Financial review

Quarter ended 30 September 2011 compared with quarter ended 30 June 2011

Revenue

Attributable gold production increased by 3 per cent from 872,000 ounces in the June quarter to 900,000 ounces in the September quarter. At the South African operations, production decreased by 4 per cent from 447,000 ounces to 428,000 ounces. This decrease in production was mainly due to a six day strike during the quarter arising from wage negotiations.

Attributable gold production at the West African operations increased by 26 per cent from 168,000 ounces to 211,000 ounces. Most of this increase was a direct result of the buy-out of the non-controlling interest with effect from 25 June, which increased the Group holding from 71.1 per cent in the June quarter to 90.0 per cent in the September quarter. Attributable equivalent gold production at Cerro Corona in Peru decreased by 6 per cent, from 98,000 ounces to 92,000 ounces, mainly due to the lower copper/gold price ratio. At the Australian operations, gold production increased by 6 per cent from 159,000 ounces to 169,000 ounces due to improved underground grades mined and processed.

At the South Africa region, gold production at KDC increased by 2 per cent from 272,500 ounces (8,475 kilograms) in the June quarter to 279,200 ounces (8,684 kilograms) in the September quarter. This increase in production was achieved despite shifts lost due to the wage-related industrial action and safety-related stoppages.

Resultant production losses were offset by an increase in surface tonnes milled and an increase in the underground and surface yields.

At Beatrix, gold production decreased by 14 per cent from 98,000 ounces (3,048 kilograms) to 84,700 ounces (2,636 kilograms) and at South Deep, gold production decreased by 15 per cent from 76,100 ounces (2,366 kilograms) to 64,400 ounces (2,003 kilograms), both due to the industrial action which resulted in lower volumes mined and processed.

At the West Africa region, managed gold production at Tarkwa was steady at 180,000 ounces despite excessive rainfall which disrupted operations and the processing of a harder blend of ore this quarter. At Damang, gold production decreased marginally, from 56,300 ounces to 54,300 ounces.

At the South America region, equivalent gold production at Cerro Corona decreased by 7 per cent from 101,000 equivalent ounces in the June quarter to 93,900 equivalent ounces in the September quarter due to the lower copper prices relative to the gold prices.

At the Australasia region, St Ives’ gold production increased by 6 per cent from 108,700 ounces to 115,000 ounces due to an increase in underground grades and increased mill throughput. At Agnew, gold production increased by 7 per cent from 50,400 ounces to 53,700 ounces. Lower underground volumes mined and processed were offset by increased yields and an increase in production from Songvang.

The average quarterly US dollar gold price achieved increased from US$1,496 per ounce in the June quarter to US$1,702 per ounce in the September quarter. The average Rand/US dollar exchange rate of R7.05 was 4 per cent weaker than the June quarter average of R6.78, while the average Australian dollar exchange rate was similar when compared with the US dollar at A$1.00 = US$1.06. The resultant rand gold price increased by 18 per cent from R326,206 per kilogram to R385,684 per kilogram and the Australian dollar gold price increased by 15 per cent from A$1,420 per ounce to A$1,638 per ounce.

Revenue increased by 15 per cent from R9,581 million (US$1,411 million) in the June quarter to R11,060 million (US$1,570 million) in the September quarter.

Operating costs

Net operating costs increased by 5 per cent from R5,124 million (US$755 million) in the June quarter to R5,404 million (US$766 million) in the September quarter. Total cash cost increased from R177,934 per kilogram (US$816 per ounce) to R192,997 per kilogram (US$851 per ounce), an increase of 8 per cent in rand terms and 4 per cent in dollar terms. The increase in the total cash cost was due to an increase in the royalties due to the higher gold price, the annual wage increase in South Africa effective from 1 July 2011 and higher electricity winter tariffs in South Africa. Refer to the total cash cost reconciliation for more detail.

At the South Africa region, net operating costs increased by 2 per cent from R3,074 million (US$453 million) to R3,131 million (US$444 million). This increase was due to an extra month of significantly higher winter electricity tariffs (two months compared with one month in the previous quarter) and wage increases averaging 10 per cent of basic pay, effective from 1 July 2011. These cost increases were partly offset by ongoing savings from the Business Process Reengineering (BPR) initiatives and a decrease in costs over the period of industrial action due to the no-work no-pay rule. The net result of the lower production and increase in costs was an increase in total cash cost of 7 per cent from R220,261 per kilogram (US$1,010 per ounce) to R235,780 per kilogram (US$1,040 per ounce).

At the West Africa region, net operating costs increased from US$122 million (R825 million) to US$132 million (R931 million) due to a lower gold-in-process credit in the September quarter, together with increased power and fuel costs. Total cash cost at the West African operations increased from US$564 per ounce in the June quarter to US$617 per ounce in the September quarter.

At Cerro Corona in South America, net operating costs increased from US$38 million (R258 million) to US$41 million (R289 million).

This was mainly due to an increase in the workers’ statutory participation in profits. Total cash cost increased from US$408 per ounce in the June quarter to US$494 per ounce in the September quarter due to the lower equivalent production and the increase in costs.

At the Australasia region, net operating costs increased from A$135 million (R967 million) to A$142 million (R1,053 million). This was mainly due to increased underground mining volumes and increased mill throughput at St Ives together with increased production from the Songvang open pit at Agnew. Total cash cost for the region decreased from A$858 per ounce (US$909 per ounce) to A$844 per ounce (US$891 per ounce) due to the 6 per cent increase in gold output.

Operating margin

The net effect of the changes in revenue and costs, after taking into account gold-in-process movements, was a 27 per cent increase in operating profit from R4,457 million (US$656 million) in the June quarter to R5,655 million (US$804 million) in the September quarter.

The Group operating margin at 51 per cent was 4 percentage points higher than the June quarter. The operating margin at the South African operations increased from 33 per cent to 40 per cent. At the West African operations the operating margin increased from 66 per cent to 67 per cent. At Cerro Corona in South America, the operating margin decreased from 73 per cent to 69 per cent and at the Australian operations the operational margin increased from 40 per cent to 49 per cent.

Amortisation

Amortisation increased from R1,277 million (US$188 million) in the June quarter to R1,377 million (US$195 million) in the September quarter mainly due to an increase at St Ives and to a lesser extent at Damang. The increase at St Ives was due to an increase in underground volumes mined, mainly at Athena, replacing open pit ounces which carried a lower amortisation rate.

Other

Net interest paid increased from R32 million (US$5 million) in the June quarter to R69 million (US$10 million) in the September quarter. This increase was mainly due to interest paid for a full quarter on loans to fund the purchase of the non-controlling interest in Peru and Ghana. In the September quarter interest paid of R120 million (US$17 million) was partly offset by interest received of R39 million (US$6 million) and interest capitalised of R12 million (US$1 million). This compares with interest paid of R88 million (US$13 million), partly offset by interest received of R39 million (US$6 million) and interest capitalised of R17 million (US$2 million) in the June quarter.

The share of profit of associates after taxation of R5 million (US$1 million) in the September quarter compared with R1 million (US$nil million) in the June quarter. These profits related mainly to the Group’s interest in Rand Refinery.

The gain on foreign exchange of R72 million (US$10 million) in the September quarter compares with a loss of R19 million (US$3 million) in the June quarter. These gains and losses relate to the conversion of offshore cash holdings into their functional currencies, together with a gain of R48 million (US$7 million) on inter-company loans in the September quarter.

The loss on financial instruments was R0.3 million (US$nil million) in the September quarter, compared with a gain of R25 million (US$4 million) in the June quarter. The gain in the June quarter mainly related to the receipt of 15 million shares in Timpetra Resources, in exchange for Central Victoria tenements, an Australian exploration project.

Share-based payments of R122 million (US$17 million) were similar to the June quarter.

Other costs decreased from R85 million (US$13 million) in the June quarter to R74 million (US$11 million) in the September quarter.

Exploration

Exploration expenditure decreased from R214 million (US$31 million) in the June quarter to R189 million (US$27 million) in the September quarter mainly due to project timing. Refer to the exploration and corporate development section of this report for more detail on exploration activities.

Feasibility and evaluation costs

Feasibility and evaluation costs increased from R17 million (US$3 million) in the June quarter to R48 million (US$7 million) in the September quarter mainly due to timing of expenditure at the Far Southeast (FSE) project in the Philippines.

Non-recurring items

The non-recurring items of R167 million (US$24 million) in the September quarter and the R101 million (US$15 million) in the June quarter were mainly due to voluntary separation packages, business process re-engineering and restructuring costs at all our operations.

Royalties

Government royalties increased from R236 million (US$35 million) in the June quarter to R305 million (US$43 million) in the September quarter. The higher royalty in the September quarter was mainly due to the increased revenue on which royalties are calculated.

Taxation

Taxation for the September quarter amounted to R1,223 million (US$174 million) compared with R866 million (US$128 million) in the June quarter, which is in line with the higher taxable income. Normal taxation increased from R521 million (US$77 million) in the June quarter to R841 million (US$120 million). Deferred taxation increased from R346 million (US$51 million) in the June quarter to R382 million (US$54 million) in the September quarter.

Earnings

Net earnings attributable to owners of the parent amounted to R2,055 million (US$293 million) or 284 SA cents per share (US$0.40 per share) in the September quarter, compared with earnings of R1,267 million (US$186 million) or 175 SA cents per share (US$0.26 per share) in the June quarter.

Headline earnings i.e. earnings excluding the after tax effect of asset sales, impairments and the sale of investments, amounted to R2,054 million (US$293 million) or 284 SA cents per share (US$0.40 per share), compared with earnings of R1,270 million (US$187 million) or 176 SA cents per share (US$0.26 per share) in the June quarter.

Earnings excluding non-recurring items as well as gains and losses on foreign exchange, financial instruments and gains or losses of associates after royalties and taxation amounted to R2,111 million (US$301 million) or 291 SA cents per share (US$0.42 per share), compared with earnings of R1,326 million (US$195 million) or 184 SA cents per share (US$0.27 per share) reported in the June quarter.

Cash flow

Cash inflow from operating activities for the quarter amounted to R5,057 million (US$717 million), compared with R2,954 million (US$436 million) in the June quarter mainly as a result of the higher earnings and timing of royalty and taxation payments.

In the September quarter dividends of R724 million (US$102 million) were paid to owners of the parent and R147 million (US$21 million) paid to non-controlling interest holders at Tarkwa, Damang and Cerro Corona. In the June quarter dividends of R7 million (US$1 million) were paid to non-controlling interest holders at Cerro Corona.

Capital expenditure increased from R2,285 million (US$336 million) in the June quarter to R2,607 million (US$370 million) in the September quarter.

At the South Africa region, capital expenditure increased from R1,169 million (US$172 million) in the June quarter to R1,266 million (US$180 million) in the September quarter mainly due to an increase in ore reserve development (ORD) and infrastructure upgrades. Capital expenditure at South Deep amounted to R492 million (US$70 million) in the September quarter compared with R472 million (US$69million) in the June quarter, with the majority of the expenditure on development and equipping the mine to achieve its build-up plan. Expenditure on ORD at KDC increased from R436 million to R454 million and at Beatrix increased from R101 million to R103 million quarter on quarter.

At the West Africa region, capital expenditure increased from US$69 million to US$73 million due to additional pre-stripping and increased expenditure on mining fleet at Damang. This was partly offset by the lower expenditure on mining fleet at Tarkwa, with the requirements for 2011 now complete.

In South America, at Cerro Corona, capital expenditure was similar to the June quarter at US$17 million.

At the Australasia region, capital expenditure increased from A$56 million to A$73 million. St Ives increased from A$39 million to A$52 million, with the majority of the increased expenditure resulting from the pre-strip at the Formidable pit, Mars/Minotaur link and Diana open pit. At Agnew, capital expenditure increased from A$17 million to A$20 million, with the increased expenditure on a new ventilation system at the Waroonga complex.

Investing activities included a second payment of R535 million (US$66 million) for the FSE project. This is in line with the terms of the option agreements to acquire a 60 per cent interest in the undeveloped gold-copper deposit in the Philippines. The option agreements were entered into with Lepanto Consolidated Mining Company (Lepanto), a company listed in the Philippines, and Liberty Express Assets, a private holding company.

Net cash outflow from financing activities in the September quarter amounted to R1.4 billion (US$185 million) compared with a net cash inflow of R2.8 billion (US$404 million) in the June quarter. The net cash outflow in the September quarter was mainly due to the repayment of an offshore facility of R1,389 million (US$180 million).

The net cash outflow for the September quarter of R406 million (US$30 million) compared with an outflow of R2,288 million (US$347 million) in the June quarter. After accounting for a positive translation adjustment of R496 million (US$53 million negative) on offshore cash balances, the net cash inflow for the September quarter was R90 million (US$83 million negative). The cash balance at the end of September was R4,435 million (US$548 million) compared with R4,345 million (US$631 million) at the end of June.

Notional cash expenditure (NCE)

Notional cash expenditure is defined as operating costs (including general and administration) plus capital expenditure, which includes near-mine exploration and the Group’s share of capitalised feasibility costs, and is reported on a per kilogram and per ounce basis – refer to the detailed table on Notional cash expenditure of this report.

NCE reflects the free cash flow available to pay taxation, interest, greenfields exploration, pre-feasibility projects and dividends.

The NCE margin is defined as the difference between revenue per ounce and NCE per ounce expressed as a percentage.

The Group NCE for the September quarter amounted to R274,615 per kilogram (US$1,212 per ounce) compared with R256,692 per kilogram (US$1,178 per ounce) in the June quarter. The NCE margin for the Group increased from 21 per cent to 29 per cent, driven by the higher gold price and sound cost control.

At the South Africa region, NCE per kilogram increased from R305,501 per kilogram (US$1,401 per ounce) to R330,023 per kilogram (US$1,456 per ounce). The NCE margin of 16 per cent in the September quarter compares with 7 per cent in the June quarter. The higher margin was due to the higher gold price, partially offset by the increase in operating costs and higher capital expenditure. NCE excluding the funding of South Deep increased from R280,986 per kilogram (US$1,289 per ounce) in the June quarter to R296,343 per kilogram (US$1,307 per ounce) in the September quarter. The NCE margin excluding South Deep was 24 per cent in the September quarter compared with 15 per cent in the June quarter.

At the West Africa region, NCE per ounce increased from US$885 per ounce to US$924 per ounce, while the NCE margin, driven by the higher gold price, increased from 41 per cent to 46 per cent.

At the South America region, NCE per ounce increased from US$526 per ounce in the June quarter to US$615 per ounce in the September quarter due to the increased operating costs together with the decrease in production. Despite decreasing from 62 per cent to 58 per cent the NCE margin at Cerro Corona remains the highest in the Group.

At the Australasia region, NCE per ounce increased from A$1,195 per ounce (US$1,265 per ounce) in the June quarter to A$1,238 per ounce (US$1,307 per ounce) in the September quarter due to increased operating costs and increased capital expenditure. The NCE margin, however, increased from 16 per cent in the June quarter to 24 per cent in the September quarter due to the higher gold price.

Balance sheet

The cash balance decreased from R5,464 million (US$810 million) at the end of the December quarter to R4,435 million (US$548 million) at the end of September. This decrease was mainly due to partly funding the buy-out of a portion of the non-controlling interest holders in Gold Fields La Cima in Peru and IamGold’s 18.9 per cent indirect holding in Tarkwa and Damang in Ghana.

Net debt (long-term loans plus the current portion of long-term loans less cash and deposits) increased from R3,974 million (US$589 million) in the December quarter to R11,096 million (US$1,370 million) by the end of September. This increase in borrowings was largely to fund the buy-out of a portion of the non-controlling interest holders in Gold Fields La Cima and Ghana during the year which amounted to approximately R7.1 billion (US$1,049 million), capital expenditure of R7.0 billion (US$1,003 million), dividend payments of R1.4 billion (US$206 million) and R0.5 billion (US$66 million) on the second instalment of the FSE project option, together with exchange rate movements of R1.8 billion. These payments were partly offset by cash generated from operating activities of R10.8 billion (US$1,550 million).