Integrated Annual Review 2012 Annual Financial Report 2012 Mineral Resources and Mineral Reserves Regional overview  

2.2.3 A new strategic paradigm for Gold Fields

The second significant outcome of the 2012 Portfolio Review was a recognition and adoption of five key guiding principles which will underpin the Gold Fields strategy going forward.

Principle 1: Focus on cash returns, not ounces

The first principle is that our focus is no longer on ounce targets at any cost, but on the generation of cash returns. Central to this is a razor-sharp focus on understanding and managing the all-in costs of producing an ounce of gold, expressed as Notional Cash Expenditure (NCE), which we pioneered in the gold mining industry and implemented in Gold Fields over the past five years. To turn this principle into action we embarked on a review and repositioning of all of the producing mines in the Gold Fields portfolio to focus on the production of profitable ounces only and to curtail marginal production which does not contribute to meaningful cash generation, even if this results in a decline in ounces of production. Some of the key actions that followed were:

  • The rationalisation of our corporate office and regional structures (including Growth and International Projects) to reflect the reality that the new Gold Fields is now a much smaller company with base production of approximately 1.8 million ounces to 1.9 million ounces per year
  • A significant reduction in our greenfields exploration expenditure from US$129 million in 2012 to approximately US$80 million in 2013 and a refocusing of our exploration efforts onto smaller, higher grade and less capital intensive targets, mainly in the regions where we already have a presence
  • At St Ives we completed the transition to owner-mining of the surface operations and mothballed the marginal heap leach operation. While this will result in a decline in annual production of between 30,000 and 40,000 ounces, it should lead to a lowering of costs and more profitable production overall
  • At Agnew’s Waroonga underground mine, we withdrew from the low-grade and marginal Main and Rajah lodes, re-focused only on the high-grade Kim Lode, and right-sized the mine accordingly. A more appropriate level of production for this mine is expected to be around 160,000 ounces per year compared with 176,600 ounces produced in 2012 and the 200,000 ounces initially targeted
  • At Tarkwa we are targeting improved performance by stopping production at the marginal and high cost South Heap leach operation, which will result in a production decline of approximately 40,000 ounces per year to between 640,000 and 650,000 ounces per year
  • At Damang we abandoned the “Super Pit” concept in favour of a smaller and more capital efficient strategy to sustain long-term production levels of between 200,000 to 250,000 ounces per annum at a minimum NCE level of 20%. This will entail the recapitalisation of the mine over the next two years, including remediation of the plant and increased stripping of the Huni and Juno deposits at the North and South extremities of the main Damang Pit, as well as a potential cut-back to the pit. Until this is achieved, production over the next two years is not expected to be more than 170,000 ounces per annum at an NCE of between US$1,650/oz and US$1,750/oz
  • At Cerro Corona the emphasis will be to maintain the mine’s consistently high performance and cash generation

While these measures will have a tangible impact in terms of reducing our overall production, they should help improve the overall profitability and cash-generation ability of our portfolio. This is what it’s about from now on: cash, not just ounces.

As the effects of these interventions feed through – and as South Deep becomes cash-generative – we believe Gold Fields could become a more attractive investment vehicle.

Principle 2: Prioritising near-mine growth opportunities

As we seek to further grow and diversify Gold Fields, it is this same principle of cash generation that will underpin every decision we make. Accordingly, we will continue to identify, assess and evaluate low-risk, high-return near-mine opportunities next to our existing mines. With the focus moving from production levels to cash generation, there are a number of opportunities at existing mines to raise production while simultaneously enhancing the Group’s ability to generate cash. These opportunities are attractive not only because of their potential for competitive returns, but also because they are low risk given that they are extensions of existing assets that we know and understand well. We continue to evaluate these opportunities, which include:

  • The proposed Tarkwa Expansion Phase 6 (TEP6) project through which we are investigating the possibility of replacing all or a proportion of the remaining North heap leach operations at Tarkwa with an expanded Carbon in Leach (CIL) capacity. This has become necessary as the pits become deeper, the ore harder, and the heap leach recoveries lower. Recoveries at the heap leach facilities are currently in the low 50% range while recoveries through the existing CIL plant are in the upper 90% range
  • The review of options to expand our existing sulphide plant at Cerro Corona to bring production forward given the long life of the mine. There is also a potential opportunity to process – through a new heap leach facility – more than 300,000 ounces of gold captured in oxide surface stockpiles

Principle 3: Pursue greenfields projects only for superior returns

The third key guiding principle that emerged from the review process is to pursue greenfields opportunities only if they offer truly attractive returns and will contribute to the cash generation objectives of the company. Our approach of not adding ounces for ounces sake will be rigorously applied to our greenfields portfolio and projects will have to be motivated on their ability to generate a return on capital invested. This means enforcing stringent stage-gating of each project to ensure that decisions to advance projects to the next level are based on a thorough understanding of all technical assumptions, economic parameters and financial viabilities.

In support of this new approach we will not provide long-term estimates of timelines and likely production levels on these projects until advanced pre-feasibility or feasibility information is available and approved. We also recognise that, from a technical and financial perspective, it is unlikely that we can advance all projects to the same extent simultaneously; prioritisation of projects will therefore become the norm. The status of our most significant growth projects is as follows:

  • In late 2012 we took the decision to return the Chucapaca project in Peru to the drawing board after the feasibility study demonstrated inadequate returns. This does not mean we are abandoning the almost 8 million ounce Mineral Resource offered by the project. Far from it, as this is potentially one of the most significant discoveries in South America over the past five years. We are now investigating various ways of optimising the project, including different production levels, underground opportunities as well as additional exploration in the area of interest which we believe could result in a more robust project
  • Likewise, we have slowed down our burn-rate at the Far Southeast Project in the Philippines pending the outcome of our efforts to secure the Free, Prior and Informed Consent of local indigenous people – a pre-requisite for a Financial or Technical Assistance Agreement which would allow us to take a majority share in the project. We have completed most of the underground drilling programmes required for a pre-feasibility study. The focus now is on a surface geo-technical drilling programme to provide additional data for the pre-feasibility study, which is scheduled to commence in late 2013 or early 2014
  • At the Arctic Platinum Project (APP) in Finland we are close to completing a pre-feasibility study with initial findings demonstrating a viable project. Our next steps are to initiate a full feasibility study once the results from the pre-feasibility study are evaluated and determine the optimal means through which to capture the inherent value in this project
  • At the Yanfolila Project in Mali, we have managed to double the Mineral Resource declared in 2011 to 1.4 million ounces. The objectives for 2013 are to conduct additional exploration drilling to further de-risk the project and, if successful, fast-track the project from scoping through feasibility to a position where a development decision could be reached

Principle 4: ‘Dividend first’ policy

We want to make sure investors benefit from our enhanced ability to generate cash. This means continuing our ‘dividend first’ policy, which we first articulated in 2012 and which prioritises dividends over other demands on our cash flows. This commits us to paying out 25% to 35% of our normalised earnings as dividends.

Principle 5: Enduring commitment to business sustainability

The long term sustainability of our business, however, remains at the heart of what we do – cash generation is, after all, an important step towards securing the future of our business. Beyond this, our approach to the sustainability of our business can be broken down into the following key components:

The first is our approach towards our employees. The sustainability of our business demands that we provide the kind of remuneration, benefits, working conditions and development opportunities that means we can attract, motivate and retain the very best in mining talent amid intense competition in the labour market. Without the right people, our future is limited. Likewise, it is essential that we keep our employees safe and healthy. This is not only a moral imperative but – as demonstrated by our past experience of safety closures at our South African operations – a business imperative.

The second is our application of responsible operational practices. We will only ever be a ‘partner of choice’ for host governments and local communities if we can demonstrate a clear record of safe working practices and responsible environmental stewardship that goes beyond ‘minimum standards’. This is particularly the case with respect to water management – an issue of particular sensitivity for many host communities.

The third is the basis of our relationships with our host communities. Unless our relationships with our stakeholders (including, our employees, suppliers and host communities, as well as our host governments) are based on the long-term, mutually-beneficial generation of shared value – our social licence to operate will never be fully assured. This is why we will continue to prioritise (where possible and sustainable) the employment of local people, the use of local supply chains and the delivery of development benefits to host communities.

We are also proud of our significant public revenue contributions in all our countries of operation – helping to turn finite natural resources into lasting national development. I do want to add a note of caution though. In some jurisdictions the demands by stakeholders, in particular governments, on the mining sector, have reached uncompetitive levels and threaten to undermine the long-term profitability of the Group and the industry and thus its ability to deliver equitable economic value to investors, communities and governments.

The fourth is our ability to maintain strong business ethics – so that we can enhance rather than erode the business environments in which we operate. This means combating corrupt behaviour, maintaining transparent government relations, promoting the effective application of mineral resource revenues to broad-based national development, and supporting positive social transformation and human rights. Without trust, we would not have much of a future.

We are already making strong progress on our journey towards improved sustainability as reflected in the fact that in 2012 we were ranked third in the mining category of the world-wide Dow Jones Sustainability Index (moving from fourth place in 2011). This makes us the top-ranked gold mining company in the world and the top-ranked South African mining company.