Many of the more painful adjustments were already made in 2012 and 2013, at which point we structured the business to deliver a free cash-flow margin of 15% at a gold price of US$1,300/oz.
This translates roughly to an all-in cost breakeven level of US$1,050/oz. We remain firmly focused on delivering on our plans in terms of both cost and production in this lower gold price environment, and we will not divert our attention from the non-negotiables encompassed in our values, including safety, health, environmental stewardship and stakeholder engagement.
US$59m swing in net cash flow
After a planned slower start to the year in the March 2015 quarter due to mine production scheduling, we had a much improved June 2015 quarter. Attributable gold equivalent production for the quarter was up 7% quarter on quarter to 535koz (Q1 2015: 501koz) with all-in sustaining costs (AISC) 10% lower quarter on quarter at US$1,029/oz (Q1 2015: US$1,143/oz) and all-in costs (AIC) 9% lower at US$1,059/oz (Q1 2015: US$1,164/oz). Tarkwa, Cerro Corona and Granny Smith were the star performers in the quarter.
Regrettably there was a fatal accident at South Deep during the quarter. The mine was negatively impacted by the related stoppages as well as management induced "stop and fix" interventions. However, there was a marked improvement in production in the June month (477 kilograms produced) and there are positive trends that emerged through the quarter, specifically in the rates of ore production, de-stress mining and new mine development.
Encouragingly, despite the slightly lower gold price in the quarter, there was a US$59 million swing in net cash flow from an outflow of US$29 million in Q1 2015 to an inflow of US$30 million in Q2 2015.
Normalised earnings for the period were US$22 million, a turnaround from a normalised loss of US$13 million in the March 2015 quarter.
We maintain our full year production guidance of around 2.2Moz, however, production at South Deep is now expected to be approximately 6,500kg (previously 7,100kg), principally due to a deliberate focus to fix the base for a sustainable long-term future. The lower production at South Deep is offset by better than expected performance at Tarkwa, St Ives, Granny Smith and Cerro Corona. Cost guidance for the 2015 year of AISC of US$1,055/oz and AIC of US$1,075/oz remains unchanged.
Green shoots starting to emerge at South Deep
After a difficult 2014 and the introduction of a new management team, we took the decision at the start of 2015 to take a step back and 'get the basics right' at South Deep to ensure a stronger foundation for sustainable growth in the future. The first six months of the year have come with its own challenges as the new management team has adopted a strategy of embedding an improved safety and productivity culture as it sets the mine up for the long-term. Notwithstanding, production for Q2 2015 was 7% higher approximately at 1,203 kilograms (39koz), despite numerous safety related stoppages. However, we are starting to see some positive trends with momentum in key mining metrics increasing in June and July.
While we have reduced our 2015 production target for South Deep to approximately 6,500 kilograms, we maintain our aspiration of achieving cash breakeven by the end of 2016. The improvement in production in the second half of 2015 is expected to be driven by an increase in the contribution from large volume long hole stoping and the introduction of new fleet, which was already factored into our capital forecast at approximately R1billion for the year. The new fleet will increase the complement of category I equipment (rigs, loaders and trucks) by a third. These new additions will meaningfully increase equipment availabilities.
We have previously said that 2015 at South Deep is more about the inputs than the outputs and have undertaken to provide a 'progress report' on the inputs. In broad terms, we have identified three focus areas at South Deep: people, fleet and mining method.
People: To augment the current skills base, we have identified the need for an additional 160 skilled employees across all levels including front-line supervision, with approximately 75% having been recruited by the end of June. Most of the remaining hires are on the engineering side and we expect to have the majority in place by the end of this year. The other positive development on the labour front was the signing of the three-year wage deal until March 2018, as previously reported, which should give South Deep a degree of stability as the mine builds up.
Fleet: A review of the fleet at the mine necessitated the acquisition of an additional 27 pieces of category I equipment, in addition to the 75 pieces in service, of which seven are to be scrapped. The majority of the new equipment (approximately 85%) is expected to be operational by the end of Q3 2015, with the remainder planned before year-end. Maintenance continues to be the bottleneck impacting the availability of the fleet, with a comprehensive planned maintenance strategy being developed. During Q2 2015, we took the decision to outsource the maintenance of the fleet in corridor 2 to Sandvik (the equipment manufacturer). This will be fully implemented by November 2015 and should provide much needed skills transfer. Approximately 35% of ore production is sourced from this corridor. In addition, the new 93-level workshop, with improved facilities and excess capacity, is expected to be fully operational for the 2 west and 3 west corridors by end-October 2015.
Mining method: The complexity and interdependence of the various elements of the mining method should not be underestimated, however, progress is being made on the different components.
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De-stress mining – one of the key constraints to de-stress mining has been support installation. At the end of June, eight additional support crews were deployed, which should debottleneck constraints in de-stress mining leading to a better last six months in 2015. |
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Ripping/sliping of de-stress ends – a trial to convert footwall ripping to hangingwall ripping in order to improve efficiencies is expected to conclude in Q3 2015. |
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Secondary support – introduction of dedicated crews responsible for secondary support installation and moving from only day shift to both day and night shifts as well as a change in the shift roster (an additional eight shifts per month). In addition, the number of rigs has increased from five in June to eight in August. All of these changes are planned to result in an increase in the rate of support installation. |
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Backfill – backfill production increased from approximately 40kt per month at the start of the March 2015 quarter to approximately 80kt per month towards the end of the June 2015 quarter which was the highest seen in 24 months. This was achieved through the commissioning of the Full Plant Tailings (FPT) backfill plant. This situation will be further improved through the conversion from mechanical to hydraulic mining of surface tailings which is expected to commence at the end of August. The mining of surface tailings is profitable and is a source of additional backfill until underground volumes increase. |
Strong quarter for Australia
Despite the 3% approximately reduction in production to 235koz, the Australian region had a strong June quarter, performing ahead of plan. AIC increased by 3% quarter on quarter to US$1,008/oz. Granny Smith was the standout performer in the quarter. The region generated net cash flow of US$40 million, with approximately 80% of the Yilgarn South acquisition paid back by the end of the quarter (in seven quarters).
Production at St Ives was higher than anticipated despite interruptions at the Hamlet underground mine due to paste line refurbishments. The development of the new, high-grade Invincible pit progressed ahead of schedule in the quarter.
Agnew had a challenging quarter mainly due to lower grades mined at the Kim lode of the Waroonga underground mine related to geotechnical constraints in the high grade areas. Remedial action following a full geotechnical review is currently underway. Fortunately, we do not expect to see any significant sterilisation of gold production that was in our plan. However, required rehabilitation of stopes as part of the remedial action means we will mine the Kim lode a little slower than planned.
Granny Smith had a good quarter, with lower tonnage more than offset by higher grade, resulting in gold production of 75koz. The mine achieved a FCF margin of 28% in Q2 201
Darlot returned to breakeven in Q2 2015, with the mine having achieved its budgeted AISC. In addition, there were some encouraging exploration results during the quarter, indicating lateral and vertical extensions of the Centenary ore body.
Ghana boosted by Tarkwa – record processed tonnage through the CIL plant
The region performed very well in Q2 2015, especially Tarkwa, which met all its KPIs for the quarter. Attributable gold production in the region increased 13% quarter on quarter to 178koz with AIC decreasing by 21% quarter on quarter to US$1,029/oz on the back of higher gold sold and lower capital expenditure.
It was a standout quarter for Tarkwa, with production of 156koz at AIC of US$938/oz. The CIL plant has had 10 consecutive quarters of record production, with Q2 2015 having the highest level of throughput ever.
Production at Damang increased by 6% quarter on quarter to 42koz. Notwithstanding this improvement, we continue to focus on improving the long-term profile and longevity of Damang. In order to increase mining flexibility and optionality, plans are being formulated to increase capital development to expose higher grade ore principally in the Saddle area (part of the greater Damang pit) and to increase exploration activities on numerous targets over a mineralised trend of some 17km.
Strong recovery from Peru
Cerro Corona had a much improved quarter, with gold equivalent production increasing 26% quarter on quarter to 84koz on the back of higher gold and copper grades. AIC were marginally lower quarter on quarter at US$662 per equivalent ounce. The mine generated US$24 million of net cash flow during the quarter.
Net debt marginally lower
Mainly due to the increase in the cash inflow from operating activities from US$150 million in the March 2015 quarter to US$191 million in the June 2015 quarter, the net debt balance decreased by US$22 million from US$1,499 million at the end of March 2015 to US$1,477 million at the end of June 2015. Net debt to EBITDA at the end of the quarter was 1.44x, compared to 1.41x at the end of Q1 2015, comfortably within our debt covenants. We have no debt maturities before November 2017, providing liquidity to the Group.
Dividend
In line with our dividend policy to pay out a dividend of between 25% and 35% of normalised earnings, we have declared an interim dividend of 4 SA cents per share, which is at the upper end of the payout range.
Woodjam Project Disposal
In line with our strategy of disposing of non-core assets, Gold Fields reached an agreement with its partner, Consolidated Woodjam Copper Corporation, to sell its 51 per cent interest in the Woodjam copper-gold-molybdenum projects located in British Columbia, Canada. Gold Fields will be issued with new Woodjam Copper shares to take its aggregate holding in Woodjam Copper to 19.9 per cent, and Gold Fields will retain a 2 per cent Net Smelter Return Royalty (NSR) over all unencumbered land owned by Woodjam Copper.
