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Gold Fields Limited (NYSE:GFI)

Q2 2010 Earnings Call

February 4, 2010 9:30 am ET

Executives

Willie Jacobz - IR

Nick Holland - CEO

Paul Schmidt - Finance Director

Vishnu Pillay - Head of the South Africa Region

Mark Zeptner - Acting Head of the Australasia Region

Peter Turner - The Head of the West Africa Region

Juancho Kruger - Executive Vice President, Head of South America Region

Analysts

John Bridges - JPMorgan

David Haughton - BMO Capital Markets

Leon Esterhuizen - RBC Capital Markets

David Leffel - Deutsche Bank

Paul Durham - Auerbach Grayson

Operator

Good afternoon and welcome to the Gold Fields second quarter results for the financial year 2010 conference call. Please note that all participants are in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions) Please note that this conference call is being recorded.

At this point in time, I would now like to hand the conference call over to Mr. Willie Jacobz. Please proceed, sir.

Willie Jacobz

Thank you very much, Leroy. Good afternoon and good morning, ladies and gentlemen. Thank you very much for joining us for this second quarter results teleconference call.

As per usual, we will kick off with our Chief Executive Officer, Nick Holland, giving us a brief overview of the quarter. Paul Schmidt will follow him talking to the finances for a few minutes. Vishnu Pillay, the Head of the South Africa Region, will then give us a brief overview of what happened in South Africa during the quarter. Mark Zeptner, who is the Acting Head of the Australasia Region, will then follow him with an overview of Australia. Peter Turner, the Head of the West Africa Region, will follow him and then, Juancho Kruger will speak about the South America Region. After that, we will take questions from the people on the call.

I hand over to Nick Holland, now.

Nick Holland

Thank you, Willie. Good afternoon or good morning, wherever you may be. Gold Fields has again benefited from the higher oil price, delivering a 40% increase in earnings for the quarter ended 31 December 2009. The solid set of financial results was achieved against the background of some safety-related challenges we experienced in the quarter.

In particular, Driefontein halted production for seven days or almost one-third of December's production month due to a major seismic event that occurred on 6th December 2009. Kloof was also held back by safety stoppages during the quarter. Both of these mines have also been constrained by a lack of flexibility.

One of the quarter's highlights is the progress being made in South Deep, which achieved a 10% quarter-on-quarter increase in production and a 50% increase year-on-year. Production of this mine is likely to benefit further from the implementation of full calendar operations as from the 1st of February, last Monday that is, as well as the mining of the South shaft project area from July 2010.

Other projects earmarked to deliver growth are also progressing well and my colleagues will present more detail on the secondary crush at Damang as well as the developments of the Athena project in Australia. We have also made significant progress with our exploration portfolio and the results continue to show significant promises.

Salient features for the quarter were as follows: gold production steady at 900,000 ounces; U.S. dollar gold price up 14% to $1,100 an ounce; cash costs higher at $613 an ounce, mainly exchange related; notional cash expenditure, $900 an ounce; operating profit up 30% at $463 million for the quarter, and the margin, of course, increasing to 43% from 38% last quarter; net earnings up 45% to $187 million.

As you all see, I'm sure, a good quarter where Gold Fields has benefited from the gold price and maintained steady production so that we could have the full effect of the gold price coming through in our results.

Cash flow generation is a key strategic focus for Gold Fields. And to this end, I am pleased to report that despite resurgence in commodity prices, Gold Fields has experienced good cost control and maintained a healthy free cash flow margin. Operationally, we achieved good results from South Deep, Beatrix, Cerro Cerona, and Agnew.

From the West Africa region, Damang was affected by the acceleration of scheduled rebuild of that and Tarkwa's production at 173,000 ounces was similar to the previous quarter. In Australia, St. Ives production was mostly lower as a result of lower grade to the mill mainly related to rehabilitation issues at the Belleisle underground operations.

As mentioned before, in the South Africa region, Driefontein and Kloof’s volumes were impacted by seismicity unplanned stoppages and a lack of flexibility. The key focus areas of Driefontein and Kloof going forward will be on managing seismicity, ore reserve development and labor optimization. Most specifically, the South African region’s relative underperformance can be attributed to a lack of flexibility and the same production stoppages I mentioned.

One of the key success factors for the region is to accelerate developments, to create flexibility and thereby reduce mining concentration. The other focus area for the region is to optimize the current labor force by investigating alternative working arrangements. We will also be attempting to be on protocols with the authorities to try and ameliorate the extent of certain stoppages. All of these strategies will be elaborated on by Vishnu.

Suffice to me to say that both Driefontein and Kloof represent long last quality ore bodies that are well capitalized. A challenge for us now is to make sure we can deliver that potential into economic delivery for shareholders. At St. Ives, the focus is on solving the grade gap and our interventions are already proving successful.

With that, I will hand over to Paul for a summary of the Group financial performance.

Paul Schmidt

Thank you, Nick and good morning everybody. If you have a look at the income statement, attributable gold production was 900,000 ounces marginally down from the 906,000 ounces in the September quarter. The gold price increased from $959 per ounce to $1096 per ounce, as a result of this revenue increased from $948 million to almost $1.1 billion for the quarter.

Net operating cost increased from $592 million to $630 million in the December quarter. This was mainly due to the effect of the strengthening rand dollar exchange, because in rand terms cost was flat at ZAR4.7 for the quarter. The net effect for the changes in revenue and cost increased operating profit by 30% and increased it from $356 million to $463 million. Operating margin increased from 38% to 43%.

Total cash cost in dollar terms increased by 5% to $613 per ounce, mainly again, due to the stronger rand, because in rand terms that were flat to rand 148,000 a kilo. NCE or notional cash expenditure, which is the total of our capital plus operating cost increased from $826 per ounce to $900 per ounce. This was mainly due to a $39 million increase in our capital.

If we move over to the bottom of the income statement, any item I talk to you is exceptional items. And we will see this $58 million, this is mainly due to us receiving additional 4.1 million shares in Eldorado Gold Corporation due to Gold Fields exercising its top up right in Eldorado Gold.

This was as a result of Eldorado completing its takeover of Sino Gold, it took over all the remaining unissued shares. Net profit increased by approximately $66 million to $210 million, while normalized earnings increased by 70% to $155 million.

If we have a look at the cash flow, cash flow from operations increased by $114 million from a $165 million in September to $279 million in December. And this is almost the same number of which operating profit increased. This is showing that the full effect of the gold price has been realized in our cash generated.

Capital expenditure increased from $223 million to $262 million. The result of all of this is that cash outflow for the quarter was $72 million taking to account the positive translation difference, the closing balance of cash at the end of the quarter was $259 million.

If we look at our net debt position, our net debt position improved from $909 million to $871 million. This again, mainly due to the effect of the stronger rand because in rand terms our net debt position was stronger. A point of noting is our net debt to EBITDA is only a 0.48, which equates to only six months of operating profit we would need to pay back our business.

If you look at our headroom facilities, at the moment Gold Fields has approximately 1 billion Rand in terms of headroom available on its facility in dollar okay. Moving across, Gold Fields achieved a 0.50 South African per share dividend, which equates to about $0.067. In terms of our policy, this amounts to 50% payout and 67% higher than the interim dividend paid for F2009 financial year.

So with that I hand over to Vishnu talk to the results.

Vishnu Pillay

Thank you Paul and good morning, ladies and gentlemen. On the back of the introduction that's been provided by Nick, I'll get straight into the matters of the South African operation and start with the summary. Despite being faced with mainly safety related challenges, the South African region achieved the production of 523,000 ounces this quarter. Beatrix maintained its consistency while South Deep is on track to deliver 300,000 ounces target for the fiscal year.

It's recorded 10% increase in quarterly production and the 50% increase year-on-year. Driefontein halted production for seven days, almost one third of December's production, mainly due to major seismic event that appeared on the December 6, 2009. Kloof was also held back by mainly by safety stoppages inline with the group policy of stop, then fix, verify and continue. The rand gold price increased by 9% to 263,000 Rand a kilogram as a result of the highest year dollar gold price.

Operating cost increased by 1% from 2.7 billion to 2.8 billion Rand. This increase was mainly due to the higher cost at South Deep inline with the project build-up and increased plan maintenance cost at Kloof, offset partly by lower electricity cost at all the operations due to the lower summer electricity tariffs.

Total cash cost at the South African operations increased by 2% from 162,000 Rand per kilogram to 165000 Rand per kilogram. NCE increased from 233,000 rand per kilogram in the September quarter to 242,000 rand per kilogram in the December quarter. The margin of the South African operations increased from 30% to 35%.

Looking at the operations now, Driefontein, the key focus area at this mine now and into the future is seismicity management and to build back up to a steady state of production. We expect production for quarter three to be slightly down at approximately five times because of the impact of the seismicity at the end of the last quarter and the risk averse approach to the January start-up following the Christmas break. We've begun building the surface stockpile to service as a buffer in the event of safety or other stoppages as well as the accelerating development to provide us with the flexibility as we needed.

Production at Kloof was also impacted by safety stoppages. This is worth noting that despite two lost days of production as a result of safety stoppages, Kloof achieved its best safety performance ever. This achievement further underscores that safety related interventions are bearing fruit. Production for quarter three is expected to be marginally lower at 4.5 times due to the knock-on effects of the December stoppages and the rest of this approach that we take following the Christmas break.

The lower production profile is temporary and Kloof demands 5.5 times to pull the operation. The improved ventilation infrastructure at three and four shaft will also positively impact production and we're fast tracking development to open our flexibility and cater for seismicity.

Beatrix maintained its consistency and is performing in line with its plan. Production for quarter three is expected to be approximately three times with an improvement in the mine coal sector providing significant opportunity for a better performance.

South Deep, with the 10% improvement in production, this mine is officially in the buildup stage to achieve its first target of 300,000 ounces for financial 2010. And then its target of 750,000 to 800,000 ounces at the end of 2014, all the logic capital project is also on schedule.

In addition, mining at the South shaft project will commence in July 2010 providing South Deep with incremental production. Full calendar operations commenced in the first of February and we look forward to the positive impact that this will have. Production for quarter three is estimated at 2.2 times as a result of the Christmas.

In calendar 2009, as a result of the unplanned stoppages, the South African region lost 7% of its production shift or 76 days which equates to approximately 2.2 tons of growth. In order to reduce the impact of these unplanned stoppages, we are engaging with our key stakeholders to introduce a six day work week. It is estimated that the additional shifts will increase phase time by approximately 9% and improve the optimization of our labor force.

The focus for the next half of the year will continue to be in safe production delivering South Deep slowdown and retaining and training of our people with an exceptional focus on accelerating development.

With that summary for the South African region, I would like to hand over to Mark Zeptner, our colleague. He is responsible for the Australian region.

Mark Zeptner

Thank you, Vishnu and good morning or good afternoon everyone. In Australasia, gold production was steady quarter-on-quarter while cash costs were down nicely some 7%. NCE was up 5% as we are currently investing capital investments while we have accelerated mine development and exploration drilling in order to build production flexibility to a degree that we have not enjoyed in the past. Production flexibility is considered essential for these operations going forward.

We are expecting to build production from the region up to the 150,000 ounces a quarter mark by the end of quarter three and positioning the mines to go beyond this in quarter four. And at the same time, we're extending the life of the mine at both sides through aggressive exploration programs.

At St. Ives, gold production of 96,000 ounce was adversely affected by lower underground grades due to a stope failure at Belleisle and non used lower grade areas within the Argo mine. Counteracting this was the fact that open pit grads were up as the higher grade Apollo pit was brought into production ahead of schedule. The quarter three outlook is to get back above the 100,000 ounce level through an increased output from the Apollo in the North American pits and the intense grade focus within the underground mines. This outlook must also be considerable within the context of a planned seven day shutdown of the mills recently completed and an ore blending strategy which will effectively tie up 3,000 ounces at the mill.

As a result of ongoing exploration success, St. Ives is targeting reserves of at least 2.5 million ounces by June 2010. With reference to the focus on grade within the underground mines, we have reevaluated the mining mix at Argo and rightly focused on the high margin areas of the mine. This has had a pronounced effect on the delivered grades from the mine since the New Year. Effectively, we are in the process of taking a mine that has produced in the 4 to 5 gram range to sometime after a figure closer to six and beyond. At the Bellisle mine, we are busy development into the new load which has a more favorable geotechnical and groundwater conditions than we enjoyed previously. Our aim is to have Bellisle back up to full production by the end of quarter three.

At Athena, we had to fast track project by completing the box cut, portal initial development and surface infrastructure in quarter two. In addition to this as of January the fourth, we've installed a high speed development team to further accelerate the project to forecast advance measures of up to 400 meters per month. The impact of these changes has been noticeable already.

We are also currently evaluating the benefits of this acceleration on the project timelines, although indications are that the full production milestone can be achieved up six months earlier which is at the beginning of F2012.

To finish the discussion on St. Ives, I want to touch on the Argo Athena Camp which has the potential to host both open pit and underground mines as the number of projects in the camp continues to grow simply in line with increased drilling. Argo, Apollo and Athena, all mines now, with Hamelt to follow by the end of the financial year. I believe that this year of the mine is capable of hosting some 4 million ounces alone and therefore can provide incremental ounces to the St. Ives production profile.

Up to Agnew now, where gold production was up slightly at 47,000 ounces and the mine continued in its characteristic neither producing consistent cash flow to the group. With cash cost of $509 an ounce and NCE about 856 an ounce already, Agnew has a solid first quarter produce in Australia.

NCE has risen from last quarter primarily on the back of a successful drilling program in the deeper parts of Kim lode down to 1400 meters below surface. This drilling has identified a wider ore zone that might be amenable to bulk mining at higher production rate down the track and the ore body also remains open below this. A similar program is planned at Maine Lode for this quarter.

As result of this drilling, Agnew is targeting 1 million ounces of reserves by June 2010 surely placing it as a varied asset in the market. So finally into the three areas in Australasia, solving the grade gap at St. Ives, getting production at about 100,000 ounce per quarter by continuing the work at Argo ramping out further output from the Apollo pit and fine tuning the Lefroy ore blending strategy.

Improving flexibility, this is about developed reserves and our aim is to have at least 12 months of pre-plan develop reserves ahead of starting funds across all of our underground mines. This is the benchmark from which we start.

And finally turning St. Ives an Agnew into long life mines. We expect their exploration efforts to deliver five year plus mine life at both St. Ives and Agnew by mid year, and in this part of the world, ore body is a typically much shorter in life than this, so the outlook is surely bright for Gold Fields in Australasia.

Thank you. Now, I'll now hand over to Zeptner who is going to discuss West Africa. Thanks, Mark.

Mark Zeptner

Good afternoon, ladies and gentleman. The West African region had a steady quarter with production coming in at 218,000 ounces. We would have even better results if it were not for the slow starts at the quarter because of power interruptions relating to the coupling of the new VRA sub-station to the new CIL process plant at Tarkwa.

I am however happy to report that these issues are behind us and we've had uninterrupted run since.. We have for the past month been running consistently at nameplate capacity of a million tons per month and Tarkwa in on an excellent position to build its production to 750,000 tons per annum level and beyond.

The cash costs for the operation were $492 per ounce, and NCE $728 per ounce. Both the CIL and heap leaches are performing well, and showing good results with continuous improvements going forward.

Grades on the mine are also holding up well. We've also commissioned HPGR projects and it is producing at a steady rate of 10,000 tons price per day. If the results from the HPGR continue to be as good as we've seen over the past month, we will in all likelihood roll the technology up, to the north heap leach pads at a later stage. We look forward to an incremental increase in gold production from Tarkwa going forward.

Moving on to Damang, at Damang our scheduled rebuild of the mill was brought forward which impacted throughput during the quarter, while this had a negative impact during the quarter under review, they're now behind us and this mine is now positioned for the future with the mill in an excellent condition.

Cash cost of the operation was $643 an ounce with NCE of $791 an ounce. In terms of growth at Damang, the installation of our secondary crush is progressing well, and is on schedule for completion in quarter four. Just to remind you, the crush will enable us to crush more hard ore and improve the ratio between the softer low grade oxides and harder high grade ore to a ratio of 95:5 up from the current ratio of 65:35, the exploration that will feed the new crush is progressing well and we are expecting reserves of approximately 2 million ounces after depletion this year.

Drilling is focused on the greater Damang pit as well as the Greater Amoanda areas. Both of these are showing excellent drill results and indications that all of that we will be able to develop a super pit at each of these locations in the future.

If you have a look at our results book and the presentations slide presented in Johannesburg this morning, you'll see some of the very interesting drill results at both of these locations. Damang is well positioned for the future with steady production, growing from the current level of about 200,000 ounces per annum to 250,000 over the next year or two.

I want to just briefly give you a heads up on our new project in the Southwest of Mali, the Yanfolila project. Just to remind you these are the properties that we acquired with the take over of Glencar last year.

This transaction was concluded during the quarter, and we now own all of the properties. We have over the past months worked hard to consolidate and grow our ground position in the area, and we now control a significant land holding of about 150/60 kilometers, this includes a large number of extremely prospective targets, many of which we have already started drilling.

Our drilling has largely been focused on improving up the flagship property in this portfolio, mainly the Komana East and West deposits, drill results at both of these properties are very encouraging. And we are progressing the drilling with the view to complete an interim scoping study by December of this year.

Encouraging is that we're picking up good mineralization near surface which will enable us to free dig, and adopt low cost mining methods. We have also been doing aggressive regional exploration across the rest of our properties within the 60 meters radius of the mother lode at Kamona. Results from all of these targets have been positive and are starting to give substance to our confidence in the potential large scale of this emerging new gold camp in West Africa.

This is indeed elephant country, as this property is located in the middle of the gold rich territory, which includes the well known Morila mine in Mali as well as Siguiri in Guinea.

In conclusion, the west Africa region of Gold Fields in now in a position to deliver better results going forward, we have started the third quarter with an excellent January month and we are confident that we will be able to maintain the pace going forward. Tarkwa is looking strong and Damang is now poised for a stiff change going forward.

Thank you very much. I'll now hand over to Juancho, who is the head of our South American Region. Juancho?

Juancho Kruger

Thank you, Peter. Good afternoon, good morning to everyone. I'm very glad to report today that on the back of continuous safety improvements, Cerro Corona outperformed its plan for the December quarter, consistently improving its performance over the previous quarter, which resulted in strong, sustained cash generation.

Gold equivalent ounces produced increased 11% to 98,400 equivalent ounces over the September quarter, driven by a 16% increase in copper and 3% increase in gold produced. These good results in production were basically as a result of three areas of focus of management during the quarter. The first one was to maximize throughput above the name plate capacity. The second one was increase our recoveries and the third one was to improve our grade control, mainly through better ore blending to the plant.

Controllable costs were in line with the plan for the quarter while the increase in cash cost was attributable to costs driven by the higher revenues, earnings and volumes shipped. The increase in production and the leverage in higher prices allowed Cerro Corona to increase its operating profit by 30% over the previous quarter offsetting the impact of a slightly higher cash cost.

Similarly, NCE margin increased from 38% in the first quarter to 43% in the December quarter. This strong performance allows Cerro Corona to generate a cash flow of $29 million for the quarter and upon the cash flow generated, we were able to prepay $30 million of project financing facility during the December quarter.

Bottom line, we continued increasing our margins and cash generated per ounce, which in turn has allowed us to consolidate three consecutive quarters of positive cash flow generation for the group. Our capital expenditure was on track for the quarter with our main project, which is the tailing facility, on schedule and within budget to be completed up to level 3740 by the end of April.

Moving to our growth strategy, our star project in the region Chucapaca continued its progress according to schedule to complete the interim scoping study by the end of this fiscal year. 16,000 meters of drilling were completed and very positive results have been obtained getting better quarter-over-quarter.

Basically, we have been able to get grades as high as nine grams per ton and importantly the deposit continues open up to the West. Looking into the current quarter, the Cerro Corona show continue improving its operational performance and deliver 100,000 gold equivalent ounces at a cash cost of $355 at an NCE of $575 per gold equivalent ounces.

As I mentioned before, this quarter we will complete the final phase of the construction on the Tailings Dam up to level 3740. Cerro Corona has proven its capacity to consistently deliver and create value quarter over quarter. This is what drives our team, who is focused on maximizing the generation of cash flow, which to us is all about sweating this asset. Thank you.

Nick Holland

Thank you, Juancho. Ladies and gentlemen from the overview that we have given you, it’s clear that our main focus is on ensuring that our current operations deliver their potential. This is ongoing work and we will continue with that. While our focus is clearly on improving our existing assets, you heard the word that continuous on a number of projects across the globe.

Particularly, the three advanced exploration projects are moving along nicely and you've heard from Peter that the potential exists on the Yanfolila Project in Mali, a very extensive land package that I'm sure is going to develop into a camp scale opportunity for us in this part of the world, which also enables us to leverage off the presence we already have in the West Africa region.

Scoping studies for Chucapaca in Peru and Talas in Kyrgyzstan, you've heard about and that should be completed soon as well. Uranium Project feasibility continues and we should be finished with all of the work on that by the end of March and we will give feedback then.

In Finland, let's not forget that we have an 11 million ounce Platinum palladium Project, 11 million ounces of 2 PGE plus gold which has been in the portfolio for some time. Some new developments are making these projects look more interesting and of course we are a gold company, this project is in the portfolio and our job is to work at how we can get value from that project even though it might not be a gold project.

Extensive test work is underway at APP to find a new metallurgical process that will improve the recoveries and we expect to complete the work on this during the course of 2010 and give the feed back later in the year as to whether or not this will transform the project into something different.

A major source of concern of course is the proposed electricity tariff in South Africa of 35% for three years going forward. In response, Gold Fields have taken advantage of the public participation process and I personally presented to the regulator on January 23. Our presentation highlighted the negative impact, both direct and indirect in terms of costs. In other words, this is not just a direct cost impact, it's likely to have a knock-on effect on all of our other costs. We just don’t know that is yet, but these excessive increase will have on Gold Fields South African operations, and in stay large. We've confidence that our high level representation together with other representations made by industry will cause the authorities to take a different view on the way forward.

In conclusion, we have benefited this last quarter from a higher gold price and achieved a strong increase in operating cash flows allowing a reduction in debt. We are making good progress on delivering South Deep and we think it’s worth noting again that South Deep's production is 50% higher than last year at very sharp increase in a short period of time.

Whereas other projects included the exploration portfolio are showing promise. Cerro Corona of course is also up 60% on the same quarter last year. So this is a clear indication and we have to live it on some of our promises and deliver it successfully. We're already addressing the challenges that some of our operations faced and I feel comfortable that we have plans in place. But again to address the issues that are holding us back.

Interventions are already underway in particular, to help us reposition the South Africa region for positive cash flow. The focus for the next half year will continue to be on safe production, increased development to open up ore bodies that are providing improved flexibility and safety as well as cash generation, and furthering our promising exploration portfolio.

Now with that, I'll hand over for some questions from you. Thank you.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from John Bridges from JPMorgan. Please go ahead.

John Bridges - JPMorgan

Good afternoon. Thank you everybody.

Nick Holland

Good afternoon, John.

John Bridges - JPMorgan

You mentioned some developments in Finland, what's status of that, is North American Palladium out of the deal now?

Nick Holland

Yeah, they didn’t exercise their option. That expired last year. So it's reverted back to us. And previously, we were going to produce a concentrate on the mine itself and then ship that to smelters, and the recoveries we were getting weren’t high enough. What we are looking now is to see, if we can produce metal on-site effectively, copper cathode and also a gold, palladium, platinum precipitate and that would enable us we believe to increase the recoveries quite a bit. Now what we're doing is we are taking another bulk sample, so we are doing more drilling on-site which entails a bulk sample. And we are going to take all of that through metallurgical test work to see how the whole process behaves right through to the end of the process I have talked about. That's going to take us well into the second half of this calendar year. And let’s see what the results look like, the early indications are positive and it could make a big difference to the economics of this project. Let’s see.

John Bridges - JPMorgan

Would that be a sort of unique metallurgical process you would be using out there?

Nick Holland

A technique called PLATSOL.

John Bridges - JPMorgan

Who is using that, somebody else using that?

Nick Holland

It's not very widely used and that's why we are doing a significant extra test work on this, just to make sure it works. So we'll take about six to nine months. It is available. There is not many people deploying this right now.

John Bridges - JPMorgan

Okay. And if I may, we've been seeing a lot of footage of floods interfering with tourist at Machu Picchu. And have you had any issues with weather in that region?

Juancho Krueger

Hello, John, this is Juancho Kruger. We have the El Nino phenomenon most of you might know coming into play and probably, it's going to be a coming into play harder in February and March and April of this year, but what is happening is that the plots are located in the southern part of the country, central part of country. Actually, the Northern part of the country, we're getting into a drought more than floods. It's raining less than the normal year.

John Bridges - JPMorgan

Okay. Thank you very much. Good luck, guys.

Juancho Krueger

Thanks John.

Operator

(Operator Instructions) Our next question will come from Murray Pollitt from Pollitt & Company]. Please go ahead.

Murray Pollitt – Pollitt & Company

Thanks very much. Good morning, good afternoon. The Toronto Newspaper business paper, the other day had an article, very high profile article on the youth wing of the African National Congress agitating for nationalization of all mines. Gold Fields, our company still has 50, maybe 60% of its gold coming from South Africa. Our company has a much by most analytical yardsticks a much lower P/E. It's much more poorly priced if you want, because of the sort of stories, which appear every so often as we all know. Nick, any chance of persuading the administration to give the investment community a large some kind of policy statement. I mean, look what happened in the Zimbabwe? Can we persuade the administration and this sort of stuff is damaging to the nation?

Nick Holland

Murray, in fact some we've got the mining indaba that took place this week in Cape Town and the Minister of mines publicly got up and said, nationalization won’t happen in her lifetime and she also went on to add that she doesn't intend dieing next week. I have also spoken personally to President, Zuma and as far as he is concerned now this isn’t even a debate. And I think this is a lot of noise.

Murray Pollitt – Pollitt & Company

I think you are right listen, forgive me, Nick, respect that but its not that stuff is not making into the public domain and that's the dilemma is to get this the President, Zuma's comments into the financial times and things like that. Sorry to interrupt, but that’s the objective, isn’t it?

Nick Holland

Absolutely, and look President, Zuma is also going on a bilateral business trip to London in March and part of it is to reassure investors about government’s role in the economy, but look I will be in Toronto in a couple of weeks time and look forward to seeing you and we'll do what we can in terms of…

Murray Pollitt – Pollitt & Company

We'll solve the world problems.

Nick Holland

And we will. Well, we will do that with a glass of wine or something. But I look forward to seeing you.

Murray Pollitt – Pollitt & Company

That will be very nice. Thank you for that and congratulations that's a hell of a quarter.

Nick Holland

Thank you very much Murray, much appreciated.

Murray Pollitt – Pollitt & Company

Thank you.

Nick Holland

What a next question.

Operator

Thank you, sir. Next question comes from David Haughton from BMO Capital Markets. Please go ahead.

David Haughton - BMO Capital Markets

Good afternoon, Nick. I have got some questions in West Africa and as with regards to the performance of some of the changes that you are implementing, quite interested to see what the outlook could be for the HPGR. I noted that the performance in South is so good, that you are thinking about in the north, wondering what the outlook could be by way of production and throughput? And then the second one relates to Damang, the impact of the secondary crusher, what we could look forward to in production and throughput?

Nick Holland

Right. I'm going to hand straight over to Peter, who's in charge of that region and he will give you all of that answers.

Peter Turner

Thank you, David. David, just to take a first question, the HPGR potential we believe is significant in terms of recovery. Certainly, we're looking at recovery improvements here any thing between 6 and 9%, those are the early indications. If you look at volumes that we could potentially process on a monthly basis through the north heap leaches are approximately 800,000 tons a month, gives you a scale of the kind of number that you could be looking at by deploying this HPGR technology.

That's the one opportunity, second opportunity obviously is at South where we have a significant resource, which we could retrieve through HPGR. These are projects for the future. I guess where we are right now is for Gold Fields proving this technology up so that we can deploy it in the world of our work for tomorrow. Moving on the…

David Haughton - BMO Capital Markets

Just before we move on to Damang, Peter. When we are having a look at the throughput, are you proposing that all of the materials stacked at south and potential north will go through the HPGR or are we looking at a mixture of HPGR and normal crushing?

Peter Turner

Look, certainly, if we look at the North heap leach processes right now and the future of the North heap leach process, we. had harder rock, we are looking at improving recovery in those areas going deeper, so definitely the North heap leach is fully on HPGR over time. Obviously, this is the subject of, diligent scoping studies going forward. And then also these two options for south re-treatment process. It's whether you fully pledge, you take the entire lot through CIL or you take the entire lot through HPGR. These are the two studies they are underway at Damang and the best returns would guide us. Does that answer your question, Dave?

David Haughton - BMO Capital Markets

I know, yeah. By way of the recovery I am trying to think here, clearly you have got some upside with the material to go through the HPGR. I am just looking for the blended outcome I think that the current recoveries are in the low 70% range low-to-mid there is potential to lift that up towards 80 and perhaps even a little bit beyond with the HPGR. I'm just trying to think, if we are looking in total of the material that’s been stacked, it's around about 10 million tones per annum there about or the combination of south and north. I am just trying to think through what's going through the HPGR, what kind of recoveries we can get and incrementally, what the production profile could look like from the heap leach as is reported.

Peter Turner

Okay. Where we're right now, just assuming you, you have a 6 to 8% improvement on that, we could take recoveries up to in order of 85%, I think quite comfortably we in the late 70s now close to the 80s we could go to the 85 mark. But that certainly is an expectation, I think what we're seeing out of this process very early is the heap leaching cycle is being accelerated and we are wining gold earlier from this project, which is encouraging. So obviously going forward the entire process from going to the North heap leach could automatically land up with high recovery and will.

Nick Holland

If I can just add, I can just add for that.

Peter Turner

Go ahead.

Nick Holland

Obviously, the key objective is to redeploy this to the north pad and once we proved it up. And then as Peter said, the opportunity is to reprocess potentially all of the preexisting heaps and recover the gold they wouldn't otherwise recover because of the size of the fraction. And that's work in progress, I'm giving you but that's what that we're going to be doing over 2010 to assess whether there is a viable opportunity once, we prove this up, but I must say the earlier results look very encouraging.

David Haughton - BMO Capital Markets

It is really very interesting that's number of other projects proposing the HPGR rate for heap leach. So it's a very interesting area of development, over to Damang, Peter.

Peter Turner

Moving on into Damang, at Damang the question is around the secondary crusher and why? And the reason for that essentially is to be able to communate your hardrock and change the blend in that plant, currently the blend is 65, 35 hardrock to oxide ratio. Where we are at the moment is our oxides carry lower grade generally than the sulphide material.

In order to change this ratio to 95, 5 we would then be blending a 95 hardrock hydride blend with the 5% low grade oxide blend. That in essence, we look at our average grades in oxide is around 0.9 and in the hardrock in excess of 1.4, 1.5. So we’ll have a significant upgrade in this blend going forward and early indications as we said in the quarterly this time around we've looking at an incremental about 50,000 ounces per annum. We think conservatively. I know Nick would like more than that, but I think for now that's what we are targeting.

David Haughton - BMO Capital Markets

Very interesting. Good question for you Nick with regard to likely timeline for the six day week in South Africa. When could we expect to see some traction with regards this negotiation and if it was to come into fruition . What's your best guess at that timing?

Nick Holland

Let me rather hand over to Vishnu who has been leading the charge on this one being the Head of SA Ops and then let him give it you first hand. Thank you.

Vishnu Pillay

David good afternoon or good morning it's Vishnu.

David Haughton - BMO Capital Markets

Good morning. Thank you.

Vishnu Pillay

South Deep is already on full calendar operations. They went into full calendar operations on Sunday night and I am pleased to say that the transition was smooth. There are few minor technical issues that we have to address, but I am happy to report that South Deep’s already on full calendar operations. With respect to the other three South African operations, we are in discussions with all three of our unions. I'm pleased to report that two of the unions have agreed. We're now awaiting the majority union, which is the national union of mineworkers to agree to this.

At this point in time, we are in workshops with the national union of mineworkers, so that they understand fully how this is going to be implemented and how it will work and the impact on their members. Assuming everything goes smoothly, I expect that by the end of this quarter we should have it in Driefontein and Kloof. Beatrix might take slightly longer, only because they're already on the six day work week, except that Saturday's on that mine is largely a voluntary shift. Hopefully, then we will seen the benefit of this in quarter four.

David Haughton - BMO Capital Markets

That's very promising. Then my last question, goes back to Eskom and Nick you're pretty alarming slight on page 72. What's the timing for the decision of Eskom whether they go for these three years 35% uplift each year or some other outcome? Do they have a timeline for this?

Nick Holland

Yes. My understanding is the regulator must finish their deliberations and give a ruling on this by February 24. That's my understanding, so let's hold on to act and see where we get to. I personally think we're going to end up with a much better outcome and I really don't believe that we're going to get anywhere near these increases. I do believe however that Eskom does need above inflation increases for sometime, the question is what and also believe that we are going to see much more aggressive demand management to pullback some of the gap between supply, demand and also the reserve margin and typically ones the reserve margin in electricity utility to be anywhere between 15 and 25%.

We are operating around the bottom end of that range but that could change if the basic metal pick-up continues. So the big lever they got to pull I believe is the demand management and that is going to have to be across the board retail, the rest of the industry as well as ourselves. One of the things we've done is we've already saved 10% in power usage. If you look at the pre-Eskom crisis numbers at the end of 2007 through to the end of 2009.

And I've set a target for the guys to come up with the plan to save another 10% over the next three years. Some aggressive plan but I think we can do it, and the other thing I would say is in years to come, business in this country is going to think differently about power usage. We are going to have to re-look at our whole process and our technology, see how we can ameliorae the impact of this. We have been a [rightful] society and the time is for us to stop wasting, and I'm sure that will find additional savings in our business so I remain optimistic that it won't be as bad as this and that possibly government will consider a recapitalization of Eskom and possibly recover that injection and balance that focus by looking at recovering at through the tax take overtime and I've given you numbers here to show you how alarming it is and just make sure that everyone in this country is aware how deeply concerned we are, let's hope we can find the another solution for the country.

David Haughton - BMO Capital Markets

Thank you. Good luck in those negotiations.

Nick Holland

Thank you.

Operator

Thank you. Our next question comes from Leon Esterhuizen from RBC. Please go ahead.

Leon Esterhuizen - RBC Capital Markets

Hi. Nick, Vishnu. I just want to touch on the FULCO that you're trying to get going, I don't want to be a alarmist or anything but this has been tried and failed every time in mining industry both for gold and the platinum side, you’ve obviously looked at those failures. Can you just give us some insight as to why you think it's going to be different at Gold Fields?

Vishnu Pillay

Leon, we are not talking full calendar operations for the conventional mines. We are talking about a six day work week, which is different from FULCO. Let me just explain, if we work full calendar operations, we need the permission of the Minister. In a six day work week, we would still have Sundays and public holidays off. So we don't need ministerial permission. So six day work week and FULCO are a tad different and I think that's the starting point for this discussion.

Leon Esterhuizen - RBC Capital Markets

Vishnu, thanks for that. Can you tell me what the premium is, what is the extra that you are proposing to pay these people to work that extra day or two days?

Vishnu Pillay

Nothing actually. We have the people in the system and it’s simply roistering the crews for face time that we have to manage. The executive in particular led by Nick. We've debated this long and hard. And we feel it’s in no one's interest to put people out on the street. We would rather put them to gold winning activities on our operations, it’s a win-win situation for all of us. The six day work week roster has been designed, quite happy to share that with you. It actually calls for our crews to work less compared to the eleven day or eleven shift format. And still have an Easter and Christmas, so I think it's a very neat design we have come up with for the conventional mines, we are still in the discussion.

However I should stress that we have full calendar operations in South Deep that's on the FULCO arrangement. And we expect that at South Deep we should see a premium of about 10% for full calendar operations, but we're looking at between 30 and 35% improvement in production.

Nick Holland

So, on the conventional mines, the people are already in a system. Okay. There is no extra people to be employed, we are not paying them any more, What we are doing is we are putting those people to work. So if it doesn't work as you suggested the cost is same to us. We are not going to be in any worse position on the conventional mines.

Leon Esterhuizen - RBC Capital Markets

That's sound great. As I again I don't want to be alarmist, but it's really failed several times in the past.

Nick Holland

If it fails, we will be in the same position we are now.

Leon Esterhuizen - RBC Capital Markets

All right. Well the extra people that you got that's going to be working these extra shifts, is there any sort of explanation as to why these people are additional or why they are already in the system not producing, I'm trying to understand that we got too much labors?

Vishnu Pillay

We bulked up our labor force to cater for absenteeism last year. So there is an additional percentage in the system, but we've got a significant amount of misplaced labor that we would like to retrain to put into our own stopes.

Leon Esterhuizen - RBC Capital Markets

Okay. All right.

Nick Holland

Thanks Leon. We're running out of time. We have given full, questions from any body else.

Operator

Thank you. Our next question comes from David Leffel from the Deutsche Bank. Please go ahead.

David Leffel - Deutsche Bank

Yeah, well gentlemen, Just I guess two questions, most of my questions have been covered. The first question, you said earlier this year that you will be pushing your development rates because Driefontein and Kloof notably are behind in development and you talked about lack of flexibility, I just wonder where is in the process because one looks at just the development rate that you put in your presentation pack we haven't seen much of a change in the rate of development? And then I guess the second follow-on question from there is with potential increases in power prices, will you revisit your capital projects at Driefontein, Kloof as they are quite significant?

Nick Holland

Which capital projects you're referring to David?

David Leffel - Deutsche Bank

Drop down projects.

Nick Holland

Yeah. Look, let me answer the second part of the question, I’ll let Vishnu talk to the development side. Look we're reevaluating what we should be doing on Driefontein. I think we have made that point before if I recall, and whether or not we should be looking at a series of declines at Driefontein and so that study is underway at the moment and clearly if we are going to have power increases to the extent that Eskom is advocating it makes the economics more and more difficult. I think we all understand that. In terms of the drop downs at Kloof, we are evaluating the so called KEA project and we have renamed that now 55 line decline.

That's also being looked at again, that's a much smaller project in any event than it was at the outset. So we'll look at those on that basis but I think the likelyhood ofdoing a major shelf deepening at Driefontein that needs to be considered very carefully against the backdrop of all of the issues that we are seeing today. We share your concern. And I'm certainly not going to commit to shareholders or the company to huge amounts of capital on projects that are very marginal. So we will look at it and then we will, I think by the middle of this year we should have a better idea as to which direction we are going to go. Vish, you want to handle the question on development.

Vishnu Pillay

I think it’s fair to say that it's been impacted by our catch up on secondary support. I'm please to see that’s behind us now and it's also been impacted by mechanization drive. We had to undertake up scaling of our cruise and put the maintenance in place that's been completed. So I think we should see an improvement in our development going forward from here.

David Leffel - Deutsche Bank

So we should see a step up quite rapidly in the next couple of quarters?

Vishnu Pillay

Yeah. You're already seeing it at Beatrix, because those crews have had a head start on all of the other mines.

David Leffel - Deutsche Bank

Okay. Nick, one final question maybe a little bit more tough, if one looks at your board right now, it is certainly dominated certainly independent Directors are there but dominated by South African people or people have been involved in the South African mining fraternity for many decades. As we I guess enter into a period where the ANC does seem to have more political rhetoric, do you think that you need to bring in more I guess global Board members that might look at the ANC rhetoric a little bit more harshly and balance your board with South African perspectives.

Vishnu Pillay

David, I would be looking for a board that is balanced in all aspects and we have to remember that we are a South African company and I would like to see us becoming more representative as well. And that's an issue that we continue to look at and make sure that we have a good representation from South Africa as well. And so our job is really to have a balanced Board and not to have predominance of for example, outside nominees on the Board.

I think we are going to have a spread of Directors, you know, we have a Non-Executive Director from Peru and we have one from Ghana, we have a couple of people who are outside the country who have been in the industry for sometime, we just got Alan Hill on the Board who has already made some very significant contributions in terms of helping us with capital projects et cetera. But I think we also have to get more influence on the Board in terms of helping us to shape how things happen in this country and also reflect the demographics of this country.

So I would want to have a domination of either local or offshore, I want to have a balance of Directors and that's what we striving for. And rest should David you know I am in touch with the headhunters in the country about this whole issue and you know the President himself said he is against this issue of nationalization, the minister said she is against it, all of the pragmatic people in government, and by the way as most of them I believe are all against this and I do think this is a storm in the tea cup, and we shouldn't over react to this issue and I'm sure in time this will disappear.

David Leffel - Deutsche Bank

Okay. Maybe we’ll take it offline in due course. Thanks so much.

Vishnu Pillay

No problem sir.

Nick Holland

Operator, thank you very much. I think we run out of time now. For any further questions, the last question.

Operator

We have a last question from Paul Durham of Auerbach Grayson. Please go ahead.

Paul Durham - Auerbach Grayson

Hi. Gentlemen, good afternoon. Some of my questions have been answered by various people, at South Deep specifically, clearly you are not looking so much of an increase in production next quarter over this quarter across obviously going up, have you got a roadmap that you have published in terms of sort of sequential progression there and what you also I don't know whether re you're going be held to a quarterly number there going forward that at least semi annual what could be sort, how do you see that the profile ramping out and the costs coming down over the next three years?

Nicholas Holland

Paul, Nick here. We did a full Analyst Day presentation I think in November...

Paul Durham - Auerbach Grayson

Yeah. I missed that unfortunately.

Nicholas Holland

And I too believe it's on the website and what Willie will do release here now, he will make sure you receive that entire presentation and it’s all in there.

Paul Durham - Auerbach Grayson

Okay I'll take there.

Nick Holland

Year-by-year and because other people have asked the same question here and it's a good question and you will see in there what we're looking at, all right?

Vishnu Pillay

I will be back in and there in we can talk about to the same.

Paul Durham - Auerbach Grayson

Keep it up. Catch up with you then and thank you.

Nicholas Holland

Thank you.

Nicholas Holland

Okay. Well, thanks very much folks for joining the call today and we look forward to a good 2010. We believe the company is certainly in better shape today than what it was year ago. And I certainly believe that coming end of 2010 we will progress the company further again. So with that, thanks for your participation and on my travels, I will look forward to seeing as many of you, as I'm able to. Thank you once again on behalf of the team and goodbye.

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Source: Gold Fields Limited Q2 2010 Earnings Call Transcript
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