participate in the real upside of the gold price.

While our shares continue to trade at a significant discount to those of our North American peers in particular, I am confident that the work we have done over the past two years has repositioned Gold Fields as a very significant value opportunity.

Our strategy, which I expounded in some detail in last year’s annual report, continues to be focused on:

  • Sweating our assets;
  • Growing Gold Fields; and
  • Securing our future.

Over the past year we have made considerable progress in the further implementation of this strategy: the benefits in each of the three strategic areas are becoming evident and are enumerated in the remainder of the annual report.

Safe production remains our single most important value and during the past year the Board continued to actively engage with management to ensure that every possible step was taken to improve our safety performance. I am encouraged by the fact that during financial 2010 we again saw an improvement: the total number of fatal injuries decreasing by 14 per cent from 22 in financial 2009 to 18 in financial 2010. This follows on a 55 per cent improvement in financial 2009, when fatal injuries were reduced from 47 to 22.

While we are pleased that the safety trends are moving in the right direction, we are deeply saddened that fatal accidents on our mines still occur. We deeply regret each one of these fatalities and your Board is committed to working with management to ensure that all serious and fatal accidents are eliminated. We believe that this is indeed possible and will not rest until Zero Harm is a reality at our operations. The fact that all of our South African mines have during the past years managed to operate for extended periods without any fatal accidents is proof of this. It is pleasing to report that all of our international mines had a fatality-free year.

Last year I indicated that Gold Fields’ operations had achieved a new level of stability, predictability and consistency, which established a platform for an improved performance going forward. It is pleasing to report that, after several years of declining production and despite a number of unplanned safety-related production stoppages in South Africa during the first half of the financial year, we have now reached a turning point: Attributable gold production increased by two per cent to 3.5 million ounces, up from the 3.4 million ounces produced in financial 2009. It is our view that this is a solid base from which we expect to see further production improvement in the coming years.

Our financials have mirrored this trend with earnings increasing by 136 per cent to R3,631 million (US$479 million) in the year ended June 2010 compared with R1,536 million (US$171 million) previously.

Of some concern are indications that input cost inflation is starting to rear its head again, a trend we expect to continue in the year ahead, in particular if the current strong revival of the global commodities sector is sustained. Our response at Gold Fields has been to pre-empt this development through a relentless focus on costs. To this end, and to ensure that we maintain a minimum 20 per cent notional cash expenditure (NCE) or real free cash flow margin, we have commenced a far-reaching business process re-engineering exercise at our three established South African mines, at Tarkwa in Ghana and at St Ives in Australia.

Notional cash expenditure remains the most important yardstick by which we measure our financial performance as we believe it is the only true measure of free cash flow generation. This metric has now been firmly established within the company and it is pleasing to note that some of our peer companies have started to adopt it as well. It would certainly offer investors greater cost transparency of the global mining sector.

Turning to the company’s growth strategy it is pleasing to report that we have seen considerable progress with Gold Fields’ strategy to expand significantly beyond the South African home base. Our pipeline of growth projects, both near-mine and greenfields, hold great promise. At St Ives and Agnew in Australia and Damang in Ghana we have made new discoveries which will be brought to account over the next few years, growing the Mineral Reserve positions of these mines and contributing to increased production.

On the greenfields exploration front the most exciting news during the past year was progress at the Chucapaca project in Peru. Gold Fields, together with its joint venture partner Buenaventura, announced an initial Mineral Resource estimate of 5.6 million gold equivalent ounces at Chucapaca, with significant mineralisation potential beyond the extent of the current drilling. Indications are that Chucapaca will become Gold Fields’ second mine in South America and the next of our new-generation international growth projects. Equally prospective is our Yanfolila project in Mali, where we are investing heavily in exploration drilling and are targeting an initial two million ounce starter project. We should be in a position to make construction decisions on both of these projects within the next three years.

In South Africa the South Deep Gold Mine remains our principal growth project. South Deep has had a very good year both in terms of gold output and the ongoing development of the mine. Production has increased by 52 per cent year-on-year to 265,000 ounces, which sets this mine up to progress towards full production of between 750,000 and 800,000 ounces a year by the end of 2014. South Deep, one of the few deep-level mines in the world that is fully mechanised, is Gold Fields’ most important development project and has been appropriately resourced for certain success. We are confident South Deep will not disappoint investors.

After the close of the year under review the South African Department of Mineral Resources approved the conversion of the South Deep old-order mining right into a new-order mining right, which includes an additional portion of contiguous ground known as Uncle Harry’s. This, together with the previous conversions for Driefontein, Kloof and Beatrix granted in 2007, means that all of Gold Fields’ South African mines have now been granted their new-order mining rights.

In addition, we have finalised the terms of three new empowerment transactions that will help us meet our commitment to achieve the 2014 Black Economic Empowerment ownership targets. These deals comprise an employee share option plan for 10.75 per cent of GFIMSA, a Broad-based Black Economic Empowerment (BEE) transaction for ten per cent of South Deep and a similar BEE deal for one per cent of GFIMSA, excluding South Deep. Our aim is to have all three of these transactions executed by the end of the calendar year, which should lay to rest concerns investors may have about the empowerment status of Gold Fields in South Africa.

Moving to external factors impacting on our company. Over the past few years I have noted with great concern the emergence of a trend around the globe for governments and other stakeholders to seek to impose ever-rising cost imposts on the mining industry. The most visible example of this during the past year was the attempt by the Australian government to impose a 40 per cent supertax on its mining sector. Fortunately sanity prevailed and gold was excluded from the proposed tax. However, despite the pull-back by the Australian government, there is very little evidence to suggest that authorities elsewhere will ease the industry’s substantial regulatory and financial burden. To the contrary, taxes and royalties are being increased in most of the countries in which we operate, while the costs of state services, such as energy provision, are escalating sharply. Furthermore, mining companies are also being asked to take on ever-increasing socio-economic responsibilities among the communities in which they operate. Gold Fields prides itself on being a responsible and dedicated corporate citizen and our sustainability report details our extensive strategies, policies and projects in this area. But there is a very real risk that countries that introduce and entrench such punitive impositions will find themselves increasingly by-passed as the mining industry scouts for new exploration projects. This can only be to the detriment of these nations and their people.

It is imperative that we share these concerns in open dialogue with all the stakeholders in the jurisdictions in which Gold Fields operates. Stakeholder relationship management is a central theme of the new sustainable development framework which we introduced and bedded down during the past financial year. I am particularly pleased with the continuing maturity we are successfully developing in relationships with trade unions and other employee representative organisations.

Equally important are the relationships that we maintain with our host and neighbouring communities, who are, in the final analysis, the granters of our licences to operate. It remains a highest priority for Gold Fields to be viewed by our communities as a caring, responsible and responsive corporate citizen.

In all of the countries in which we operate the availability of appropriate skills in the required numbers remains a significant challenge. I reported last year that we had instituted a number of programmes to nurture and retain the skills in the company while at the same time attracting new talent. These efforts continue apace and remain high on our agenda.

A critical component in our strategy to retain and attract the best talent in the industry is to offer them an appropriate worklife balance. As we strive towards greater productivity at all our operations it is proving difficult to achieve this critical balance. While not a sole panacea, I believe that the governments in many countries would do well by employees and the wider population if they considered the introduction of daylight savings time. This would not only benefit industry through greater levels of productivity, but undoubtedly improve the quality of life of all citizens.

In conclusion, on behalf of the Board I would like to commend our Chief Executive Officer, Nick Holland, his executive team and all our employees for their unstinting commitment and dedication to the Gold Fields cause and vision.

I would also like to express my sincere appreciation to my fellow directors for the enthusiasm and energy which they bring to our Board deliberations. After several changes in the composition of the Board over the past two years, the Gold Fields Board has developed into a cohesive and strong unit, well endowed with a good mix of the right skills and expertise to lead this company into the future.

It is with great sadness that we bade farewell to our fellow director John Hopwood, who passed away in March 2010 after a brave battle with cancer. John joined the Board in February 2006 and made a positive contribution to its deliberations right up to the end. He will be missed.

Looking to the future, I have decided that this is an appropriate time in the evolution of Gold Fields to take my leave and to hand the responsibility for this great company to a new person with a fresh eye and a firm hand.

I am very pleased that Dr Mamphela Ramphele has agreed to take on this challenge. Albeit diminutive in stature, she is a giant on the South African and global corporate, social and political stages and brings with her a wealth of experience and wisdom from which Gold Fields will undoubtedly benefit. Mamphela joined the Board on 1 July 2010 as Deputy Chair and I will hand over the reins to her at the annual general meeting in November, at which time I take retirement after over 40 years with the company.

It has been an honour for me to serve Gold Fields and its stakeholders as Chair and, prior to that, in the various roles and capacities that punctuated my career with this great company.

I will continue to watch from the sidelines with considerable interest as Gold Fields moves towards the achievement of its vision of being the global leader in sustainable gold mining. In my view the achievement of this vision is inevitable.

Thank you for your support over the years.

Alan J Wright