Key issues of the December 2012 quarter

The December quarter of 2012 was a quarter of great challenges on the one hand and significant milestones on the other. While the international operations had an outstanding quarter, KDC and Beatrix in South Africa were impacted by the industrywide illegal strikes in the South African mining industry.

Group attributable gold production of 754,000 ounces for the December quarter was 7 per cent lower than the 811,000 ounces achieved in the September quarter. This decline was due to the impact of the illegal strikes, compounded by a slower than anticipated resumption of normal production following the cessation of the strikes. In the South Africa region, production at KDC and Beatrix in aggregate decreased by 30 per cent from 316,000 ounces in the September quarter to 220,000 ounces in the December quarter. The strike action during the December quarter resulted in the loss of 23 production days at KDC East, 27 production days at KDC West, 29 production days at Beatrix as well as 110, 000 ounces of gold production during the quarter.

The protracted strikes across the industry had a significant impact beyond the production impact. Mining companies not only suffered significant earnings losses but also a breakdown of trust and common purpose between employees and employers, which will require a significant effort to restore. Specifically, a new engagement model needs to be established whereby mining companies no longer rely solely on trade unions to communicate with employees. Instead direct contact needs to be established and regularly maintained with the workforce for us to gain a first-hand understanding of the concerns and aspirations of our employees. In this way companies will be more in tune with the challenges faced by our employees and can determine relevant action plans to create closer alignment.

South Africa’s economy was the biggest loser of the strike, suffering not only from the loss of tax revenue but, more significantly, from a loss of investor confidence and support at a time when investment is critical in achieving our national development objectives, the most important of which is the need to create and protect jobs.

To prevent a recurrence of the labour turmoil of 2012, it is vital that government, organised labour and the mining industry work together to determine a sustainable future for the mining industry. This conversation will need to focus first and foremost on the economic realities faced by the industry, namely increasing depth, declining grades, wage increases beyond inflation along with productivity declines, as well as unaffordable increases in electricity tariffs and other input costs, to name just a few. Fiscal measures already implemented and those mooted are a further concern. Should the industry have to continue to bear the brunt of the collective impact of these factors, further declines in mining output and job losses are inevitable.

Sound leadership is needed from government, industry and organised labour, all of whom need to take a sober look at the events of last year. We, as the mining industry cannot achieve this on our own. Labour and government need to urgently collaborate with the industry to return South Africa to a competitive investment destination. First and foremost it will require government to moderate its views on taxes, electricity costs and other imposts that the industry simply cannot afford. Our workforce and their trade unions need to modify their demands for wage increases well beyond inflation that accompany flat or declining productivity. The mining industry in turn must honour its commitment to all stakeholders in terms of transformation as well as social and labour plans. Only by working together can we determine a sensible and sustainable way forward for the industry.

The international operations increased their combined managed production by 11 per cent from 446,000 gold equivalent ounces in the September quarter to 496,000 gold equivalent ounces in the December quarter. Cerro Corona in the South America region and Agnew in the Australasia region were the best performers. Cerro Corona increased production by 18 per cent from 83,000 gold equivalent ounces to 98,000 gold equivalent ounces while Agnew increased production by 15 per cent from 48,000 ounces to 55,000 ounces. More importantly, however, the NCE margin at Agnew improved from 32 per cent to 46 per cent. At Cerro Corona the NCE margin remained very high at 49 per cent, a slight decrease from the 52 per cent in the September quarter. The West Africa region also increased production by 11 per cent from 209,000 ounces to 232,000 ounces while the Australasia region increased production by 8 per cent from 154,000 ounces to 167,000 ounces.

The lower Group production during the quarter resulted in cash costs increasing by 3 per cent from US$916 per ounce to US$946 per ounce and Notional Cash Expenditure (NCE) increased by 2 per cent from US$1,448 per ounce to US$1,476 per ounce. The Gold Fields continuing operations, excluding the operations of the newly listed Sibanye Gold achieved cash costs of US$793 per ounce and an NCE of US$1,365 per ounce.

At South Deep, three significant milestones in support of the build-up to an annual production run-rate of 700,000 ounces by the end of 2015 were reached during the quarter. The first was the completion, within budget and on time, of South Deep’s new ventilation shaft. The commissioning process at the shaft has already started. The additional rock hoisting capacity provided by this shaft is planned to ramp up to a nameplate capacity of 195,000 tonnes per month by December 2013, which, combined with the 175,000 tonnes capacity of the existing Main shaft, will be sufficient to sustain a full-production mill-feed of 330,000 tonnes per month. The second major milestone was the completion and commissioning of the gold plant expansion, which increased South Deep’s plant capacity from 220,000 tonnes per month to 330,000 tonnes per month. The third major milestone was the conclusion of a landmark agreement with the National Union of Mineworkers (NUM), introducing a new operating model for the mine. The implementation process has commenced and is well underway. The essence of the agreement is the introduction of a new 24/7/365 operational schedule which is in line with best practice mechanised underground operations world-wide. This is expected to provide an additional 30 per cent face time and help achieve further productivity improvements. The new operating model which includes, inter alia, more competitive grading, remuneration and targeted incentives, is expected to underpin the production ramp-up to the full production run-rate of 700,000 ounces of gold per annum planned for the end of 2015. It also seeks closer employee alignment with the mine’s business objectives. During the December quarter South Deep produced 62,700 ounces of gold, increasing the total for the full 2012 year to 270,000 ounces. Production is expected to improve by between 10 to15 per cent during 2013, though it will still take some months for the full benefits of the new operating model to be realised.

It is with regret that the Gold Fields Board of Directors received, and reluctantly accepted, the resignation of Dr. Mamphela Ramphele as Chair of the Company’s Board, with immediate effect, to dedicate herself to her socio-economic and political interests. On behalf of the Board, the management, and all of the people of Gold Fields, I thank Dr. Ramphele for her enormous contribution to and inspirational leadership of the Company over the past two-and-a-half years.

Gold Fields non-executive director, Cheryl Carolus, will succeed Dr Ramphele as Chair of the Company with immediate effect. Ms Carolus was appointed a director of Gold Fields on 10 March 2009.

KDC and Beatrix in the South African region, which now form part of the unbundled Sibanye Gold, are classified as discontinued operations for accounting purposes and as such all prior periods have been restated to exclude results from these operations. For comparative purposes only, the Group results, which include continuing and discontinued operations, are provided together with the separate results for continuing and discontinued operations. Commentary relating to Gold Fields operations before the unbundling combined continuing and discontinued operations. Commentary on only continuing operations new Gold Fields after the unbundling of Sibanye Gold. Commentary on only discontinued operations Sibanye Gold.

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During the second half of 2012 the Group engaged in a comprehensive analysis of Gold Fields’ operating model and the assets in the portfolio - both producing mines and growth projects. This was in response to the ongoing underperformance of gold industry share prices, including Gold Fields’, when measured against the higher gold price, and the inability of the sector to reflect the decade-long gold bull market in its valuations. The outcome of this analysis and review was a recognition and adoption of five key guiding principles which will underpin the Gold Fields strategy going forward.

The first of these is that our focus will not be on ounce targets at any cost, but on the generation of cash returns. Flowing from this, the Group embarked on a review and repositioning of all of its assets and structures to optimise cash generation in a more sustainable manner. Central to this is a concerted focus on understanding and managing the all-in costs of our business, expressed as Notional Cash Expenditure (NCE).

The most significant outcome of the review process was the decision to separate the Gold Fields portfolio into two entities reflecting the diverse nature of the ore bodies, mining methods, management and operational skills, and technologies required to optimally and sustainably extract these diverse ore bodies.

This decision led to the November 2012 announcement of the creation and unbundling to shareholders of the new Sibanye Gold as a totally independent company with its own dedicated executive management and board of directors, led by well-known and respected South African mining and business entrepreneurs, Neal Froneman (Chief Executive Officer) and Sello Moloko (Chairman). The new Sibanye Gold, which comprises the KDC and Beatrix mines as well as the various South African service entities, was successfully listed on the JSE Limited and New York Stock Exchange on 11 February 2013. The transaction, which has been widely welcomed by local and foreign investors, has created a fit-for-purpose new vehicle which allows Sibanye Gold management to determine the optimal future exploitation strategy for its assets and to have control over its cash flows, including rewarding shareholders through dividend payments.

The review process also resolved to reposition 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 decisions that followed were:

• At Agnew, it was decided to withdraw from the low-grade and marginal Main and Rajah Lodes and to focus only on the high grade Kim Lode at the Waroonga underground mine and to right-size the mine accordingly. This is expected to reduce unit costs and improve profitability. A more appropriate level of production for this mine is expected to be around 160,000 ounces per annum relative to 176,600 ounces produced in 2012.
• At St Ives, the marginal heap leach operation was mothballed. While this will result in production declining by between 30,000 and 40,000 ounces per year, it should also lead to a lowering of costs and more profitable production overall.
• At Tarkwa, production at the marginal and high cost South Heap leach operation ceased, which resulted in a production decline of 40,000 ounces per year. The objective at both St Ives and Tarkwa is to, as far as possible, maintain costs through absorbing much of the inflation pressures.
• At South Deep, the focus is to become cash generative by the end of 2013 and for cash costs and NCE to reduce as the production build-up progresses over the next three years. At full production South Deep is expected to be globally competitive from a cost perspective.

The second key guiding principle which emerged from the review process is to channel our growth efforts, in the first instance, on low-risk, high-return brownfields opportunities near 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. One example is the proposed Tarkwa expansion phase 6 project (TEP6), which entails the replacement of all remaining heap leach operations with appreciably higher recoveries. We continue to evaluate this opportunity which could result in a new CIL plant or an extension to the existing plant, which will have a positive impact on production levels. Similarly, at Cerro Corona, an opportunity exists to expand the existing sulphide plant, thereby bringing production forward. At Cerro Corona there is also the potential to process more than 300,000 ounces of gold which remains captured in oxide stockpiles through a new heap leach facility. We continue to evaluate these opportunities.

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 organisation. Gold Fields has a number of greenfields projects at various stages of evolution, including Chucapaca in Peru, APP in Finland, Yanfolila in Mali and FSE in the Philippines. We intend to enforce prudent stage-gating of these projects and ensure that construction decisions are based on a robust understanding of technical assumptions and economic parameters. As such, we intend to refrain from giving longterm estimates of timelines and likely production levels on these projects, or for the Group as a whole, until advanced prefeasibility or feasibility information is available and approved internally. 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. 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 is therefore important.

With this in mind we can provide a status update on our key greenfields projects. We continue to value-engineer Chucapaca to take advantage of the significant declared Mineral Resource of 7.6 million ounces. We are investigating various means of optimising the project including different production levels, underground opportunities as well as additional exploration in the area of interest. At FSE we have completed most of the underground drilling programmes and are continuing to focus on licensing and social engagement activities, along with surface geotechnical drilling, as these are critical for the project to proceed successfully. In due course we intend to commence a prefeasibility study. At Arctic Platinum we are close to completing the key elements of a pre-feasibility study, which demonstrate a viable project, and we are in the process of determining the next steps to capture its inherent value. Finally, at Yanfolila we have had significant exploration success over the last year and the project is scheduled to progress to pre-feasibility status this year.

The fourth principle is that the new Gold Fields will continue to follow its “dividend first” policy as articulated in 2012, which is a commitment to pay 25 to 35 per cent of normalised earnings as dividends.

The fifth principle is our enduring commitment to the long-term sustainability of our business which entails, inter alia, the health and safety of our people, respectful stewardship of our natural environment, and the creation and equitable sharing of value for all of our stakeholders.

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