Safety is our top priority and our efforts to achieve zero harm continued in 2016. The Group’s fatality injury frequency rate improved by 67% to 0.02 in 2016 (FY2015: 0.06). The total recordable injury frequency rate (TRIFR) improved by 33% to 2.27 in 2016 (FY2015: 3.40).
For FY2016, attributable gold equivalent production was 2,146koz (FY2015: 2,159koz), with all-in sustaining costs (AISC) of US$980/oz (FY2015: US$1,007/oz) and all-in costs (AIC) of US$1,006/oz (FY2015: US$1,026/oz). This compares with revised guidance of 2,100koz to 2,150koz (original guidance of 2,050koz to 2,100koz) at AISC of US$1,000/oz to US$1,010/oz and AIC of US$1,035/oz to US$1,045/oz (same for original and revised guidance).
Our focus on generating free cash flow yielded positive results again in 2016 with the eight mines in the Group generating net cash flow of US$444m (FY2015: US$254m). A significant driver of the increase in net cash flow was South Deep achieving a small net cash inflow for the full year of US$12m, compared to the c.US$80m outflow in the previous year. After taking into account the interest paid on net debt, growth expenditure at Salares Norte and sundry other costs, Group net cash flow was US$294m (FY2015: US$123m).
The strong cash generation has enabled us to further improve our balance sheet, by reducing our net debt by US$214m during the year to US$1,166m at the end of 2016 (31 December 2015: US$1,380m). Net debt to EBITDA as at 31 December 2016 was 0.95x, surpassing our target of 1.0x by end 2016 which we set ourselves at the start of 2015. It is worth highlighting that this improved balance sheet has been achieved even after the US$197m payment to Gold Road for the acquisition of 50% of the Gruyere Gold project announced at the end of 2016.
In line with our trading statement released on 2 February 2017, there was a more than threefold increase in normalised earnings for 2016 to US$191m (FY2015: US$45m) or US$0.24 per share (FY2015: US$0.06). The increase in normalised earnings has enabled us to declare a final dividend of 60 SA cents, which takes the total dividend for 2016 to 110 SA cents, which implies a pay-out at the upper end of our dividend policy.
As detailed in a separate announcement, we have announced the new long-term build-up plan for South Deep. The mine is expected to ramp-up to steady state production of c.500koz over the next 5 years at AIC below US$900/oz.
Strong operational performance in Q4 2016
Attributable gold equivalent production for Q4 2016 was 566koz (Q3 2016: 537koz), with all-in sustaining costs (AISC) of US$911/oz (Q3 2016: US$1,026/oz) and all-in costs (AIC) of US$941/oz (Q3 2016: US$1,038/oz).
Reinvesting today for tomorrow
In 2017, we will continue to drive operational excellence but in addition increase our focus on setting up the business for the future. With various new growth and development projects, we have entered the next cycle in our evolution. This focuses on reinvesting in the business and our future to target both continuing and increasing free cash flow for the benefit of all stakeholders.
At the end of 2016 we announced our joint venture with Gold Road to
develop and operate the Gruyere Gold project. We have taken over its
management in February 2017 and production should start end-2018/early-2019. Last year also saw the decision on the reinvestment
plan for Damang, extending the life-of-mine from 2017 to 2024, with
clear upside beyond that.
In Chile, the Salares Norte project has achieved the key milestone of receiving Government approval for sufficient water rights. As at 31 December 2016, Salares Norte had Mineral Resources of 4.4Moz gold equivalent ounces (25.6Mt at 4.6g/t Au; 53.1g/t Ag), of which 52% is in the Indicated category. In addition, land easement has been granted for a period of 30 years. The project is on track to complete a prefeasibility study in Q2 2017.
In addition, we will continue to invest in brownfields exploration in Australia with positive results at St Ives and Granny Smith, and look for opportunities, for life extension at Cerro Corona and Tarkwa.
Investments such as these do not mean that our strategy has changed. We remain focused on generating cash in order to reduce our debt, pay dividends to shareholders and share the value we create with employees and host communities.
However, for us to grow and sustain cash flow, investing is necessary. While we may spend more cash than we may generate in 2017, depending on, inter alia, gold price and exchange rate, we are taking a longer term view to growing our cash flow in the future. Our business is a long-term game, which has to be sustainable though price cycles. Importantly, we are ensuring that we only embark on investments and capital expenditure with excellent potential for pay-backs and returns and which will continue to drive down our costs. It is also important to remember that we need to keep managing our existing ore bodies with regard to grade management and ongoing sustainable capital expenditure, so as to provide a platform for repetitive strong cashflow.
In October, we announced the Damang reinvestment plan which requires an investment of US$340m and will extend the life of mine (LoM) by eight years from 2017 to 2024. Over the LoM, a total of 165Mt waste and ore will be mined, with 32Mt processed at a grade of 1.65g/t, resulting in total gold production of 1.56Moz (average annual production of 225koz) at average AIC of US$950/oz. The project offers healthy returns, with an IRR of 28% at a gold price of US$1,200/oz and a payback period of 4.5 years.
In November 2016, Gold Fields entered into a 50:50 joint venture with Gold Road Resources for the development and operation of the Gruyere Gold project in Western Australia. The total purchase consideration was A$350m payable in cash and a 1.5% royalty on Gold Fields’ share of production after total mine production exceeds 2Moz with an approximate value of A$15 million. The Gruyere project is
expected to have average annualised production of 270koz for a 13-year life of mine at average AISC of c.A$945/oz (US$690/oz at A$1;00: US$0.73), with construction capital expenditure estimated at A$507m. First production from Gruyere is expected end-2018/early-2019. The project offers a return of 6% on reserves only and excluding other known deposits on the joint venture tenements at a gold price of A$1,600/oz, after taking the acquisition cost into account. Importantly, this investment established a foothold in a new and very significant gold province, the Yamarna belt, east of the Yilgarn Craton system.
Gruyere has received approval from the Department of Mines and Petroleum (DMP) for the Project Management Plan, Mining Proposal and Mine Closure Plan. This is the final level of approval required to allow commencement of construction of the process plant and associated infrastructure, and development work on the Gruyere open pit mine. In addition, all environmental approvals have been received.
Before year-end we completed the sale of a portfolio of eleven existing producing and non-producing royalties to Maverix Metals Inc, in return for 42.85 million common shares and 10 million common share purchase warrants of Maverix. Gold Fields owns approximately 32% of the issued and outstanding common shares of Maverix, which is currently worth around US$42m.
South Deep cash positive in 2016
South Deep is a key part of the Gold Fields portfolio and will be a key contributor to Group production and cash flow as the mine ramps up to full production. Production at South Deep increased by 47% to 9,032kg (290koz) in FY2016 from 6,160kg (198koz) in FY2015 driven primarily by increased mining volumes. AIC decreased 8% YoY to R583,059/kg (US$1,234/oz). Good progress was made on a number of important activities:
| • |
An overall improvement in safety during 2016 with the TRIFR improving 17% YoY to 2.42 in FY2016 (FY2015: 2.91). As previously reported, there was one fatality at the mine during the year. |
| • |
Improved operating performance and the higher rand gold price received resulted in the mine generating net cash flow of R175m (US$12m), which is a complete turnaround from the outflow of R1,009m (US$80m) in 2015. |
| • |
Development increased by 47% to 6,933 metres in 2016 from 4,701 metres in 2015. New mine development increased by 9% YoY to 811 metres. |
| • |
Given the change to the high profile method in the middle of 2015, destress mining was little changed YoY at 32,333m2 (FY2015: 31,499m2). The high profile method accounted for 69% of total destress mining in 2016 compared to 5% in 2015. All destress mining on the mine now uses the high profile method. |
| • |
Longhole stoping volumes increased by 74% to 745kt in FY2016 (FY2015: 429kt). There was a notable improvement in longhole stoping rig productivity during FY2016, which increased by 28% YoY to 9,805t/rig. |
| • |
Secondary support installation increased by 32% YoY in FY2016 to 8,694 metres. |
| • |
Backfill placed was 10% higher YoY at 373m3. |
Australia
Gold production in the Australia region for FY2016 was 5% lower YoY at 942koz, but exceeded original and revised guidance of 905koz and 925koz, respectively. AIC for the region was 4% higher YoY in A$ terms at A$1,261/oz and 3% higher YoY in US$ terms at US$941/oz. The region had another strong year of cash generation, with net cash flow of A$343m (US$256m) for 2016.
In line with our strategy to continually upgrade the Gold Fields portfolio, we have commenced a sales process for Darlot. Darlot was acquired in 2013 as part of the acquisition of Barrick Gold’s Yilgarn South assets. We have invested heavily to extend the life of the mine beyond the initial projected six months which has resulted in Darlot producing more than 241,000 ounces of gold in the past three years. However, we believe that Darlot needs a more intensive exploration focus, which Gold Fields is unable to provide given our significant exploration activities at our other Australian assets as well as the development of Gruyere project.
The brownfields exploration programme in Australia continued to show positive results in 2016, with resources flat and reserves up +10% for the year (excluding Gruyere), with both Granny Smith and St Ives more than replacing depletion in 2016. The total exploration spend for the year was A$102m.
West Africa
Attributable gold production from the West Africa region was 5% lower YoY at 644koz due to lower production at both Tarkwa and Damang. However, AIC for the region decreased by 3% YoY to US$1,020/oz mainly as a result of lower net operating costs and lower capital expenditure, partially offset by lower gold sold. The region generated net cash flow of US$100m for FY2016. The Damang project is progressing according to plan, with the mining contractors having been mobilised on site, along with most of their fleet.
South America
Attributable equivalent gold production at Cerro Corona decreased by
9% YoY to 269koz, mainly due to lower gold head grades, as a result
of planned sequencing and the lower copper price. AIC decreased by
31% YoY to US$499 per gold ounce (2015: US$718 per gold ounce).
AIC per equivalent ounce decreased by 2% YoY to US$762 per
equivalent ounce (2015: US$777 per equivalent ounce). Despite the
lower production, the mine generated net cash flow of US$77m.
FY2017 outlook and guidance
Attributable equivalent gold production for the Group for 2017 is expected to be between 2.10 million ounces and 2.15 million ounces, unchanged from the updated guidance provided in 2016. The Australian region is expected to produce around 910,000 ounces. Cerro Corona’s anticipated gold equivalent production of around 290,000 ounces is higher than 2016 with the increase mainly due to the positive impact of the higher copper/gold price ratio. Lower production of 120,000 ounces is expected at Damang given the reinvestment currently underway and South Deep is expected to increase production to around 9,800 kilograms (315,000 ounces). AISC, for the Group, is expected to be between US$1,010 per ounce and US$1,030 per ounce.
As mentioned earlier, Gold Fields plans to embark on a year of reinvestment in 2017 with the focus on new growth and development projects, and to target both sustaining and growing free cash flow. Apart from the additional investment in South Deep, three other major projects namely the Damang reinvestment project, the Gruyere development project and the Salares Norte project require investment. Growth expenditure at South Deep is planned to increase to R287 million (US$20 million) in 2017 (2016: R115 million/US$8 million).
In 2017, US$120 million will be invested in future growth at Damang largely on waste stripping to expose high grade ore sources in the future, while A$153 million (US$112 million) is planned to be spent on the development of Gruyere and A$106 million (US$78 million) on the balance of the purchase price. In Chile, Salares Norte is on track to complete a prefeasibility study in H2 2017. The plan is to increase expenditure to US$64 million at Salares Norte in 2017 (2016: US$39 million) as it anticipates commencing detailed feasibility.
As a result of the above, AIC for the Group is planned to increase significantly to between US$1,170 per ounce to US$1,190 per ounce. Sustaining capital expenditure for the Group is planned at US$617 million and growth capital expenditure is planned at US$252 million. The US$252 million comprises US$120 million for Damang, A$153 million (US$112 million) for Gruyere, as well as R287 million (US$20 million) at South. These expectations assume exchange rates of R/US$: 14.14 and A$/US$: 0.73.
