Gold Fields

3.1 Introduction

Gold Fields' financial strategy has a singular focus – growing the margin and free cash flow (FCF) for every ounce of gold produced. This has long replaced the traditional focus on growth in production and reserve ounces and is aimed at turning the Group into a focused, lean and globally diversified gold mining company that generates significant FCF and provides investors with superior leverage to the price of gold, even when gold is trading at its current low levels.

Our priorities for the cash we generate include:

1.	Rewarding our shareholders with dividends Our policy is to pay out between 25% and 35% of our normalised earnings as dividends
2.	Improving our balance sheet by paying down debt Our target is to further and consistently reduce our net debt and net debt to Earnings before interest, taxes, depreciation and amortisation (EBITDA) ratio
3.	Pursuing accretive acquisitions Our preference is for the acquisition of in-production ounces that will contribute positively to EBITDA and cash flow from the outset

Our strategy is embodied in our overarching objective of generating at least a 15% FCF margin at a notional long-term planning gold price of US$1,300/oz, which translates to an All-in Cost (AIC) breakeven level of approximately US$1,050/oz. The Group's FCF margin for 2015 was 8% despite the fact that, at US$1,140/oz the actual annualised gold price received was 12% below the US$1,300/oz long-term planning price. If the price received for the year was normalised to US$1,300/oz, then the free cash flow margin would have been 15% – in line with our stated guideline. Details of the Group’s production and cost performance are contained in the Operational Performance Overview (p61 – 67).

2015 financial performance

During 2015, the ongoing impact of Gold Fields’ transformation process was reflected in its positive financial performance, which enabled the Group to improve its cash reserves, balance sheet and debt position and to continue to reward shareholders with dividends, despite the lower gold prices.

The financial highlights for Gold Fields during 2015 were:

	2015				2014		2013
Average US$ gold price received	US$1,140/oz				US$1,249/oz		US$1,386/oz
Average A$ gold price received	A$1,541/oz				A$1,404/oz		A$1,446
Average Rand gold price received	R478,263/kg				R441,981/kg		R434,915/kg
Revenue	US$2,545 million				US$2,869 million		US$2,906 million
AIC	US$1,026/oz				US$1,087/oz		US$1,312/oz
AIC excluding South Deep	US$944/oz				US$1,020/oz		US$1,040/oz
Net operating costs	US$1,456 million				US$1,678 million		US$1,667 million
Capital expenditure	US$634 million				US$609 million		US$739 million
Net cash flow1	US$123 million				US$235 million		(US$235 million)
Free cash flow margin	8%				13%		n/a
Net debt	US$1,380 million				US$1,453 million		US$1,735 million
Net debt/ EBITDA ratio	1.38				1.30		1.50
Normalised earnings	US$45 million				US$85 million		US$58 million
Total dividend payment	R0.25/share				R0.40/share		R0.22/share
Dividend as % of normalised earnings	34%				34%		30%

1 Net cash flow from operating activities less net capital expenditure and environmental payments

During 2015, net revenue decreased by 11% from US$2,869 million in 2014 to US$2,545 million, as a result of lower production and the 9% drop in the average gold price received. Net operating costs declined by 13% to US$1,456 million as a result of the 17% weakening in the Rand/US Dollar and Australian/US Dollar exchange rates, the lower oil price and good cost control. (p62)

The Group All-in Sustaining Costs (AISC) of US$1,007/oz and total AIC of US$1,026/oz in 2015 compared with US$1,053/oz and US$1,087/oz in 2014. These lower costs were due to lower net operating costs, the weaker average Rand/US Dollar and Australian/US Dollar exchanges, partially offset by lower by-product credits and higher capital expenditure. Operating profits fell from US$1,191 million in 2014 to US$1,089 million in 2015.

Other salient features during 2015 included:

• Asset impairments and write-offs of US$213 million including impairments at Darlot (US$14 million), Damang (US$36 million), scrapping of assets no longer in use at Cerro Corona (US$8 million) and the Arctic Platinum project in Finland (US$39 million) as well as impairments to the Group’s investment in the Far Southeast project in the Philippines (US$101 million) and Hummingbird Resources (US$15 million)
• Royalty payments of US$76 million in 2015 compared with US$86 million in 2014
• A rise in capital expenditure from US$609 million in 2014 to US$634 million in 2015
• An increase in the taxation charge to US$247 million (2014: US$118 million), mainly due to impairments of deferred tax assets of US$68 million at Cerro Corona and US$37 million at Damang, along with a US$32 million charge related to the weakening of the Peruvian Nuevo Sol

As a result of the above, net losses attributable to the Gold Fields shareholders amounted to US$242 million in 2015 compared with net earnings of US$13 million in 2014 leading to a headline loss of US$28 million in 2015 compared with earnings of US$27 million in 2014. Normalised earnings fell from US$85 million in 2014 to US$45 million in 2015.

Impact of weaker currencies

In Australia and South Africa, Gold Fields receives its gold revenue in foreign currency terms. As a result of a significant weakening in the Australian Dollar and the South African Rand during 2015 this offered the operations in these countries a measure of protection against the weaker US Dollar gold price when converting their revenues to local currency. The impact has been computed as follows:

• Australia: During 2015 the Australian Dollar weakened by 17% against the US Dollar and the average gold price received by our Australian mines therefore rose from A$1,404/oz in 2014 to A$1,541/oz in 2015. Taking into account the 43,000 ounces drop in production in the region last year, this had the impact of boosting revenue by A$75 million.
• South Africa: The South African Rand weakened by 17% against the US Dollar during 2015 and the average Rand gold price received strengthened from R441,981/kg in 2014 to R478,263/kg in 2015 as a result. South Deep’s revenues in 2015 benefited by around R190 million, taking into account the marginal drop in production. During Q4 2015, the average Rand gold price received averaged just over R500,000/kg, assisting South Deep to operate cash positively for the first time in November and December.

A weaker local currency means that imported costs rise at the same time, which can push up the costs of the heavy equipment, machinery and other components that we mostly import at our South African and Ghanaian operations.

Gold price in various currencies

A detailed analysis of our financial performance is provided in the Management’s Discussion and Analysis of the Financial Statements in the 2015 Annual Financial Report (p6 – 33).

The Consolidated Income Statement, Statement of Financial Position and Cash Flow Statement – extracted from the Annual Financial Report 2015 – are provided on the pages that follow.

Consolidated income statement

for the year ended 31 December 2015 Figures in millions unless otherwise stated	UNITED STATES DOLLAR
	2015			2014
Revenue	2 545,4			2 868,8
Cost of sales	(2 066,1)			(2 334,4)
Net operating profit	479,3			534,4
Investment income	6,3			4,2
Finance expense	(82,9)			(99,2)
Loss on financial instruments	(4,7)			(11,5)
Foreign exchange gains	9,5			8,4
Other costs	(21,2)			(62,5)
Share-based payments	(10,9)			(26,0)
Long-term incentive plan	(5,3)			(8,7)
Exploration expense	(53,5)			(47,2)
Share of results of equity accounted investees after taxation	(5,7)			(2,4)
Restructuring costs	(9,3)			(42,0)
Impairment of investments and assets	(221,1)			(26,7)
Profit on disposal of investments	0,1			0,5
Profit on disposal of Chucapaca	–			4,6
Loss on disposal of property, plant and equipment	(0,1)			(1,3)
Profit before royalties and taxation	80,5			224,6
Royalties	(76,0)			(86,1)
Profit before taxation	4,5			138,5
Mining and income taxation	(247,1)			(118,1)
(Loss)/profit for the year	(242,6)			20,4
(Loss)/profit attributable to:
– Owners of the parent	(242,1)			12,8
– Non-controlling interest holders	(0,5)			7,6
	(242,6)			20,4
(Loss)/earnings per share attributable to ordinary shareholders of the
Company:
Basic (loss)/earnings per share – cents	(31)			2
Diluted basic (loss)/earnings per share – cents	(31)			2

Consolidated statement of financial position

for the year ended 31 December 2015 Figures in millions unless otherwise stated	UNITED STATES DOLLAR
	2015				2014
ASSETS
Non-current assets	4 969,6				5 764,9
Property, plant and equipment	4 312,4				4 895,7
Goodwill	295,3				385,7
Inventories	132,8				132,8
Equity accounted investees	129,1				252,4
Investments	10,9				5,5
Environmental trust funds	35,0				30,4
Deferred taxation	54,1				62,4
Current assets	908,1				1 092,8
Inventories	298,2				368,3
Trade and other receivables	168,9				226,5
Cash and cash equivalents	440,0				458,0
Assets held for sale	1,0				40,0
Total assets	5 877,7				6 857,7
EQUITY AND LIABILITIES
Equity attributable to owners of the parent	2 656,1				3 538,8
Share capital	58,1				57,9
Share premium	3 412,9				3 412,9
Other reserves	(2 262,2)				(1 636,5)
Retained earnings	1 447,3				1 704,5
Non-controlling interest	111,9				124,5
Total equity	2 768,0				3 663,3
Non-current liabilities	2 545,6				2 481,3
Deferred taxation	487,3				387,0
Borrowings	1 761,6				1 765,7
Provisions	284,1				320,3
Long-term incentive plan	12,6				8,3
Current liabilities	564,1				713,1
Trade and other payables	427,6				509,7
Taxation and royalties	77,8				58,2
Current portion of borrowings	58,7				145,2
Total equity and liabilities	5 877,7				6 857,7

Consolidated statement of of cash flows

for the year ended 31 December 2015 Figures in millions unless otherwise stated	UNITED STATES DOLLAR
	2015				2014
Cash flows from operating activities	743,9				808,5
Cash generated by operations	1 005,4				1 061,3
Interest received	5,9				3,6
Dividends received	–				0,1
Change in working capital	43,6				83,7
Cash generated by operating activities	1 054,9				1 148,7
Interest paid	(86,8)				(103,8)
Royalties paid	(76,9)				(88,8)
Taxation paid	(118,4)				(105,3)
Net cash from operations	772,8				850,8
Dividends paid	(28,9)				(42,3)
– Ordinary shareholders	(15,1)				(29,8)
– Non-controlling interests holders	(12,1)				(10,6)
– South Deep BEE dividend	(1,7)				(1,9)
Cash flows from investing activities	(651,5)				(530,9)
Additions to property, plant and equipment	(634,1)				(608,9)
Proceeds on disposal of property, plant and equipment	3,1				4,9
Proceeds on disposal of Chucapaca	–				81,0
Purchase of investments	(3,0)				(4,4)
Proceeds on disposal of investments	–				6,4
Environmental trust funds and rehabilitation payments	(17,5)				(9,9)
Cash flows from financing activities	(88,3)				(125,9)
Equity contributions from non-controlling interest holders	–				2,0
Loans raised	506,0				463,9
Loans repaid	(594,3)				(591,8)
Net cash generated	4,1				151,7
Effect of exchange rate fluctuation on cash held	(22,1)				(18,7)
Cash and cash equivalents at beginning of the year	458,0				325,0
Cash and cash equivalents at end of the year	440,0				458,0