Business Context and Reporting Period
Company: Gold Fields Limited (GFI)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Quarter ended September 30, 2008 (Q1 FY2009)
Announcement Date: October 29, 2008
Gold Fields reported a significant reduction in short-term earnings driven primarily by safety-related rehabilitation measures at its South African operations (Driefontein, Kloof, and South Deep). While the company achieved its best safety performance ever, production was curtailed to address backlog secondary support and main shaft infrastructure. The quarter also marked the first shipment of concentrate from the Cerro Corona project in Peru.
Key Financial Metrics
| Metric | Sept 2008 (R) | Sept 2008 (USD) | June 2008 (R) | June 2008 (USD) |
|---|---|---|---|---|
| Revenue | R5,724 million | US$740 million | R6,452 million | US$836 million |
| Operating Profit | R1,574 million | US$203 million | R2,721 million | US$355 million |
| Net Profit (Attributable) | R39 million | US$5 million | R843 million | US$105 million |
| Normalized Earnings* | R120 million | US$16 million | R943 million | US$123 million |
| Operating Margin | 27% | 27% | 42% | 42% |
| Net Debt | R7,756 million | US$978 million | R4,991 million | US$624 million |
| Cash Balance | R1,818 million | US$229 million | R2,007 million | US$251 million |
*Normalized earnings exclude gains/losses on foreign exchange, financial instruments, exceptional items, share of loss of associates, and discontinued operations.
Material Changes vs. Prior Period
- Production Decline: Attributable gold production decreased 8% quarter-on-quarter to 798,000 ounces. South African production fell 11% (553k to 492k oz) due to safety rehabilitation, while international production dipped 2%.
- Cost Inflation: Total cash costs rose 22% to US$617/oz (from US$502/oz). Drivers included a 10% annual wage increase in South Africa, a 20% increase in electricity tariffs, and higher global commodity prices (fuel, steel, cyanide).
- Revenue Impact: Revenue fell 11% in Rand terms despite a 40% year-over-year increase in the average gold price, as the production decline outweighed price gains.
- Debt Increase: Net debt increased by approximately R2.76 billion (US$354 million) due to borrowings for capital expenditure at Cerro Corona and South Deep, as well as funding working capital needs.
- Cash Flow: Operating cash flow swung from an inflow of R2,568 million in June to an outflow of R32 million in September, largely due to lower profits and a working capital outflow.
Guidance, Outlook, and Risks
Management Commentary & Outlook
CEO Nick Holland emphasized that safe production remains the number one priority. The company remains on track to achieve a run rate of approximately 1 million attributable equivalent ounces by the March 2009 quarter.
- December 2008 Forecast: Production is expected to increase ~5% to 840,000 ounces. Notional Cash Expenditure (NCE) is forecast to decrease to US$890/oz, and total cash costs to US$580/oz (assuming R8.00/USD).
- Long-term Target: Group NCE is targeted at US$725/oz (at R8.00/USD) by the March 2009 quarter.
- Project Milestones: Cerro Corona (Peru) is ramping up; first concentrate shipment occurred Sept 30. South Deep rehabilitation is complete. Kloof main shaft rehabilitation is on track for December completion.
Risks and Contingencies
- Safety Incidents: Two fatal injuries occurred during the quarter (ore pass accident and winch/rigging accident), though the Fatal Injury Frequency Rate improved significantly to 0.05 per million hours.
- Legal: Gold Fields received a summons from Randgold and Exploration regarding alleged historical share disposals involving Western Areas Limited (WAL). Gold Fields asserts strong defenses as the liability relates to a period prior to its acquisition of WAL.
- Operational: Ongoing risks include power supply interruptions in South Africa, labor disruptions (stay-aways), and the successful commissioning of new projects like Cerro Corona.
Investor Verification Checklist
- Production Recovery: Verify the timeline for the completion of the Kloof Main Shaft rehabilitation and its impact on Q2 FY2009 production volumes.
- Cost Trajectory: Monitor the sustainability of the US$580/oz cash cost target given the volatility of diesel and electricity prices in South Africa and Ghana.
- Cerro Corona Ramp-up: Confirm the achievement of the 55,000–60,000 equivalent ounce production target for the December quarter and the associated NCE reduction.
- Debt Servicing: Assess the impact of the increased net debt (US$978 million) on interest coverage ratios, particularly with higher interest rates in the current environment.
- Legal Exposure: Review the status of the Randgold summons to ensure no material financial provision is required for the historical Western Areas claims.