Business Context and Reporting Period
Company: Gold Fields Limited
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Quarter ended 31 December 2006 (Q2 Financial Year 2007)
Announcement Date: 25 January 2007
Gold Fields reported steady performance for the December 2006 quarter, driven by higher gold prices and increased production, despite cost escalations in the mining industry. The quarter was marked by two major strategic achievements: the formal approval of new-order mining licenses for its three South African operations (Driefontein, Kloof, and Beatrix) and the completion of the acquisition of Barrick Gold Corporation's 50% interest in the South Deep Gold Mine.
Key Financial Metrics
| Metric | Dec 2006 (R) | Dec 2006 (US$) | Sep 2006 (R) | Sep 2006 (US$) |
|---|---|---|---|---|
| Revenue | 4,854 million | 658 million | 4,732 million | 667 million |
| Operating Profit | 1,969 million | 267 million | 1,987 million | 280 million |
| Operating Margin | 41% | 41% | 42% | 42% |
| Net Earnings | 767 million | 104 million | 698 million | 98 million |
| Headline Earnings | 762 million | 103 million | 692 million | 98 million |
| Net Earnings (Excl. FX/Financials) | 564 million | 76 million | 702 million | 99 million |
| Operating Cash Flow | 1,381 million | 190 million | 1,609 million | 227 million |
| Capital Expenditure | 1,376 million | 187 million | 1,188 million | 167 million |
| Cash Balance (End of Period) | 1,413 million | 202 million | 1,224 million | 161 million |
Production: Attributable gold production increased by 1% to 1,015,000 ounces (10,000 ounces higher than the prior quarter).
Costs: Total cash costs increased to US$353/oz (R83,707/kg) from US$350/oz in the prior quarter.
Material Changes vs. Prior Period
- Revenue: Increased 3% in Rand terms (R4,854m vs R4,732m) due to higher production and a 2% increase in the Rand gold price, despite a 2% decrease in the average US dollar gold price.
- Operating Profit: Decreased slightly by 1% (R1,969m vs R1,987m) due to an 8% increase in operating costs.
- Net Earnings: Increased 10% to R767 million, driven by a significant gain on foreign debt (R264 million) related to the South Deep acquisition loan, offsetting a decline in core earnings excluding financial items.
- Costs: Operating costs rose 8% to R2,975 million. The increase was primarily due to the inclusion of South Deep (R113 million) and inflationary pressures (steel, fuel, food) at existing operations.
- Cash Flow: Operating cash flow decreased 14% to R1,381 million, reflecting an increase in working capital (inventories and receivables).
Guidance, Outlook, and Risks
Management Commentary
CEO Ian Cockerill described the quarter as steady, with production largely as expected except for Kloof. He highlighted the conversion of mining rights and the South Deep acquisition as cornerstones for the future. The integration of South Deep is a top priority, with plans to ramp up production to achieve its significant potential.
Outlook
- Production: Forecast to be 2-4% higher in the March 2007 quarter due to increased Australian output and a full quarter of South Deep production, partially offset by reductions at Choco 10.
- Costs: Cash costs in Rand terms are expected to remain similar quarter-on-quarter.
- Dividend: An interim dividend of 90 SA cents per share was declared, payable on 19 February 2007.
Risks and Contingencies
- Operational Disruptions: Choco 10 (Venezuela) faces severe production constraints due to water shortages, with output forecast to drop below 9,000 ounces in the March quarter. Agnew (Australia) saw a 10% production decrease due to ground conditions and delayed paste fill plant commissioning.
- Safety: Three fatal injuries occurred in the quarter (two tramming-related, one fall of ground) at South African operations. The Fatal Injury Frequency Rate improved to 0.08 per million man hours.
- Financial Instruments: The company holds a complex gold derivative structure acquired via Western Areas, exposing it to gold price fluctuations. A marked-to-market valuation of these positions was negative R2,673 million.
- Accounting Policy Change: Ore Reserve Development (ORD) costs are now capitalized and amortized, aligning with industry peers. This change resulted in a R40 million credit to earnings for the quarter.
Investor Verification Checklist
- South Deep Integration: Verify the timeline and capital requirements for ramping up South Deep production to the targeted 200,000-220,000 tons/month.
- Choco 10 Water Crisis: Monitor the status of the water exploration program and the permit for the Yuruari River pipeline, as this poses a significant risk to Venezuelan output.
- Derivative Exposure: Review the impact of the Western Areas gold derivative structure on future earnings volatility, particularly given the negative marked-to-market valuation.
- Cost Inflation: Assess the sustainability of cost control measures (Project 100+, Project Beyond) against ongoing industry-wide inflation in steel, fuel, and labor.
- Western Areas Squeeze-Out: Confirm the completion of the compulsory acquisition of remaining Western Areas shares to finalize the South Deep ownership structure.