Business Context and Reporting Period
Company: Gold Fields Limited (GFI)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Quarter ended March 31, 2008 (Q3 FY2008)
Announcement Date: May 9, 2008
Gold Fields reported headline earnings for the March 2008 quarter, significantly impacted by severe power disruptions in South Africa and a series of fatal mining accidents occurring both during and immediately after the quarter. The period was characterized by a 17% increase in the US dollar gold price and a 10% weakening of the South African rand, which helped offset production declines.
Key Financial Metrics
| Metric | March 2008 (ZAR) | March 2008 (USD) | Dec 2007 (ZAR) | Dec 2007 (USD) |
|---|---|---|---|---|
| Revenue | R6,109 million | US$821 million | R5,430 million | US$801 million |
| Headline Earnings | R1,246 million | US$176 million | R456 million | US$67 million |
| Net Earnings (Ordinary Shareholders) | R1,248 million | US$167 million | R1,938 million | US$281 million |
| Operating Profit | R2,566 million | US$347 million | R2,037 million | US$300 million |
| Operating Margin | 42% | 42% | 38% | 38% |
| Attributable Gold Production | 827,000 oz | 827,000 oz | 960,000 oz | 960,000 oz |
| Total Cash Costs | R122,920/kg | US$513/oz | R101,532/kg | US$467/oz |
| Cash Flow from Operations | R3,039 million | US$408 million | R1,148 million | US$175 million |
| Cash Balance (End of Period) | R1,944 million | US$243 million | R1,321 million | US$189 million |
Material Changes vs. Prior Period
- Production Decline: Attributable gold production decreased 14% to 827,000 ounces. South African operations dropped 21% (from 657,000 to 520,000 oz) primarily due to Eskom power disruptions causing nearly a week of lost production. International operations saw a slight increase to 307,000 ounces.
- Cost Inflation: Total cash costs rose 21% to US$513/oz. This increase was driven by the loss of production volume (spreading fixed costs over fewer ounces) and inflationary pressures on inputs like steel and fuel.
- Revenue Growth: Despite lower production, revenue increased 13% in Rand terms. This was achieved through a 29% increase in the Rand gold price (R220,612/kg), resulting from a 17% rise in the US dollar gold price and a 10% weakening of the Rand.
- Profitability: Operating margin improved from 38% to 42% due to the higher gold price shielding the company from cost increases. Headline earnings surged 173% compared to the December 2007 quarter.
- Exceptional Items: The quarter included an exceptional loss of R42 million, primarily a provision for costs related to the suspension of the Driefontein 9 shaft project due to power shortages. This contrasts with a R1,417 million gain in the prior quarter from asset sales.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Production Recovery: Management expects South African production to normalize as power supply stabilizes. Production for the June quarter is forecast to be 2-4% higher than the March quarter.
- Project Milestones: The Cerro Corona mine in Peru is on track to produce concentrate in the September 2008 quarter. The Tarkwa CIL plant expansion in Ghana is expected to be completed in the December 2008 quarter.
- Cost Pressures: Outlook remains challenged by rising input costs (steel, fuel, power) and potential further Eskom price hikes (14.2% effective April 1, 2008, with more expected).
- Dividend: An interim dividend of 65 SA cents per share was declared, payable June 2, 2008.
Risks and Contingencies
- Safety Incidents: Five fatal accidents occurred during the quarter. Post-quarter end, three separate accidents resulted in 14 deaths (4 at Driefontein, 1 at South Deep, and 9 at South Deep due to a winder rope failure). An external full safety review has been commissioned.
- Power Supply: Ongoing reliance on Eskom remains a critical risk. Power rationing continues to constrain output and increase unit costs.
- Regulatory: A new Mineral and Petroleum Resources Royalty Bill is under review, which could increase the effective royalty rate to approximately 3.3% for South African operations.
- Leadership Transition: Nick Holland assumed the role of CEO on May 1, 2008, succeeding Ian Cockerill. Terence Goodlace was appointed Chief Operating Officer.
Investor Verification Checklist
- Power Supply Stability: Verify the extent of Eskom power restoration and the impact on June quarter production guidance (forecast 2-4% increase).
- Safety Review Outcomes: Monitor the results of the external safety review commissioned following the 14 post-quarter fatalities and the status of the South Deep winder replacement.
- Cerro Corona Commissioning: Track the progress of the Cerro Corona mine in Peru, specifically the timeline for concentrate shipment in Q3 2008.
- Cost Inflation: Assess the impact of rising steel, fuel, and electricity costs on the ability to maintain the 42% operating margin in subsequent quarters.
- Royalty Bill Impact: Evaluate the final legislation regarding the new royalty structure and its potential effect on South African cash flows.