GFI

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 December 31, 2014 (Q4 2014) and Full Year 2014.
Date of Filing: February 12, 2015

Gold Fields reported Q4 2014 results, highlighting a transformation strategy to operate successfully in a low gold price environment. The Group generated positive cash flow from operating activities for the sixth consecutive quarter. While international operations performed strongly, the South Deep mine in South Africa faced ongoing challenges, resulting in a slower-than-expected production build-up.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Q4 2014 reported a net loss of US$26 million compared to a net profit of US$19 million in Q3 2014. This was driven by non-recurring items totaling US$50 million in Q4, compared to US$12 million in Q3. However, normalised earnings remained positive at US$17 million.
• Production: Attributable gold production decreased marginally to 556,000 ounces in Q4 from 559,000 ounces in Q3. Full-year 2014 production increased 10% to 2.2 million ounces, primarily due to the full-year inclusion of Yilgarn South assets in Australia.
• Costs: AISC decreased 5% to US$1,023/oz in Q4 compared to Q3. Full-year AISC dropped 12% to US$1,053/oz. Operating costs decreased 2% quarter-on-quarter to US$405 million.
• Balance Sheet: Net debt reduced by US$45 million in Q4 to US$1,453 million. The net debt to EBITDA ratio improved to 1.30. Net debt as a percentage of enterprise value decreased to 29% from 41% in December 2013.
• Regional Performance:
  • South Deep (South Africa): Production increased 16% quarter-on-quarter to 48,500 oz following ground support remediation, but full-year production was down 34% due to a four-month remediation programme.
  • Australia: Strong performance with a 20% free cash flow margin. Granny Smith was the standout performer.
  • West Africa: Damang turnaround sustained with 12% production increase; Tarkwa production decreased 4% due to heap leach closure.
  • South America: Cerro Corona production stable; AIC increased due to inventory charges but equivalent ounce costs decreased.

Guidance, Outlook, and Risks

2015 Guidance

• Production: Forecast at approximately 2.2 million ounces of attributable equivalent gold.
• Costs: AISC forecast at US$1,055/oz; Total AIC forecast at US$1,075/oz (lower than 2014 achieved levels).
• Capital Expenditure: Set at US$660 million, weighted to the first half of the year.
• South Deep: Forecast 15% production increase to ~230,000 oz in 2015; expected to move to breakeven in 2016.

Management Commentary

Management emphasized a shift in focus from production ounces to cash generation, targeting a 15% free cash flow margin at a gold price of US$1,300/oz. The CEO noted that while South Deep remains challenging, 2014 was the low point, with consistent improvement expected. The Australian region is expected to see increased exploration spending in 2015.

Risks and Contingencies

• South Deep Tax Dispute: SARS (South African Revenue Service) disallowed an Additional Capital Allowance of R688 million (US$60 million). Gold Fields has lodged an objection and is vigorously defending the position.
• Native Title Claim (Australia): An appeal was filed regarding the Ngadju native title matter affecting St Ives tenements. The court found re-granted tenements invalid to the extent they affect native title, though mining tenure remains valid. Operations are expected to continue as usual pending the appeal.
• Occupational Lung Disease: Gold Fields is part of an industry working group addressing compensation and medical care for silicosis and tuberculosis, with ongoing class action litigation.
• Historic Litigation: A summons regarding alleged unlawful disposal of shares in Randgold Resources (pre-dating Gold Fields' acquisition of the subsidiary) remains pending.
• Operational Risks: Load shedding in South Africa and Ghana; fuel price volatility (partially hedged in Australia); and safety incidents (TRIFR increased in Q4 due to diesel fume exposure at South Deep).

Investor Verification Checklist

• South Deep Viability: Verify the timeline for South Deep reaching breakeven (forecast 2016) and the impact of the ongoing tax dispute on deferred tax assets.
• Non-Recurring Items: Review the composition of the US$50 million non-recurring expense in Q4 (rehabilitation updates, asset impairments, retrenchment) to assess the quality of the US$17 million normalised earnings.
• Cost Guidance: Monitor if the 2015 AISC guidance of US$1,055/oz is achievable given the weighted capital expenditure in the first half of the year and inflation in labour/power costs.
• Native Title Appeal: Track the outcome of the Ngadju native title appeal in Australia, which could impact St Ives operations or require compensation.
• Cash Flow Sustainability: Confirm the ability to maintain the 9% free cash flow margin in a low gold price environment, particularly as capital expenditure ramps up in H1 2015.