Business Context and Reporting Period
Company: Gold Fields Limited (NYSE & JSE: GFI)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Quarter ended June 30, 2011 (Announced August 11, 2011)
Business Overview: Gold Fields is a global gold mining company with operations in South Africa, West Africa (Ghana), South America (Peru), and Australasia (Australia). The quarter was characterized by increased production and higher gold prices, offset by rising operational costs and safety challenges.
Key Financial Metrics
| Metric | June 2011 (Q2) | March 2011 (Q1) | June 2010 (YoY) |
|---|---|---|---|
| Revenue | R9,581 million (US$1,411 million) | R8,969 million (US$1,285 million) | R8,803 million (US$1,169 million) |
| Net Earnings (Parent) | R1,267 million (US$186 million) | R1,100 million (US$158 million) | R900 million (US$120 million) |
| Headline Earnings | R1,270 million (US$187 million) | R1,101 million (US$158 million) | R1,039 million (US$138 million) |
| Operating Profit | R4,457 million (US$656 million) | R4,091 million (US$586 million) | R3,738 million (US$496 million) |
| Operating Margin | 47% | 46% | 42% |
| NCE Margin | 21% | 21% | 18% |
| Gold Production (Attributable) | 872,000 oz | 830,000 oz | 898,000 oz |
| Total Cash Cost | R177,934/kg (US$816/oz) | R168,455/kg (US$751/oz) | R166,215/kg (US$688/oz) |
| Notional Cash Expenditure (NCE) | R256,692/kg (US$1,178/oz) | R245,326/kg (US$1,093/oz) | R235,223/kg (US$974/oz) |
| Operating Cash Flow | R2,954 million (US$436 million) | R2,783 million (US$398 million) | R3,650 million (US$482 million) |
| Capital Expenditure | R2,285 million (US$336 million) | R2,069 million (US$296 million) | R2,157 million (US$287 million) |
| Net Debt | R10,208 million (US$1,482 million) | R3,974 million (US$589 million) | N/A |
| Cash Balance | R4,345 million (US$631 million) | R6,603 million (US$954 million) | R3,791 million (US$501 million) |
Material Changes vs. Prior Periods
- Earnings Growth: Net earnings increased 15% quarter-on-quarter (QoQ) and 41% year-on-year (YoY), driven by a 5% increase in production and a 13% increase in the average gold price (US$1,496/oz vs US$1,191/oz YoY).
- Production: Attributable gold production rose 5% QoQ to 872,000 ounces. South African production increased 9%, while West African production decreased 3% due to lower head grades at Tarkwa.
- Cost Inflation: Net operating costs rose 5% QoQ. A significant portion of this increase (R180 million) was attributed to a 28% annual electricity tariff hike in South Africa and seasonal winter tariffs. Excluding electricity, costs would have risen only 1%.
- Debt Position: Net debt increased significantly from R3.97 billion to R10.21 billion due to borrowings used to fund the buy-out of minority shareholders in Peru (La Cima) and Ghana (Tarkwa/Damang).
- Acquisitions: Shareholders approved the acquisition of IamGold's 18.9% stake in Ghanaian mines (Tarkwa and Damang), increasing Gold Fields' holding to 90%. The buy-out of minorities in Peru was also completed, increasing the holding to 98.5%.
Guidance, Outlook, and Risks
Guidance and Outlook
- Production: Full-year 2011 production guidance remains unchanged at 3.5 to 3.7 million attributable ounces.
- Costs: Full-year Total Cash Cost guidance revised upward to US$790/oz (from US$760/oz) due to higher fuel, power, wage, and royalty costs. NCE guidance revised to US$1,190/oz (from US$1,050/oz) reflecting capitalization of growth projects.
- Dividend: An interim dividend of 100 SA cents per share was declared, payable September 5, 2011.
- Projects: Progress continues on major growth projects including South Deep (targeting 750,000 oz/yr), Far South East (Philippines), Chucapaca (Peru), and Arctic Platinum (Finland).
Risks and Contingencies
- Safety: A critical concern. The Group recorded 7 fatalities in the South Africa region and 1 in West Africa during the quarter. The fatal injury frequency rate regressed from 0.13 to 0.20. Management noted a concerning leveling off of safety improvements in South Africa.
- Operational Disruptions: Production was impacted by unscheduled interruptions at St Ives (Australia) due to SAG mill failure and at KDC (South Africa) due to seismic events and ground falls.
- Regulatory/Legal: A South African Constitutional Court ruling regarding silicosis compensation rights creates potential liability exposure, which is currently being assessed.
- Market Risks: Exposure to gold and copper price volatility, currency fluctuations (Rand/USD), and inflationary pressures on input costs.
Investor Verification Checklist
- Safety Metrics: Verify the trend in fatal injury frequency rates and the effectiveness of new safety interventions in the South African region.
- Cost Trajectory: Monitor the impact of electricity tariffs and wage increases on the ability to maintain the NCE margin target of 20-25%.
- Acquisition Integration: Assess the financial impact and production uplift from the completed minority buy-outs in Ghana and Peru.
- Project Timelines: Track progress on the feasibility studies for Chucapaca and the pre-feasibility study for Arctic Platinum, as these are key to the 2015 growth target.
- Debt Servicing: Review the utilization of the new US$1 billion loan facility and the company's ability to service increased debt levels amidst fluctuating commodity prices.