Gold Fields Q4 2006 Earnings Conference Call Transcript (GFI)

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Gold Fields Limited (NYSE:GFI)

Q4 2006 Earnings Conference Call

August 03, 2006, 10:30 am ET


Ian Cockerill - Chief Executive Officer

Nicholas Holland - Chief Financial Officer

Brendan Walker - Head of South African Operations

Terence Goodlace - Senior Vice President, Head of International Operations


Victor Flores – HSBC

Mayostard - Royal Bank of Canada

George - Royal Bank of Canada


Good day, ladies and gentlemen, and welcome to Gold Fields Fourth Quarter Fiscal Year End 2006 Conference Call. My name is Anthony and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today’s conference. [Operator Instructions]. I would now like to turn the presentation over to your host for today’s call Mr. Ian Cockerill, Chief Executive of Gold Fields. Please proceed sir.

Ian Cockerill - Chief Executive Officer

Thanks Anthony, and good afternoon everybody and welcome to this phone call. With me here today, I have Nick Holland our Chief Financial Officer, I have Brendan Walker, in charge of the South African Operation as well as Terence Goodlace who will be talking later on about our International Operation.

And it is good afternoon today, because this is the fourth quarter fiscal year 2006 feedback and it’s also the final of the year, the fiscal year 2006. So another year is over and I think it is fair to say that in the current environment, it certainly a lot more fun winning in gold company than it was a year ago. As you can see from our results, it has been another pleasing quarter, very much inline with the guidance that we previously gave to the market.

For this quarter, we manage to maintain our production levels at 1.02 million ounces of gold. We certainly achieved a much better production from the Kloof mine, much more inline with what we expect on the sustainable basis. With the high gold prices we received our margins improved from 32% to 38%. Our cash cost were essentially flat quarter-on-quarter at $376 an ounce. Our operating profit improved 47% to $260 million and net earnings also rose 25% from $95 million for the quarter. And we were able to declare a final year dividend of 110 South African cents per share which combined with the interim dividend of 40 cents per share, means of the total dividend for this year is 150 South African cents.

If one looks at the complete financial of year, gold produced with very much inline with last year with 4.1 million ounces of gold, cash cost were up 8% year-on-year to $358 per ounce, but that despite incredibly high input cost pressure. And I think bearing in mind the inflation of the impact of many of these things and 8% year-on-year increase is a very creditable performance.

Our operating profit rose almost two times to $681 million and our bottom line earnings were up an impressive 10 times, $217 million. We also concluded the acquisition of the Cerro Corona project in northern Peru. Bolivar Gold Choco 10 mine in Venezuela and we commence developments on the Cerro Corona project in Peru as well.

We also increased our interest in Sino Gold to 13.9% and we also increased our interest in western areas to 18.9%. So I think it’s fair to say that all in all it’s been a very successful year, on one way the previous efforts to reposition Gold Fields for a tough operating environment that paid off quite handsomely. Clearly, when higher revenue makes good cost control this can lead to good margin for investor, the investors now accounting that we are very proud to deliver.

With that, brief introduction let me hand it over to Nick taking through some of the details on the financial.

Nicholas Holland - Chief Financial Officer

Thanks Ian, and good afternoon. Looking at our income statements results over the last quarter, the increase in our gold price up to $628 an ounce from $555 an ounce has enabled us to increase our revenue from $602 million to $683 million.

Our costs over the last quarter went up 2% to $426 million and that’s against the background of a 4% increase in volumes in South Africa, (indiscernible) also effectively are resourcing for a step up in our development that planned up a (indiscernible) operation this next year and Brendan will talk more about that. And the fact that’s our fleet maintenance cost in Choco because of the nature of the contract in effect of higher rates are paid as the which increase those, that impacts this June quarter as well as the fuel price, we’ve seen the oil price go up over the last quarter and affect the diesel costs in Ghana from $0.78 or $0.88 a liter and (indiscernible) mine will use about 61 million liters a year you could see the impact of that very quickly.

We also add the first four quarter of Choco 10 in our results, remember the mining that was acquired on the first of March, so last quarter we only showed one month of results, this quarter we’re shining a full quarter, so of course there is going to be a cost and the revenue impact of that. And also we were impacted by the cost of a fairly extensive plant shutdown that quite honest which doesn’t happen, so I guess the background of those going to affects us as well as the ongoing cost pressure on our inputs that we’re feeling overtime, we’re very satisfied with the strict control that we’ve maintained over our cost.

And going forward, I think that’s going to be critical to ensure that we protect our margins. Our operating profit, for the quarter was up from $190 million to $360 million and looking at out line items on the income statement, the other notable issue is our exploration expenditure was up from $5 million to $15 million, a significant increase and most of that relates to stepping up our spend on particularly as we try and get that project up to a resource feasibility by the end of September, and there is some reassaying is taking place to achieve that. So that’s the reason that’s been stepped up and even after that net earnings for the quarter were up 24% to $95 million. And cash cost as you heard earlier from Ian, $376 an ounce.

I just want to emphasize again that the policy that we follow on development is not the same as the other South African companies with regard to their underground mines, in that we tend to write-off all of the waste development and associated shaft direct overheads whereas Harmony and Anglo Gold capitalize those cost, we generally stop development capitalization once we intersect reef, but for your purposes we provided a life-to-life comparison and that would have drop the cost for the quarter for $376 an ounce, to $345 an ounce. So on a life-to-life basis definitely you should look at the $345 an ounce.

Summarizing the main cash flow for the quarter, our cash flow from operations went up from $176 million to $234 million that really reflects the increase in the operating profit for the quarter. Our CapEx was up significantly from $76 million to $104 million, that’s probably due to an increase at Cerro Corona, we are accepting expenditure on that projects getting that project really going on, gaining momentum. Last quarter we only spent $7 million, this quarter we spent $19 million, Ian will talk about that again later.

There is also been a catch up of some backlog capital at these South African operations. Also during the quarter you will note from the cash flow that purchases of investments have increased from $24 million to $133 million during the quarter $130 million was spent on the increase in non-interest and western areas from 3% to 19% during the quarter. Now really significant to note that over the last two quarters we spent almost $600 million on growth activities what I would call growth not just on the existing operations, in other words purchasing the interest in Venezuela, purchasing the Cerro Corona project and in commencing with the expenditure and we manage to fund around about $400 million of that from internal sources and despite that we still have other $200 million impact at the end of the quarter compared to $239 million in the previous quarter and have only drawn down $158 million of debt. So I think the cash generating machine is very strong and in fact at the moment if you look at the current spot prices of around $650 an ounce. And after taking into account all expenditure, not just operating cost, the capital expenditure, taxation, corporate cost, exploration, I think at the bottom line, but before gross projects this group is generating over $30 million per month.

Our cash balance at the end of quarter as I said was $218 million, gross staff of $315 million giving a significant of $97 million. I think if you look at that in relation to the cash flow generated that we have mentioned essentially that’s only 3 months of cash flow. So we have a very, very strong balance sheet, we are very comfortable with the financial position we are in. And more importantly we have the fire power and the ability to do a lot more than this.

If I look briefly at the 2006 year, we ended summarize a lot of that full year, (indiscernible) production as you heard 3% down to 4.1 million ounces, and marginal decline manages to cliff. And the price achieves up $102 from $422 to $524. And that was the main driver behind the significant increase in operating profit from $368 million to $681 million, that would increase by 85%. And our net earnings as you heard increased 10 fold from $21 million to $217 million.

Ian mentioned the cash flow is going up 8% to $358 million. And I think one of the reasons why that is a creditable performance is, if you look at the background of some of the cost inputs we have to deal with, labor cost in South Africa went up 6.5%, diesel in Ghana has gone up 28% over the year and 16% up in Australia. Cyanide has gone up 20% in both Ghana and Australia. And our fleet maintenance cost doubled at Tarkwa because of the nature of the contract. And despite all of that annual reduction is over 100,000 ounces and plus, I think the 8% increase of cash cost is a good performance.

Looking forward the key on cost is to ensure that we continue with our cost management for Michigan, I am not going to drill in these now but you’ve heard about project beyond. There is a lot of information on quarterly booklet on that, you heard about project 100, it’s going to be key that we keep the initiative going on those projects. You are withstanding that we all concerned about the impacts of the commodity boom and whether in fact we fully seen the impact of that being absorbed into our costs. And so I think going forward if we can track cost inline with inflation that would be a good performance. Obviously we’ll try and beat that but I think we need to be mindful with some of these external cost pressures and not to mention labor as well. Going forward, the company that manages its cost in this current commodity cycle and ensure that the improved gold price flows through to the bottom line (indiscernible) the most value. And with that, I am going to hand you over to Brendan Walker.

Brendan Walker - Head of South African Operations

Thanks Nick. Good afternoon ladies and gentlemen. The South African operational strategy from mine, was successful revenue strategy as previously reported. We continue to mine, leverage those values to maintain quality and profitable ounces. The open-pit grade is 92,000 in kilogram with 7.6 grams per ton. And this quarter we achieved 7.5 grams per ton. The increase from last quarter is (indiscernible) time which I elaborate on later.

Cost production increased on about 4% also 22,000 ounces quarter-on-quarter. Driefontein manage to maintain its gold production despite the Sino Gold from the number one (indiscernible) that featured in the previous quarter. Cost production have soon increased significantly and at Beatrix there was a slight deduction. Meadows developed increased by approximately 9% to 25 kilometers, inline with our strategy of reinvesting some of the increased margin in our ore bodies.

Operating cost increased marginally on mining as a result of the increased (indiscernible) and developing volumes that include. The increase in operating cost was offset by the increase in gold production and total cash cost decreased from $415 an ounce to $400 an ounce. Operating profit increased by 88% to $142 million, resulting in the operating margin increasing from 22% to 34%.

Capital expenditure on the South African operations for the quarter amounted $35 million. Turning to Driefontein, Driefontein has gold production of 285,000 ounces driven inline with the previous quarter production. This was achieved as our previously started despite and the fact that, we no long ahead of our 25,000 ounces from the number one from Sino, which was created in last quarter. And resulted from higher than expected growth on that number 5 and number 4 shots as we were mining in those areas. But that will be unsustainable going forward as we revert back to the average reserved yield.

Operating cost remained constant as a $110 million, total cash cost at recent time decreased from $376 per ounce to $372 per ounce, headed by the weakening of the ramps. The operating profit increased about 57% to close to $70 million giving recent time in operating margin of 59%.

Looking forward gold production for the September quarter at recent time is forecast to be between 5% and 10% lower than the June quarter. As a result of the lower anticipated grade and that’s the number 4, number 5 shots as remain more and in last shaft towards the average reserve value. We also have an issue with the higher grade panels at number 4 shaft which has anticipated 12 and required to be reestablished during this quarter.

Cost will be impacted by the wide increase and we will continue to develop a gratitude this quarter to improve on our mining flexibility. The number 9 shaft on feasibility study and has been completed and will be presented to the Gold Fields board later this month. Currently we were commenced working of the shaft and exploration drilling and has started from study 8 level.

Turning to Kloof, gold production at Kloof increased by 14% to 236,000 ounces, this was due to a 13% increase in underground tonnages and as a result for the concerted effort to restore volumes that had declined significantly in the previous quarter.

Operating cost for the quarter, were 104 million an increase, slightly due to increased volume demand and (indiscernible) developed. The higher gold production and continued focus on cost control resulted in the cash cost decreasing by 9% to $427 per ounce. The operating profit improved from $14 million in the previous quarter to $44 million on this quarter just to increase gold production and higher gold price. Gross margin increased to 30%.

Looking forward, production at Kloof is expected to average at about 240,000 ounces in the next quarter and we remain at these levels going forward. Cost will be impacted by the wage increase and plant 7% increase and 88% increase that we experienced this quarter.

The KEI feasibility study at Kloof is also been completed and what we presented to the Gold Fields board later this month.

Turning to Beatrix, gold production at Beatrix decreased 5%, co-transported to 148,000 ounces. The decrease in gold production was as a result of lower volumes being mined in the higher grade results of the west section. As a result of restricted access to the higher grade ducts resulting from some of the haulages being affected by the smectite in the area. Locating the process of redeveloping accesses into that area and the west section will turn back to normal in the next quarter.

Total cash cost remain flat and Beatrix starts an operating profit of 29 million compared to $18 million in the March quarter and resulted in a margin of 32%. Looking forward gold production at Beatrix’s fourth quarter remain steady in the September quarter, with the July wage increase and increases in development affecting slightly on cost.

The (indiscernible) feasibility study is currently being revised and we hope that towards the end of current quarter it will be completed and we’ll be in a position to present it to the Gold Field board.

In conclusion on the South African operation gold production will be similar to slightly lower than the June quarter with the fuel cost of decrease in production at recent times. Total cost will increase inline with the increase in wages and in increase in development meters and all three operations. But we will continue with our aggressive tough management strategy and focus on quality volume.

Thank you. I now hand over to Terence.

Terence Goodlace - Senior Vice President, Head of International Operations

Thank you, Brendan, and good afternoon all. After the international operations reduced for the quarter with attributable gold production down to 350,000 ounces and managed productions at 417,000 ounces versus 450,000 in the previous quarter. The reduction was driven primarily by lower grade with volumes processed and treated at similar levels to the previous quarter. Federal cash costs increased to $335 per ounce and were driven up by the lower gold production. Operating cost increase by 6% to a $149 million and the drivers were increased as a top line synapse and the full quarterly inclusion of the newly acquired Choco 10 mine. At the gold cost $626 per ounce, we had operating margins for the international operations of 45% and an operating profit of $117 million.

Operating margins at the mines, all exceeded 46% other than Sino which disappointed at 34%. Capital spend for the quarter was $45 million for the majority of the spend from the bigger mines. Gold production at Choco was below our plan at 185,000 ounces and last quarters at 176,000 ounces and we had consistent deep reach performance and lower production through the CIL plant. Throughput at the CIL plant was affected by the lack of sufficient stuffs of competent ore. Increases to the total operating cost at Choco reflect high maintenance as Nick has said earlier and increased fuel costs and these were offset by other reductions in terms of equipment higher and lower contract mining. Capital for the quarter was spent primarily on pre-stripping of the (indiscernible) pit, the fleet pack construction and the purchase of additional mining fleet to buy down cost.

The targets on the feasibility study towards increasing throughput of the CIL plant is on track and is still due for completion by calendar year-end. For the upcoming quarter to outcome our effect gold production inline with the current quarter and which matches annual production rate of between 700,000 and 720,000 ounces per annum, unit cost are expected to increase marginally. It’s also important to note that we are currently in the wage negotiation cycle in Ghana and there are high expectations.

As far as the mine is concerned, this mine performed inline with expectation and produced 56,000 ounces. Gold production was lower as a result of processing reduced volumes due to plant shut downs and the processing of a high proportion of harder ores from some of the open pits.

Lower head grades for the quarter were driven through this relatively lower production from the higher grade and the one in the pit as this pit is nearing depletion. Cost were well controlled and we actually had lower costs, due to lower mining cost, the place driven blast and lower unit cost with a high proportion of tonnages coming from pits closer to the plant.

The operating profit was $16 million and the margin of this plant will be 6%. Good progress continues to be made on the domain with cutback and this mine started producing ore in the quarter. It comprises 70% of our capital spend. During the coming quarter it is expected that gold production levels were reduced by some 5%, our cost remain at current levels, unless is largely attributable to the depletion of the Amoanda pit.

The Choco 10 mine performed inline with guidance and produced 20,000 ounces at total cash cost of $293 per ounce for the quarter. There was one prime challenge in the quarter and that was the lack or the shortage of process water and we have really identified and looked at alternative sources of water and water saving machines to reduce our reliance on rain water. The primary focus on this mine is still concentrated around making sure that we can deliver a consistent 5400 tons per day and (indiscernible) effort if being replaced to make sure that we achieve this.

For the upcoming quarter, it is claimed to deliver high gold production, albeit that there has been significant downtime with the vibration on the bill note which affected most of the July month. This is being rectified as of this morning.

Overall the recapitalization of the plant is progressing well and they all shutdown plant for the quarter to try a nuclear bio sections designed to increase throughput. Total spend for the recapitalization of the low, of the plant is $6 million and we are planning to complete this by the beginning of the December quarter.

This mine is still delivering good values in terms of exploration potential and some of the information that we shown on the slide this morning really reflects the values that we getting at the VBK area.

Synods (ph) was disappointing for the quarter and produced only 116,000 ounces. There was a five day shutdown in April and this resulted in the mine producing very low quantity of ounces in that month making the sub-proof very difficult.

High cost at the mine, reflected an increase in the price participation royalty, high plant maintenance cost for the shutdown and exploration cost that were written off. Capital expenditure is focused around underground development at the Leviathan complex and the pre-stripping of the Thunderer open pit. Gold production for the coming quarter is expected to increase and cost of plant submitted enrolls to the current quarter.

There were quite a few problems at Synods this quarter, one of the prime areas was some of our geological models, un-plant dilution which will start too high, which affected some of the grades coming into the plant. A lot of these has been rectified and we all getting better reconciliations through the plants. Regional exploration at this mine is still critical and very important and our changing strategy initiate to really look at final drilling and step out from the drilling in and about the plant has realized some better targets in terms of (indiscernible) Westport junction and the east idaho ore body. Agnew had a record year and continues to perform well. Albeit the gold production for the quarter was 49,000 ounces. Pressure problems did affect us during the quarter but these were identified and rectified.

Operating costs were very well controlled and again this month has a strong margin of 49%. Capital expenditure on the mine is focused primarily around development at the Kim and Main Lode underground mines. Overall the international operations should deliver a similar performance to that achieved in the June quarter. Margins and cash flow will continue to be robust with the current production levels and the high gold process. Importantly cost controlled remain at common theme and the emphasis on global and regional procurements is increasing as our mine start initiatives to reduce consumption and hence cost.

On the safety half and environmental side, the targeting of zero injuries and zero incidence is progressing well and we will continue in this time. Operational excellence and higher productivity levels remain core themes as our exploration programs focused upon driving organic growth. Thank you and I’ll pass back to Ian.

Ian Cockerill – Chief Executive Officer

Thanks John. And before I make my concluding remarks I would like to just give you a quick update on two key projects that we have in the pipeline. And firstly the Cerro Corona project in Northern Peru. Now we are certainly pleased with the elections are over in that country and it does appears that country is settling down and getting back to business.

As far as the project is concerned we are still on target for the delivery of the initial concentrates, at the end of calendar year 2007. There is a project stand at the moment, we the contract accounts is up and running, both key equipment is either been ordered or in fact is already been delivered and some of the earth moving equipment is being used in the commencement of the bulk effort. Particularly around the pressure and plant installation, we commenced with the pre-strip of the Cerro Corona deposited itself and lower that ways until its being used in the construction of the bulk of work. Certainly engineering design is now 90% complete and we will 100% complete with in the next month or two.

While all capital projects around the world, we are experiencing some cost pressures but we are actively engaged in managing that situation and making sure that cost do not over on alarmingly.

On the second project that I would like to report back on our exploration efforts and that is the African joint venture the Kennecott. We are starting program, is going well there and one of the reasons why you may notice in the quarterly income statement, the increase on the exploration expenditure a large chunk of that is attributable to the increased sampling activity that’s taking place at the Kennecott and those cost come through. But certainly I think stand on that project was still on target to deliver revised bankable over to that numbers before the final quarter of this year. And then hopefully we will be moving into a feasibility study which we would like to have completed towards the middle of next year.

Now I think it’s clear to all of us that we are obviously moving into an era of sustained higher practices of gold albeit not just in dollar terms but also it seems in other currencies as well. That something that Gold Field is long predicted and we are very pleased to see that is coming to provision. Now the question many of you many have is so what Gold Field’s response just positive market going to be, let me state clearly and let me just reiterate what Brendon said previously, certainly in South Africa. The Gold Field is going to continue with its policy of mining quality volume. I will not revert to our old strategy i.e. the Wal-Mart strategy. We are going to be looking as to utilize the better profits to receive by firstly reinvesting into our ore body. And in South Africa despite big increases in development that you seen in this last two quarters. Certainly going forward into fiscal 2007 we are going to increase the development rate even further. And this is all in an attempt to improve a mining flexibility.

Secondly, the second way of reinvesting needs extra profits, we will be going to the board later this month and seeking the final approval for the commencement of the Driefontein and the Kloof drop down project. And these will be presented to the board for their final approval. And we are confident that we will be given that approval. In addition we certainly see some potential at the Beatrix mine in the fluckpom (ph) project which is on the western edge of the Beatrix mine. And we are also going to undertake a review of the further potential expansion of Choco at the CIL plant. And the objective here is to see the justification are doubling, the size of the current CIL plant. And there is some interesting work in projects that we are looking at in Australia that this entire mine as well.

I mean together with our exploration activities we are confident that these initiatives particularly the international one and if one looks at further underground potential in Venezuela as well as in Ghana we are hopeful that these initiatives and other potential acquisition opportunities are going to allow us to deliver on our objective of giving the additional international 1.5 million ounces by the end of 2009.

Now as you’ve heard the outlook for the group next quarter is very much the more of the same, some pluses and minuses across the piece. And certainly we will be seeing some lower production coming out from Driefontein but we do think that’s going to be contracted by a stronger shine from the international operation. Impressively like everyone else in this industry, cost pressure continue to double and we certainly have to accommodate the second phase of last year’s wage agreement here in South Africa but will impact on the South African cost. But I think as we have done in the past there are lot of innovative programs in place in our operations that we believe will help us familiarize on this fairly high cost increases.

Finally for the year ahead we look forward to with great optimism, once resist it remains an extremely challenging business I feel very comfortable. The Gold Fields with its sound balance sheet, low sensible levels of gearing and good project pipeline and an unhedged exposure to gold is well positioned to take advantage of the more positive environmental goal that we see ourselves in.

And with that let me hand you back to Anthony to any questions that you may have. Anthony it was you.

Question-and-Answer Session


[Operator Instruction]. Our first question comes from Victor Flores from HSBC. Please proceed.

Victor Flores - HSBC

Thanks, good morning and you made a comment, that sort of going first with my question which is the management of South African assets given that the wrangle prices now gone up and perhaps the temptation to go back to the Wal-Mart strategy. And I am wondering just how do you manage this higher cost, sorry higher Rand price environment with the temptation of mines from lower grade material?

Ian Cockerill

Thanks Victor, and it is a challenge there is always a temptation to the operational guys to try and mind the easier low grade stuff. As I say that Brendan is looking at me and smiling but it really is a question as we made a commitment, we are going to continue mining that our average ores that upgrades and we are looking to capture the additional margin of these higher prices were given. And as I said, we are going to reinvest in our ore bodies, we are going to increase our mining, the development that we are bringing into these mines to improve the mining flexibility. And we’ll also be looking to reinvestment of those profits in projects that will ensure the greater longevity of these mines. And lastly we think that shovel (ph) deserve to be very patient and they deserve to also benefit from the better prices and they should see that reflected in better dividend. We are not changing a divided policies as yet but clearly as we get higher prices there is no doubt that that should flow through into stronger dividend to share holders. So that’s how we are going to manage it, how we are going to use life and money.

Victor Flores – HSBC

Thanks, if I could just ask a follow-up, how much flexibility does the mine management team have in terms of managing relative to the current gold price relative to a reserve base that is calculated as you point out on a trialing gold price?

Ian Cockerill

This, I mean obviously we look to these guys to produce the base plan after stated price and the planning process and we’ve taken a 100,000 Rand a kilogram. That is consulted to current prices, but remember a year ago, we were at 90,000 Rand a kilogram. So these things can change so we don’t want to get too carried away but if the guard comes to us with a good motivation just to why going into a specific area is worthwhile, we would look at it and we would see whether or not had added value to that particular mine. But the basic proceed is that we are going to mine as to the current ores and upgrades.

Victor Flores – HSBC

Right. Thanks, Ian.


Our next question comes from Mayostard (ph) from Royal Bank of Canada. Please proceed.

George - Royal Bank of Canada

Hi its actually George. Just a question for Nick. Nick just with the tax rate for the quarter is a little bit higher than expected assuming margins from mine of these levels a little bit high and makes -- what do work on in 2007?

Nicholas Holland

I think (indiscernible) because as you are rightly saying, it has gone in to loss. There is a number of factors behind that. In our last quarter we had a big deferred tax credit adjustments at 16 million Rand related to reduction in tax rates in Ghana. And obviously that has had an impact in comparing quarter-on-quarter. You’ve heard about the big increase in the exploration spend this quarter which is non-deductible. And also last quarter we had an exchange gain of 65 million Rand relating to the funds, the warehouse for the Bolivar transaction which is also no tax for last quarter. So all of these have conspired to push up the overall tax rate for the quarter. But I think going forward, looking at the kind of process we are now, I would use a weighted average tax rate of about 34%, 35% at these sort of prices and that varying mining that’s a blended tax rate even that you have the mining formula in South Africa which has the margin rate of 45%, a 5% of window on the revenue. Ghana has tax rate now of 25%, Australia has 13%, and Venezuela has 34%. So those are the various tax rate but as I said, the weighted average about 34% I don’t think you will be too far off.

George - Royal Bank of Canada

Again just another one on the payout ratio, I think you got a two times cover at the moment given the fact that they are generating quite a bit of cash. Is it change that we should look at, sort of a payout ratio?

Nicholas Holland

Look, as Ian said earlier we are not going to change our dividend policy, it is two times cover but remember there is a caveat in that policy as I said, it depends on investment opportunity. And I think as you’ve heard Ian say we think we got a lot of projects to spend that money on. Interestingly enough this question came up this morning when we were doing our presentation to the South African market here. And someone asked what is your future capital expenditure budget and what we did reveal is that we are planning to spend 4.2 billion Rand next year on capital which includes 1.7 million Rand on the Cerro Corona project. And those increases at the South African operations as well. And that is before considering the full impacts of the drop-down projects there is something enhanced the KAI project, I think it was about 90 million Rand, and that’s the reason for that is that project is more advanced. But if the board approves the two projects this month then we’re going to have re-look at that budget bearing in mind that those projects will have funded as five to ten year period. So, I think the capital demands on this business particularly given the fact that we are trying to grow the business in certain areas which is for example Cerro Corona project and maintain our current production which is the objective of the Driefontein project. We are going to be spending some other capital. So I think its significant cash difficult of in the business even after those requirements, we would certainly reevaluate our path but certainly not policy at this stage.

George - Royal Bank of Canada

And if you do a few drop down projects, what do we look at next year? 200 million extra CapEx, there kind of going forward?

Nicholas Holland

George, I don’t think we want to give too much details at this stage. Once we’ve approved these projects which hopefully will be in the next 2.5 weeks or so. The intent would be to give a detailed account of these projects that full capital profiles et cetera. And I think then we will give you better handles, so that you can model to these things but before just be patient with us.

George - Royal Bank of Canada

Okay, thanks. Just last something if you bring [technical difficulty] could understand and coming and mention about the maintenance contract to talk with, that it’s a nature of the contract, what would you actually mean by the nature of the contract, are we expected to see any move, kind of rises because of the maintenance contracts coming through at fulcrum or was this that we never worked on?

Terence Goodlace

Hi George, its Terence, we have more contracts in other words the contracts with specified rates for different hours for different machines. And its goes up in 6000 hours blocks. So once you move from say 6000 to 12000 hours you go into a different rate. And so its goes up and down and right now its 90% of the fleet is in the 12000 to 18000 bracket and that’s when we do the major changes. For instance on the 9 down tracks, that right will come down, right now it was about $65 per hour but it drops to I think round about $47 per hour once we move into 18000 bracket. So that’s just where we are with that fleet, that was all bought at once and all of it has moved into this major change up area of the mall contract. We didn’t do any smoothing as far this is concerned, so what you see is what you get.

George - Royal Bank of Canada

Okay, so you might actually see some relief coming on the next 6 months.

Terence Goodlace

Most of the vehicles at around about 15000 hours, bear in mind that we do about 1800 hours per quarter we’ll soon be into 18000 hour bracket and then we go to some other high rate. But again, that’s not with the all the equipment some equipment it goes up it just on the nature of the equipment but on the big dump trucks it will go down once we move into the 18000 racket.

George - Royal Bank of Canada

And again thanks (indiscernible).


[Operator Instructions] We have no further question sir, I will turn it back to you for closing remarks.

Ian Cockerill - Chief Executive Officer

Anthony, thank you very much indeed and thank you to everybody for listening in today. There is a more detailed presentation which is available on our website as a presentation that we gave this morning, clearly most of you have actually had a chance to see that. Once again thank you for listening and we look forward to talking to you again in 3 months time. Thank you and good afternoon.


Thank you for your participation in today’s conference. This concludes the presentation, you may now disconnect. Everyone have a wonderful day.

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