It is with deep regret that I have to report that South Deep had two fatal accidents
in short succession on 17 and 27 May 2014. Our deepest sympathy and
condolences are extended to the family, friends and colleagues of the deceased.
These were industrial-type accidents associated with workshops and equipment,
and precipitated the issuing of a Section 54 order by the Department of Minerals
Resources, placing a moratorium on all workshop-related activities across the mine
and effectively stopping production for a total of about two weeks. During this time
a mine-wide reassessment of safety control systems was undertaken on the
mechanised mining fleet as well as on working practices in all workshops.
Coinciding with but independent from the closure of the mine by the DMR, the new
management team appointed at the beginning of 2014, concluded a
comprehensive mine-wide review of all safety protocols, procedures and
standards. This is in line with the team’s mandate to improve the mechanised
mining culture on the mine, with specific emphasis on introducing international best
practice standards on equipment availability and utilisation as well as the
mechanised mining skills of employees. As a result of the safety review, it was
determined that approximately 1,000 metres of legacy ground support in some of
the ramps serving production areas in the older part of the mine on 95-level and
above, were below the international best practice standards applied at our
international mines and presented a serious latent safety risk. Approximately 70
per cent of current production is sourced from these areas.
As a result of the safety review, and in line with our first value – ‘If we cannot mine safely we will not mine’ – all production and
destress activities in the affected areas were stopped and a ground support remediation programme implemented. This
programme is expected to be completed by the end of September.
While this intervention comes at an unfortunate time, it will contribute to de-risking South Deep’s build-up plan; will make the
mine safer; and has provided management with an opportunity to fast-track a wide range of other interventions that will
contribute to placing South Deep on a more stable footing over its 70-year mine life; and position the mine for an improved
performance in 2015. These interventions are discussed in more detail in the South Deep section below.
Introduction
During the June 2014 quarter, the Group continued to focus on improving the execution and delivery at all the mines in the
portfolio, to improve margins and generate free cash flow. This effort has achieved appreciable success in the Australia, West
Africa and South America regions, whilst in the South Africa region there is ongoing rebasing of South Deep to set it up for
medium-term success. Specific focus areas during the quarter included:
| • |
Rewarding shareholders with the declaration of an interim dividend; |
| • |
Improving the Group’s balance sheet by extending the tenor of certain of its syndicated bank credit facilities along with
further net debt reduction; |
| • |
Ongoing rebasing of South Deep to set it up for long-term success; |
| • |
Normalising production at Tarkwa following the closure of the heap leach operations at the end of 2013; |
| • |
Further consolidation and optimisation of our operations in Australia, in particular the newly acquired Yilgarn South assets;
and |
| • |
The disposal of non-core assets from our international project portfolio. |
Improving margins and generating free cash flow
The safety interventions at South Deep during the quarter masked what was a better quarter for the Group as a whole, in terms
of costs, margins and cash flows.
All activities undertaken in the Group and at operations are singularly focussed on the objective of generating a sustainable free
cash flow margin of at least 15 per cent at a US$1,300/oz gold price, without compromising the long-term sustainability of our
ore bodies through a lack of investment in ore reserve development and stripping, or through high grading.
During the quarter, Gold Fields exceeded this target for the first time by achieving a free cash flow margin of 18 per cent
compared with 13 per cent in the March quarter (see table on page 9).
To achieve this, the Group recorded an all-in sustaining cost (AISC) of US$1,050/oz and all-in cost (AIC) of US$1,093/oz, from
attributable gold equivalent production of 548,000 ounces.
Compared with the same quarter a year ago, the Group’s AISC improved by 26 per cent from US$1,416/oz to US$1,050/oz and
the AIC improved by 30 per cent from US$1,572/oz to US$1,093/oz in the June 2014 quarter. Over the same period,
attributable equivalent gold production increased by 22 per cent from 451,000 ounces to 548,000 ounces, reflecting the October
2013 acquisition of the Yilgarn South assets in Australia.
If the South Deep project (which is not at commercial levels of production), is excluded from the June quarter results, then the
Group’s AIC was US$1,030/oz and the Group’s free cash flow margin approximately 23 per cent, which demonstrates the
robustness of the portfolio.
Despite a 1 per cent decline in the realised gold price and a 2 per cent decline in gold production against the March 2014
quarter, cash flow from operating activities, after taking account of net capital expenditure, environmental payments, debt
service costs, and non-recurring items, improved by 20 per cent from US$54 million in the March 2014 quarter to US$65 million
in the June 2014 quarter.
Notwithstanding a 7 per cent decline in the gold price, from US$1,372/oz in the June 2013 quarter to US$1,275/oz in the June
2014 quarter, cash flow from operating activities, after taking account of net capital expenditure, environmental payments, debt
service costs and non-recurring items, improved by 128 per cent from a net cash outflow of US$230 million in the June 2013
quarter to a net cash inflow of US$65 million in the June 2014 quarter, a positive swing of US$295 million.
This brings the total cash flow from operating activities, after taking account of net capital expenditure,
environmental payments, debt service costs and non-recurring items for the year to date, to US$119
million, placing Gold Fields as one of the most cash generative gold mining companies in its peer group.
Despite the lower production expected from South Deep for the year, the Group remains on track to achieve its full-year
guidance of AISC of US$1,125/oz and AIC of US$1,150/oz on attributable production of approximately 2.2 million gold
equivalent ounces.
Rewarding shareholders
As previously stated, our priorities in terms of cash generation are to:
| a) |
Reward our shareholders with dividends; |
| b) |
Improve our balance sheet by further reducing net debt; and |
| c) |
Pursue accretive acquisitions, ideally of “in-production ounces”. |
Our strong cash generation for the year to date has enabled the Group to declare an interim dividend of 20 SA cents per share.
This is in line with our well-established dividend policy of paying out between 25 per cent and 35 per cent of normalised
earnings to shareholders.
Improving the balance sheet
Despite the robustness of our balance sheet, we have had a strategic objective for 2014 to further improve the strength of our
balance sheet in terms of the maturity schedule of our outstanding debt, reducing the absolute amount of our debt, as well as
improving our net debt to EBITDA ratio.
In pursuit of this objective, we reached agreement with our group of bankers during the quarter to amend and extend certain
facilities under our syndicated bank credit facilities agreement. Under the amended agreement, the maturity date of
commitments totaling US$715 million has been extended, on the same terms, by two years from November 2015 to November
2017.
In addition, during the June 2014 quarter, we reduced our net debt by a further US$52 million to US$1,635 million. This is in
addition to the US$49 million repaid in the March quarter, which brings our net debt reduction for the year to date to US$101
million. Based on a 12-month rolling historical average our net debt to EBITDA ratio improved from 1.53 in the March 2014
quarter to 1.47 in the June 2014 quarter. If the June quarter EBITDA ratio is annualised it is 1.44. Our medium-term objective
is to reduce our net debt to EBITDA ratio to approximately 1 times, which is consistent with our long-stated comfort zone.
Setting South Deep up for long-term success
At South Deep all mining related activities were severely curtailed towards the end of May, for the final one month of the quarter,
following two fatal accidents in quick succession, as well as the separate and unrelated introduction of an extensive ground
support remediation programme. As a consequence South Deep’s production declined by 14 per cent from 1,840 kilograms
(59,200 ounces) in the March quarter to 1,591 kilograms (51,100 ounces) in the June quarter.
The remediation programme, which took all of the legacy haulages and arterial routes on 95-level and above - from where
approximately 70 per cent of current production is sourced - out of service. The programme will continue for the entire
September quarter with a commensurate impact on production (three months in the September quarter vs one month in the
June quarter). While normal production is expected to resume at the start of the December quarter, the ground support
remediation programme is delaying the opening up of a number of long-hole stopes that were planned to be mined in the
December 2014 quarter, with a commensurate knock-on effect on production during that quarter.
Considering the total impact of the safety stoppages as well as the ground support remediation programme, production during
the second half of the year is expected to be approximately similar to that of the first half of the year.
A positive consequence of the ground support intervention, and in the absence of normal production pressures, is that it has
afforded management the opportunity to fast track a number of other critical interventions aimed at setting South Deep up for
long-term success:
| • |
The leadership structure on the mine has undergone a fit for purpose transformation aimed at the introduction and
enforcement of greater levels of accountability and responsibility through-out the operation; |
| • |
Management has embarked on a programme to address the surplus of old high cost equipment and people on the
mine, both of which are prerequisites for an improved safety culture and improved productivity, and are deemed critical
to de-risk the mine’s build-up to full production. After extensive discussions with the trade unions, a voluntary
separation process was implemented which resulted in a rationalisation of the employee body by approximately 550
people (representing 14 per cent of employees). Further rationalisation is expected as certain contractors are exited
and existing employees redeployed to fill their roles. Post the voluntary separation process, South Deep currently has
3,431 employees, as well as 1,909 contractors; |
| • |
The process of rationalising the equipment is currently underway and includes the removal of surplus and redundant
equipment as well as the limited introduction of more appropriate, specialised new equipment in certain areas; |
| • |
In addition, management and the trade unions have reached agreement on changes to the shift roster which is
expected to lead to the optimal re-deployment of employees to further improve productivity. The implementation of the
amended shift roster is currently underway; and |
| • |
The mine has utilised the hiatus in normal production activities to fast-track an extensive training programme aimed at
improving the mechanised mining skills of employees. |
It is expected that the ground support remediation programme will contribute to de-risking South Deep’s build-up plan to full
production (a run rate of between 650,000 ounces and 700,000 ounces by the end of 2017); will make the mine safer; and will
position the mine for an improved performance in 2015. Assuming current spot prices, South Deep is still anticipated to reach
cash break-even by the middle of 2015, as previously advised.
Soon after the appointment of the new management team in February 2014, and in line with the team’s overall mandate to
improve the mechanised mining culture on the mine, an International Geotechnical Advisory Board (IGAB), consisting of
industry leaders from around the world, was appointed to review South Deep’s current destress mining methodology. The
IGAB’s mandate was to consider the latest developments in the industry as well as the accumulation of new knowledge and
experience in the application of the destress methodology at South Deep over the past five years, to determine if it was still the
most appropriate method to use, and if there were safer and more cost effective alternative methods. After extensive studies
and investigations over the past seven months, the IGAB has concluded that there are two alternative mining methods that hold
significant promise and could potentially replace the current destress mining method.
The first method is the 4X4 Meter Destress Method, which effectively reduces destress mining from a three-pass system to a
one-pass system by increasing the destress excavation dimensions from 2.2m high and 5.0m wide, to 4.0m high and 4.0m
wide. This will allow for the use of conventional equipment throughout the mine as opposed to low-profile equipment which is
currently used in destress areas. In addition to removing the need for footwall stripping to increase cavity sizes before mining,
this will alleviate logistical constraints and facilitate a fully mechanised mining process.
The second method, and the most promising, is the Inclined Mining Slot Method which is a one-pass system which completely
removes the need for conventional destress mining as well as the need for low-profile equipment. It also decreases the mining
lead time from between three and six years per destress area, to closer to six months. This method entails the development of
an access slot within an existing destress shadow, followed by the installation of a vertical 4.5m X 4.5m inclined slot at an angle
of 55 degrees, thus providing a destress shadow in which the next access slot and inclined slot can be developed. The vertical
inclined slots are installed at 15m intervals on a horizontal plane and the blocks between them mined out through longhole
stoping and then backfilled.
Both of these methods, if successful, could significantly de-risk the South Deep build-up plan and future production profiles, and
have a meaningful impact on costs. Both methods will be piloted in discrete areas of the mine during the period from Q4 2014 to
Q2 2015. It is too early to assess whether either of these methods could be commercially deployed, the results of the pilot
studies will determine this.
Normalising of production at Tarkwa in Ghana
At Tarkwa, the transition from a mixed heap leach and Carbon in Leach (CIL) operation, to a CIL only operation, progressed
well after stacking was suspended at the North heap leach operations during the March quarter, resulting in the feed of all
medium and high grade material to the CIL plant. There was a commensurate increase in yield from the CIL plant from 1.19
grams per tonne in the March quarter to 1.29 grams per tonne in the June quarter. The higher CIL head grades also benefit the
much higher recoveries obtained in the CIL circuit, resulting in production of 140,700 ounces at an AIC of US$1,026/oz for the
quarter.
With year to date production of 285,900 ounces at an AIC of US$1,021/oz, Tarkwa remains on track to achieve its 2014
guidance of 520,000 ounces of production at an AIC of US$1,100/oz. Tarkwa is a steady performer and is contributing
significantly to the Group’s cash generation objectives.
During the quarter, Damang delivered another strong performance despite a nine-day mill shutdown, as a result of which gold
production decreased by 13 per cent from 46,700 ounces to 40,500 ounces and AIC increased by 15 per cent from
US$1,111/oz to US$1,282/oz.
With year to date production of 87,200 ounces at an AIC of US$1,192/oz, Damang remains on track to achieve its 2014
guidance of 165,000 ounces of production at an AIC of US$1,240/oz. Despite the unplanned nine-day mill shutdown, Damang
has now consolidated its return to profitability from a loss making position a year ago, and is expected to continue to deliver
steady performances for the foreseeable future.
The strategy of revisiting historically mined open pits along the 27 kilometres of strike between Damang and Tarkwa, which
were last drilled when the gold price was between US$300/oz and US$400/oz, is starting to bear fruit and is expected to
contribute to an appreciable addition to Reserves and Resources by the time of the next declaration early in 2015. Success in
this programme will redefine the future of Damang in the Gold Fields portfolio, and has the potential to extend the life of this
mine substantially.
Further consolidation and optimisation of our operations in Australia, in particular the newly acquired Yilgarn South assets
The Group’s Australian operations had an excellent quarter, recording AIC of US$1,042/oz on gold production of 256,900
ounces. This brings total production for the year to date to 502,100 ounces at an AIC of US$1,072/oz against guidance for the
full year of 975,000 ounces at an AIC of US$1,130/oz.
Central to this performance are the newly acquired Yilgarn South assets which have now been fully integrated into the Australia
region and are exceeding our expectations. The star performer was the Granny Smith mine which contributed 84,600 ounces at
an AIC of US$692/oz for the quarter. Year to date, the mine has produced 151,100 ounces at an AIC of US$788/oz, against full
year guidance of 240,000 ounces at an AIC of US$1,060/oz.
A key focus of the Australian portfolio is the accelerated US$52 million near-mine exploration programme at all of the mines in
the region, aimed at increasing the Resource and Reserve position of these mines by the end of 2014. Appreciable progress
has been made, in particular, at St Ives with the newly discovered high-grade-Invincible deposit, and at Granny Smith where
exploration results are indicating significant Resource and Reserve expansion potential at the Wallaby underground deposit.
Good progress is also being made at Agnew/Lawlers with potential extensions to the Waroonga underground mine as well as
the New Holland and Genesis underground ore bodies. During the quarter, we hosted a series of site visits to our Australian
mines, to give the investment community some insight into the outstanding potential of these assets. The presentations are
available on our website at www.goldfields.com.
During the quarter, the Australian legislature repealed the controversial carbon tax laws which will bring welcome tax relief to the
gold mining sector in particular. The savings to the mines in the Gold Fields portfolio is approximately A$15 million per annum.
The disposal of non-core assets from our international project portfolio
During the quarter, good progress was made with the disposal of two further non-core assets in our International Projects portfolio, with the disposal of both the Yanfolila project in Mali as well as the Chucapaca project in Peru.
Gold Fields sold its 85 per cent interest in the Yanfolila project in Mali to London-listed Hummingbird Resources for US$20
million in the form of Hummingbird shares. The consideration represents an acquisition price of US$16/oz, which was higher
than both (a) the weighted average enterprise value per resource ounce of listed West African gold companies; and (b) recent
M&A precedents of West African exploration/development assets, of US$14/oz. Through our shareholding in Hummingbird,
which also holds the Dugbe asset in Liberia, we see real potential for Gold Fields to receive significant growth in the value of its
shareholding, which was a key consideration in favouring this bid.
The latest sale is that of the Chucapaca project in southern Peru. Gold Fields has agreed to sell its 51 per cent stake in
Canteras del Hallazgo S.A.C (the Chucapaca project) to its joint venture partner in the project, Compañía de Minas
Buenaventura S.A.A. (Buenaventura). Buenaventura is Peru’s largest publicly traded, precious metals mining company and
previously owned 49 per cent in the Chucapaca project. The total agreed sale price is US$81 million all paid on closing of the
agreement and Gold Fields will also receive an uncapped 1.5 per cent net smelter royalty on all future gold, silver and copper
sales emanating in the area of interest. Not only does the consideration ensure that all of our historical costs on the project are
recouped, the consideration also represents an acquisition price of US$26 per attributable gold ounce (gold resource of 6.07
Moz), which is higher than the weighted average enterprise value per resource ounce of listed companies with projects in Latin
America (average of US$22/oz) and those with open pit projects globally (average of US$26/oz). The royalty of 1.5 per cent on
all future production provides us with further future upside, especially as we see a quality company like Buenaventura moving
this project swiftly ahead. As a result, the Chucapaca project has been classified as held for sale at 30 June 2014.
The sale of our holdings in these projects is in line with our strategy of focusing on growing cash flow through quality assets.
This focus has also led us to move away from greenfields exploration as a strategy for growth, in favour of the acquisition of inproduction
ounces such as the Yilgarn South assets and near-mine exploration and development at our Australian, Ghanaian
and Peruvian assets.
