Business Context and Reporting Period
Company: Gold Fields Limited (NYSE & JSE: GFI)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Six months ended 30 June 2016 (H1 2016)
Date of Filing: 18 August 2016
Gold Fields reported a strong operational first half, characterized by a buoyant gold market following Brexit, which pushed gold prices approximately US$250/oz higher than the company's 2016 planning price. The Group achieved marginally higher production and significantly lower costs, driven by favorable exchange rates (weaker Rand and Australian Dollar) and operational improvements, particularly at the South Deep mine.
Key Financial Metrics
| Metric | H1 2016 | H1 2015 | Change |
|---|---|---|---|
| Revenue | US$1,305 million | US$1,270 million | +3% |
| Operating Profit | US$639 million | US$522 million | +22% |
| Net Profit (Attributable to Owners) | US$115 million | (US$2 million) Loss | Significant Improvement |
| Headline Earnings | US$124 million (US$0.16/share) | US$5 million (US$0.01/share) | +2,380% |
| Normalised Earnings | US$103 million (US$0.13/share) | US$8 million (US$0.01/share) | +1,188% |
| EBITDA | US$579 million | US$477 million | +21% |
| Net Cash Flow (Operating less CapEx) | US$60 million | US$1 million | Significant Increase |
| Net Debt | US$1,155 million | US$1,380 million (Dec 2015) | -16% |
| Net Debt/EBITDA Ratio | 1.05x | 1.38x (Dec 2015) | Improved |
| All-In Sustaining Costs (AISC) | US$992/oz | US$1,083/oz | -8% |
| All-In Costs (AIC) | US$1,024/oz | US$1,108/oz | -8% |
| Gold Production (Attributable) | 1,044,000 oz | 1,036,000 oz | +1% |
Material Changes vs. Prior Period
- Profitability Surge: The Group moved from a net loss of US$2 million in H1 2015 to a net profit of US$115 million in H1 2016. This was primarily driven by a 3% increase in the average gold price and an 11% decrease in net operating costs due to lower local currency costs and favorable exchange rate translations.
- South Deep Performance: Production at South Deep increased by 87% to 140,000 oz, driven by higher volumes and grades. Consequently, AIC at South Deep decreased by 19% to US$1,257/oz. The mine turned cash positive in the June quarter.
- Cost Efficiency: Group AISC decreased by 8% to US$992/oz. The weakening of the South African Rand (29% YoY) and Australian Dollar (5% YoY) against the US Dollar significantly reduced costs when translated.
- Regional Variances:
- West Africa: Production decreased 7% due to lower output at Tarkwa and Damang, but AIC decreased 9% to US$1,052/oz.
- South America: Equivalent production at Cerro Corona decreased 15% due to lower head grades and copper prices, causing AIC to increase 9% to US$728/eq oz.
- Australia: Production decreased 2% overall, but all mines exceeded guidance. AIC in US$ terms decreased 6% to US$928/oz due to currency effects.
- Balance Sheet: Net debt reduced by US$322 million to US$1,155 million following a bond buyback and equity raising. The company successfully refinanced US$1,440 million in credit facilities, extending the first maturity to June 2019.
Guidance, Outlook, and Risks
Updated FY2016 Guidance
- Production: Increased to 2.10 – 2.15 million ounces (from 2.05 – 2.10 million oz) due to outperformance at South Deep and Australian operations.
- Costs: AISC guidance remains unchanged at US$1,000 – 1,010/oz; AIC guidance remains unchanged at US$1,035 – 1,045/oz.
- Capital Expenditure: Increased to US$655 million (from US$602 million).
- Specific Mine Guidance:
- South Deep: Production guidance raised to 289,000 oz; AIC guidance raised to US$1,310/oz due to increased capital spend on housing and fleet.
- Tarkwa: AIC guidance raised to US$980/oz due to increased capital stripping.
Management Commentary
CEO Nick Holland highlighted the "buoyant gold market" and the company's focus on strategic objectives. The interim dividend was declared at 50 SA cents per share, a 12.5x increase over the prior year's interim dividend, representing a 26% payout ratio of normalised earnings.
Risks and Contingencies
- Legal Litigation: The filing details a High Court ruling certifying two classes of claimants (silicosis and tuberculosis) in a consolidated class action. Gold Fields has applied for leave to appeal the certification and the amendment of common law regarding the transmissibility of general damages claims. The company denies liability but is engaged in settlement discussions via the Gold Working Group.
- Operational Risks: Risks include fluctuations in gold/copper prices, exchange rate volatility, power stoppages, labor disruptions, and geological uncertainties.
- Regulatory: Changes in government regulations regarding royalties, taxes, and environmental standards, particularly in Ghana where a new Development Agreement was concluded (lower royalties effective 2017).
Investor Verification Checklist
- South Deep Sustainability: Verify the long-term viability of the 87% production increase at South Deep and the impact of the increased AIC guidance on future margins.
- Legal Exposure: Monitor the progress of the appeal regarding the silicosis and tuberculosis class action certification and potential settlement costs.
- Exchange Rate Sensitivity: Assess the impact of the Rand and Australian Dollar strengthening on future US$-denominated costs and earnings.
- Capital Allocation: Review the justification for the increased capital expenditure (US$655m) and its effect on the net debt/EBITDA target of 1.0x by year-end.
- Dividend Policy: Confirm the sustainability of the significantly increased interim dividend (50 SA cents) relative to cash flow generation.