Business Context and Reporting Period
Company: Gold Fields Limited
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Quarter ended September 30, 2005 (Q1 FY2006)
Release Date: October 26, 2005
Overview: Gold Fields reported a return to profitability for the quarter, driven by higher gold prices and cost controls, despite an 8% decline in attributable gold production. The production shortfall was primarily attributed to a strike at South African operations and operational issues at international sites.
Key Financial Metrics
| Metric | Sept 2005 (R) | Sept 2005 (US$) | June 2005 (R) | June 2005 (US$) |
|---|---|---|---|---|
| Revenue | 3,023 million | 464 million | 3,156 million | 492 million |
| Operating Profit | 554 million | 85 million | 656 million | 103 million |
| Net Earnings | 39 million | 6 million | (27) million (Loss) | (5) million (Loss) |
| Headline Earnings | 36 million | 6 million | 122 million | 19 million |
| Operating Cash Flow | 303 million | 47 million | 708 million | 110 million |
| Cash Balance (End of Period) | 2,800 million | 442 million | 3,375 million | 504 million |
| Total Cash Costs | R72,768/kg | $347/oz | R67,773/kg | $330/oz |
| Operating Margin | 18% | 18% | 21% | 21% |
Material Changes vs. Prior Period
- Production Decline: Attributable gold production fell 8% to 993,000 ounces. South African production dropped 6% (impacted by strikes), while international production fell 12% (impacted by lower grades and mill clean-up timing).
- Revenue Impact: Revenue decreased 4% in Rand terms despite a 4% increase in the Rand gold price, as the production decline was not fully offset by higher prices.
- Cost Management: Operating costs decreased 1% to R2.46 billion despite a 6.5% wage increase in South Africa, achieved through strict cost controls and lower volumes.
- Profitability: Net earnings improved from a loss of R27 million in the prior quarter to a profit of R39 million. However, earnings excluding financial instruments and exceptional items dropped significantly from R217 million to R44 million.
- Cash Flow: Operating cash flow was less than half of the prior quarter (R303 million vs. R708 million) due to lower production and a negative working capital change of R188 million.
Outlook, Risks, and Management Commentary
Management Commentary
CEO Ian Cockerill noted that while production declined due to strikes and operational issues, these issues have largely been resolved. Positive trends observed in October suggest a stronger December quarter. The company maintained a firm grip on costs despite wage increases.
Guidance and Outlook
- Production: Gold production at both South African and international operations is expected to increase in the December quarter.
- Costs: Cash costs are expected to decrease in the December quarter as production volumes recover.
- Projects: Major projects remain on track. The Cerro Corona project in Peru anticipates Environmental Impact Assessment (EIA) approval in the December quarter.
Risks and Contingencies
- Safety: The company reported 10 fatalities during the quarter, primarily at Driefontein due to ground falls and seismicity. Management stated these rates are "unacceptably high" and is reviewing safety initiatives.
- Operational: Ongoing challenges include smectite problems at Beatrix and grade issues at Kloof and Tarkwa.
- Financial Instruments: The quarter included a loss of R9 million on financial instruments, contrasting with a gain of R100 million in the prior quarter.
- Accounting Changes: Adoption of IFRS 2 (Share-based payments) resulted in a restatement of prior year earnings and a current quarter expense of R15.6 million.
Investor Verification Checklist
- Strike Resolution: Verify the extent of production recovery post-strike at South African operations (Driefontein, Kloof, Beatrix) in the December quarter.
- Safety Metrics: Monitor the Lost Day Injury Frequency Rate and Fatal Injury Frequency Rate to assess the effectiveness of new safety initiatives following the 10 fatalities.
- Grade Recovery: Confirm if underground grades at Kloof and Tarkwa return to reserve levels as management anticipates.
- Cost Targets: Track progress toward the South African cost objective of reducing costs below R70,000 per kilogram.
- Financial Instruments: Review the impact of currency hedging and interest rate swaps on future earnings, given the volatility seen in the current quarter.
- Cash Position: Assess the sustainability of the dividend policy given the net cash outflow of R431 million and the reduction in cash reserves to R2.8 billion.