4.3.3 Quality portfolio of assets

Growth strategy
Gold Fields’ definition of growth is underpinned by our focus on cash generation. Growing Gold Fields does not necessarily imply a growth in geographical footprint or number of operations. We define growth as ‘growth in cash flow per share, and growth in average reserve life.’

Over the past three years we have made significant progress in terms of restructuring our portfolio so we can achieve the targeted growth in the average reserve life per operation and free cash flow per ounce. Gold Fields’ portfolio is now characterised by modern, fully mechanised open-pit and underground mining, with diversified production spread across three continents.

When growth is driven by such a strong focus on cash generation, the business may, in certain instances where operations are not strategically aligned or not contributing to our cash generation imperative, dispose of assets in its quest for growth. We have focused on disposing of growth projects that are marginal, located in ‘higher-risk’ locations and/or are primarily focused on metals other than gold. This has resulted in a short-term reduction in Gold Fields’ Mineral Resources – from 113 million ounces in 2013 to 108 million ounces in 2014 and 102 million in 2015 (p82 – 87). In light of our new focus, however, it is not only acceptable but is expected that every new ounce Gold Fields brings into production will directly support the delivery of superior returns to current and future shareholders, and upgrade our existing portfolio.

Of the various growth channels available – greenfields exploration, brownfields exploration, acquisitions, mine construction and targeted portfolio management – Gold Fields has selected those that align with our cash-focused strategy, our core competence and our list of growth criteria. Our strategy has informed the adoption of three growth pillars:

  • Acquisitions: pursuing cash-generative acquisition opportunities that are aligned with Gold Fields’ core competencies
  • Near-mine (brownfields) exploration: we ceased all early greenfields exploration activity, which does not add to short- to medium-term cash flow, and shifted to low-risk, near-mine exploration
  • Ongoing active portfolio management to optimise our existing assets

These growth channels emerge as the business follows a process to achieve sustainable growth in cash flow per share and growth in average reserve life. This process, outlined in the diagram (see below) , starts with two courses of action, during which we assess:

1. Potential future acquisitions
2. The current mines and projects in our portfolio of assets

Assessing potential future acquisitions
In assessing potential acquisitions, Gold Fields looks broadly and globally at potential assets. Once a potential acquisition is identified, it is assessed against the Group’s five growth criteria:

  • Quality: All-in Costs
  • Jurisdiction: the right address
  • In-production: cash producing or near-production
  • Life: minimum eight years, ideally 10
  • Scale: large enough to produce US$20 million – US$30 million free cash flow annually

The resultant list is tested against additional balance sheet criteria to develop a shortlist of assets for which the Group has both the appetite and capital available for purchase.

Gold Fields then undertakes a prudent and phased investigation that may ultimately result in acquisition. This process includes approaching the current owner, conducting desktop and on-site due diligence; building the business case, both internally and externally and, if appropriate, entering the final deal phase.

While no major acquisitions have been made over the past two years the difficult market conditions in the industry have made further consolidation in the industry more likely. We will take a disciplined approach to any corporate activity and will model it on our successful US$262 million acquisition of the Yilgarn South assets from Barrick Gold in October 2013. An acquisition like this will be impossible to replicate in terms of the price we paid for the three mines in the Yilgarn portfolio at the time (Granny Smith, Darlot and Lawlers), but the structural benefits and subsequent management efforts have given us a model to replicate.

The integration of the Yilgarn South assets with our existing mines in Western Australia have:

  • Helped the Australia region expand its cash-generative production to the point where it now contributes 45% of Gold Fields’ total produced ounces
  • Paid for themselves by Q3 2015 – a two-year payback that is almost unheard of in the industry

On an annual basis, all assets in our portfolio undergo the Group’s Business Strategic Planning process. Multiple scenarios are run for each operation, assessing various operational options for how best to maximise cash flow, life and margin for each operation. After taking into account the Group’s capital profile, existing portfolio and current economic environment, a go-forward option is made for each operation, which feeds into our operational planning cycle.

Thereafter, a five-year business plan and a detailed, annual operational plan are developed; looking at all aspects of the operation and tested against the existing investment criteria.

Once this Business Strategic Planning process is complete, we run our current mines and projects through a screening filter of the same five growth criteria used to screen potential future acquisitions (outlined previously). Based on the outcome of this exercise, the Group concludes a way forward for each operation, deciding on how to:

  • Optimise the operation including, inter alia, through near-mine (brownfields) exploration
  • Continue running them in line with the current status quo as developed in the previous iteration or
  • Investigate potential divestment

Together, this process of assessing existing assets and potential future assets has the effect of increasing the quality of the portfolio in order to deliver on the business strategy.