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Gold Fields Limited (NYSE:GFI)

F1Q07 Earnings Call

October 26, 2006 10:30 am ET

Executives

Nerina Bodasing - Head of IR

Ian Cockerill - CEO

Nick Holland - CFO

Brendan Walker - EVP and Head of South African Operations

Terence Goodlace - EVP and Head of International Operations

John Munro - Head of Corporate Development

Analysts

Victor Flores - HSBC

Heather Douglas - BMO Capital Markets

Peter Townsend - BJM

[Muneer Ismail] - Deutsche Bank

Barry Cooper - CIBC

John Doody - Gold Stock Analysts

Terence Ortslan - TSO & Associates

Leon Esterhuizen - Investec Securites

[Carl Durum] - HSBC Securities

[David Lathal] with Deutsche Securities

[Bob Medway] - Royal Capital

Sam Robbins - Robbins Planning Company

Presentation

Operator

Good day, ladies and gentlemen, and welcome to Gold Fields First Quarter Fiscal 2007 Conference Call. My name is Kobe and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). I would now like to turn the presentation over to your host for today’s call Nerina Bodasing, Head of Investor Relations for Gold Fields. Please proceed.

Nerina Bodasing

Ladies and gentlemen thank you for joining us for this Gold Fields First Quarter F 2007 Results Conference Call. Ian Cockerill will provide you with a few introductory remarks after which Nick Holland will go through the financial. Brendan Walker will review the South African operational performance followed by Terence Goodlace on the International Operations. Ian will then wrap up, after which we will open the floor for question, and I'll hand you over to Ian.

Ian Cockerill

Nerina thank you very much indeed good afternoon and good morning everybody. In line with the guidance that we provided last quarter, Gold Fields has again delivered a strong performance for this first quarter fiscal 2007. Despite a slight decline in gold production and a marginal drop in the price received from U$628 per ounce to US$622 per ounce. Operating profit was up by 4% to US$218 million. Expressed in rand terms, this was close to R2 billion which is the best ever operating profit that would have been achieved by a Gold Fields.

Net earnings increased slightly from $97 million to $98 million at the same time, and which is the fifth consequent quarter of increases in our earnings. However, cost pressures continue to remain a challenge in the current commodity cycle, and we are going to have to be vigilant to ensure that the current gold price as far as possible will report through to the bottom line, meaning we are going to make sure that we control our costs. Certainly, Nick will spend some time and elaborate on the cost situation of the economy we find ourselves in.

I think of particular importance this quarter is the fact that we've decided to bite the bullet and to change our accounting practices such that we are going to be in line with those who are out there around the world. Our ore reserve development costs, which was previously expensed at the South African operation, will be now be capitalized in an one-time. So, you can now compare apples with apples. We are looking at Gold Fields' cost compared with those, Harmony and AngloGold. And as a rule of thumb, this means that in comparison with the pervious quarter, expressed in rand per kilograms/ton, our costs would have declined by approximately R9,000 per kilogram. And if you look in the quarterly booklet that we have produced, all of the -- all the historic figures have been restated using this new accounting practice.

Importantly, this past quarter was very important from the growth perspective. We announced investment of just over $3 billion into South Africa on the debt extension projections that closed in Driefontein as well as, the proposed acquisition of the South Deep Gold Mine through Western Areas as well as bank's 50% share. These investments into South Africa are going to provide Gold Fields with a very solid foundation, from which it will continue its commitment to international growth and as you are all aware of the 1.5 million of commitment, we’re still short of about 600,000 ounces that must be delivered before the end of 2009. But we feel this investment in South Deep certainly now allows us to focus primarily on the international expansion. And, I think those few introductory remarks, let me hand you over to Nick, who will give you a breakdown on the financials. Over to you Nick.

Nick Holland

Thank you, Ian and good afternoon or good morning to everyone where you are. If you look at our income statements over the last quarter, our revenue is slightly down to $656 million and that’s mainly because of the 1% drop in gold production that you heard about from Ian, and also a marginal drop in our gold price from $628 ounce to $622 per ounce. Before I enter into a discussion on the cost in the dollar terms, I would like to go through the cost first in local currency or rand terms and explain to you some of the drives behind them. Let me then circle back and explain to you what they are in dollars and how they compare to previous quarter.

If you look at our costs in rand terms, our cost were in fact up 10% quarter-on-quarter to R2.7 billion, that’s an increase of R245 million, which on one quarter is a fairly substantial increase on the face of it. I think we need to breakout some of the main factors behind that increase so that you can better understand that.

First of all, the rand exchange rate has depreciated from R6.39 in the previous quarter that was the average for the June quarter to an average of R7.10 in the current quarter. And in addition the Australian dollars also had shown a 30% move going from R4.77 to R5.38. And why that's important is that when you actually translate your costs of those operations from their local currencies into South African rands the impact of the weaker rand against those currency has a direct impact on our rand cost. And in fact that inflation adjustment translates to a R109 million for the quarter. And that's almost half of the total cost movement. In addition in South Africa during the last quarter, we've seen the annual wage increase take place with effect from the first of July. That relates to the bulk of our workers and that was an increase from some 6% and that roughly adds further R45 million. So already that’s much more than half of the total cost increase.

In addition, we've had an increase in underground tons of about 6% quarter-on-quarter, this is June 2006 to September waste developments have been increased by 4%, and we've had a number of cost increases in certain commodities. I think, if we look at the overall resources boom we're seeing around the world, it's clear that Gold Fields is still being impacted by that, as our other mining companies. And in particular, we've seen fairly significant increases, particularly in this country in steel and in silver, as well as food which obviously impacts our feeding costs. And also, there is a delayed impact of the previous oil price increases that we have been experiencing.

In particular, as being part of the acute shortage of steel in South Africa and the major steel producers now are virtually exporting nothing, to supply the requirements of the local industry. And as you can imagine, the supply demand fundamentals have certainly worked against us. And steel prices alone have ranged in terms of increases between 20% and 35% of the last quarter. Steel components in our total cost make a significant proportion of total costs. Also, we have seen an increase in labor costs outside the company that impacts on us. We have spent approximately R0.5 billion a year on sourcing work from contractors that do various things for us and we have also seen a big increase in labor costs there. So, it's not just on our own labor we have experienced these increases.

You will also hear later on from Cerro, from the international operations that there have been increases in other areas like power on both the Australian and Ghanaian operations. And certainly, we may see further cost increases on that front. So, in rand sense, that explains more or less the increases. When you convert this back into US dollar terms, you will see that our costs are in fact virtually flat quarter-on-quarter, that’s gone from $393 million to $389 million. But, I think the issue that we need to appreciate is that both operating costs have been marked by the weaker end which has moved over from R6.39 to R7.10. That’s why I think you need to appreciate the impact of the cost increase in rand terms. Net operation profit after amortization for the quarter $184 million compared to $196 million in the previous quarter, not much difference there again, we are seeing the impact of the slightly lower production and the slightly weak prices.

If we look at what we're doing further on cost, we have further initiatives that are ongoing throughout organization and our strategy of investment in cost reduction n will continue. And what we're really trying do here is make sure that we can counter the impact of some of these above inflation increases by reducing our cost in other areas. An example of this are conversions from diesel to battery locos in our local operation as a replacement of rail track to reduce [platinum]. And if we could achieve these kinds of savings, then I think this group will do reasonably well to track inflation therefore at least for the short-term to medium-term.

As Ian has mentioned, bottom line earnings for the quarter were $98 million compared to $96 million in the previous quarter and important to reiterate our policy of capitalization of waste development of the South African operations has changed with effect from July 1. Previously, we used to fully expense our waste development, now we've taken the policy that we are going to capitalize that waste development because we get an enduring injury benefit from it and certainly, it is in line with what the peer group certainly does in this country, and prior period figures that you see in this report have all been restated to take accounts of that changing basis.

In terms of generally accepted accounting practice when you change an accounting policy, it's necessary to restate all of the prior period. So in the report that you see on the website, you will see that all of the columns for the previous quarter show restated. And the impact of that is that we've reduced working costs and increased capital expenditure. But at the same time, we've also increased our amortization. And the policy, we are talking to you is we're going amortize this ore reserve development costs or it's [waste development cost over the life of the developers per shaft]. And to give you an indication as to what this policy change means, if you look at the last quarter in rand terms, the impact of the change was about R50 million on our net earnings. And in U.S. dollar terms, the impact was only $97 million. So on the net earnings as a whole, the impact is pretty small and that's not the reason this is being done. The reason it is being done as to ensure comparability of treatment of unit costs.

Looking at the cash flow for the quarter, our operating cash flow was strong at $226 million for the quarter. And that was even after making final year-end tax payments of $44 million. And if this tax is added back, then our operating cash flow is similar to the previous quarter. With the Cerro Corona Project ramping up, CapEx increased from $137 million to $167 million with almost a third of this amount attributable to the Cerro Corona Project during the quarter.

Our net debt at the Gold Fields group level is a $130 million and that provides significant debt capacity, particularly if you look at operating cash flow less non-discretionary capital including the project CapEx on an annualized basis nearly two times this figure and that indicates to you the strength of our balance sheet. I think lastly just to reiterate this, as we mentioned to you at the time of announcing the South Deep transaction, we intend to fund $1.2 billion of the purchase of the 50% stake from Barrick with an external loan. That loan is in the process of being documented and should be ready for us to draw that down when the transaction closes.

With that, I am going to hand you over to Brendan.

Brendan Walker

Thank you, Nick. Ladies and gentlemen, at the South African operations, gold production decreased about 3% or 19,500 ounces quarter-on-quarter. The increase in gold production at Kloof and Beatrix was offset by 10% decrease in Driefontein due to lower underground grades being mined and the revision of the [exposure of further] extraction trend, which has been (inaudible) through deterioration of ground conditions around the shaft. It has developed, increased for approximately 5% to 26,600 million in line with our strategy of reinvesting some of the increased margin in our ore body to create more mining flexibility.

Operating costs decreased about 5% from $244 million to $232 million. There was a 5% increase in rand operating costs. Approximately, half was due to the 6% annual wage increase. Increased stoping at Beatrix and inflationary increases, the largest in timber contributed to the rate.

Our bar gold production was larger than the previous quarter, total cash cost in US dollar per ounce reduced about 3% to $340 per ounce as a result of an 11% depreciation of the rand against the US dollar. Operating profit decreased by 2% to $173 million. The margin increased from 42% to 43%. The South African operations contributed 62% of Gold Fields' operating profit. Capital expenditure amounted to $61 million, which was the first time as Nick reported includes the capitalization of ore reserve development.

Turning to Driefontein, Driefontein gold production of 257,000 ounces were 10% down on the previous quarter's 295,000 ounces. The drop in production is attributable to the underground grade, which decreased from R8.7 to R7.5 per ton for the quarter. This decrease in grade was due to the depletion of high grade panels at 4 shafts pillar and a reduction quarter-on-quarter in the mining of the high-grade shaft pillar where mining was stopped due to ground instability at 4 shafts and lower-grade mines at 6, 7, and 8 shafts.

Looking forward, the instability experienced around the 4 shafts pillar during the quarter has necessitated to redesign of the shafts per extraction schedule, which will enable Driefontein to extract the pillar from other shafts should the integrity of the shaft infrastructure be comprised. This will require the development of additional foothold infrastructure and while this is taking place, the pillar will be delayed. This will result in gold production for the next two quarters reducing to approximately 248,000 ounces per quarter, and then increasing slightly in the following quarter.

Turning to Kloof, gold production at Kloof increased about 3% from 236,000 ounces to 243,000 ounces. This was due to an increase in underground tonnages mold compared with the previous quarter as a result of additional emphasis being placed on the removal of underground accumulation. Looking forward, we expect the gold production at Kloof in the December quarter to be similar to that of the September quarter.

Beatrix, gold production at Beatrix increased slightly to 149,000 ounces. This was as a result of the increasing ton mold from 884,000 tons to 984,000 tons, which was particularly offset by the low-grades from Beatrix North and South shafts, which contributed to the increased volume.

Looking forward, we expect gold production at Beatrix to be marginally high in the December quarter and as production increases at the West section. The outlook for the South African operations for the next quarter, and we'll see gold production (inaudible) as mentioned as a result of the rescheduling of the 4 shafts and pillar extraction at Driefontein. The 9 shaft depth extension project team is in place and preparatory work to commence, I think in early financial 2008 is in progress.

At Kloof on the KEA depth extension project, development will continue in the next quarter towards the whole September. Thank you. I'll now hand over to Terence.

Terence Goodlace

Good day everybody At the international operations, we had an overall increase in production with the increased gold output from the Australian operation offset by lower gold outputs at the Ghana and the Venezuelan operations. The total gold production for the international operations was 420,000 ounces. Total volume processed was 9 million tones.

Gold production at Tarkwa was marginally lower than the June quarter due to lower grade offset by additional volumes treated. Damang gold production reduced in the quarter on the back of lower grades due to having depleted the high grade Amoanda pits as forecast previously. Production at this mine will climb back up again in about six months' time as we exit ore from the Damang cutback and Juno 2 South West pit.

Choco 10 had a disappointing quarter primarily due to the failure of the ball mill clutch which affected 29 days of mill throughput. At St. Ives the increase in gold production came from increased throughputs through the Lefroy mill, and at Agnew, gold production increased by 20% due to increased underground grades and tonnages from the Wahroonga.

As far as costs are concerned, in US dollar terms, costs increased by 6% from $146 million to $155 million. The prime reasons for this if I go through an operation by operation basis, operating costs in Damang where we had additional costs due to on-mine power generation in line with the national load shedding requirements that were required in the country. Costs at Tarkwa were also impacted by an increase in fleet maintenance costs as well as explosive costs.

Operating costs at Choco 10 increased as a result of higher processing to fix the mold and general and administration costs. Processing costs also included the included the purchase of water in line with our water shortages that we actually have at the mine. At St. Ives operating cost increased by 9%, but the prime reason for this was really an acceleration of waste normalization charges of $6.8 million and this was as a result of the shortening of (inaudible).

Agnew had a reduction in cost of $4 million or 20%, and the reason for this was a change in estimate relating to the waste normalization of Songvang open pits. Overall with a 1% reduction in the gold price, the margins at the international operations were 41%.

Moving on to capital expenditure, we had $10 million increase from $44 million to $54 million for the quarter. Tarkwa was steady at $13 million. There was a slight reduction at Damang which was stated to be $7 million with $6 million of that on Damang with cutback.

Choco 10 had an increase from $4.2 to $10.9 million and that’s on the back of the increased exploration effort. The acquisition of two dump trucks as well as the upgrading and recapitalization of the process front.

As far as St. Ives is concerned, we had an increased from $14 million to $16 million and that is driven primarily by the increases in development at Argo, increased stripping at the Thunderer as well as the commencement of the expansion of the heap leach pad, which was sized 3 of that heap leach pad.

Agnew had an increase from $5 million to $8 million, the primary driver for that was the transfer of some of the costs out of the Songvang pit to capital as I explained a little bit earlier. If one looks at what's coming at us in the coming quarter from a production perspective, we expect that Choco will probably be at about the same levels at 174,000 ounces. Damang the same at around about 50,000 ounces. As far as Choco 10 is concerned, we've had a very good start to the quarter and we certainly expect to produce a whole lot more than 16,000 ounces. St. Ives will be very similar at 123,000 and as far as Agnew is concerned, we expect that we will be able to maintain some of grades out of the underground as what we can uplift from Songvang open pits. So all in all, I would expect the international operations should have on or about the same production for the coming quarter.

I'd now like to hand it over to John to talk to you about the Cerro Corona.

John Munro

Thank you and good after and good morning everyone. Just briefly on Cerro Corona, two of the usual dimensions on the project. From a project development and construction point of view, we made very good progress in the September quarter. Engineering and procurements is almost entirely complete. And on the procurement side, the construction of the most precious and other large equipment continues to track very nicely, so no scheduled impact from those sorts of equipments which often tend to be problematic in projects like this.

In terms of on-site activity, this ramped up very substantially in the September quarter, we now have over 600 people working on this site. In terms of operations, we've actually ramped up the mining operation. In fact by the end of the quarter, we'll almost have full scale tonnage of around a million tones being moved from it. The bulk of the mining is waste stripping at this stage. Although we have started to encounter some sulfide and oxide ore and whole grade control process is working nicely. So that aspects of the operation has ramped up quite well.

In terms of the actual construction activities, the bulk of the work was really bulk earthworks. On the plant side, the various roads, runoff control facilities, and the man-camp which will help the cause of the entire workforce once the mine is operating. At the moment we -- in the September quarter, we have spent around $51 million in the project and that will be a fairly typical burn rate through the next few quarters. So that’s from a construction point of view, things are doing very well.

During the quarter, community relationships developed very nicely, employment levels are high as I indicated and the most bulk of these people obviously being forced from the other communities. An issue at the [number 4] which was problematic earlier in this year, but is now being handled quite nicely is the involvement of community contractors in the construction of the project. So, good progress was made in those two fronts during the quarter.

So against that background, it was disappointing to report that around the middle of the month of October, a project's action started against the Cerro Corona Project. I think it's important to see this action against the broader dimensions of what's happening in Peru at the moment. We had Presidential elections early in this year which went off very smoothly, but we do have in all the regions Mayor elections appearing in the month of November. And throughout the country, we are seen disruptions appearing around mine sites with mining projects being used as the platforms for various political agendas unless we think it’s a degree behind what we are seeing at the moment at Cerro Corona. So, we do have a group protesting against various employment issues at the project and during the last week, they commended obstructing access to the site on the main highway that accesses the Cerro Corona project. So, with this obstruction in place, we in fact decided to suspend operations on the site in the interest of the health and safety of our workers, and I think just to give you a context of what that means, it will appear that the protestors are not from the immediate community and as such not really our workers. So, these are people that protesting against the operation. The problem is that the people at work for us and the people that are doing living by either working directly for us or providing contracting activities to projects are now out of wok while the suspension remains in place. And we in fact concerned about conflict developing between our workers and the protestors and as a result, we sought to defuse the situation by suspending operation there. Obviously for a handful of the authorities, peaceful resolution of the situation is the priority. So, at the moment we are working the community groups and with the national government in an attempt to get this resolved. But as you are aware, we taking it very carefully given the volatile nature of the Peruvian mining environment.

In terms of schedule for the projects and as soon we get this community issue resolved in a relatively near future, we do remain on track for commissioning of the project at the end of calendar 2007, the construction of the mall and the associated facilities is going very well. The critical part remains on the (inaudible) stands and as we've previously indicated to you, and we will have various worksheet on the go in an attempt to take that off the critical part to make it as simple as part of the project. Thank you and back to Ian.

Ian Cockerill

Thanks very much, John, and with those feedback from my colleagues. I would just like to end up with a few of these following comments. I think it is fair to say that the basic engine of Gold Fields is in good shape despite the short-term impact of the Driefontein issue that Brendon has highlighted. We're generating strong internal cash flow that are very important to funding across and development plan. We continue with an active exploration program across some very favorable terrain in various parts of the world, and certainly we've got some projects that we are very optimistic, and we have the potentials of developing into Gold Fields size project.

On the M&A front, we will be posting the offer documents to the Western Area shareholders in the next few days and concurrent with that, the competition process will begin in the final regulatory hurdle to the planned acquisition of South Deep mine.

Since then, it certainly looks as if we should be on schedule to get closure on this acquisition probably towards the end of 2007 if not early into -- end of 2006 if not early into 2007.

And finally as you heard both from Brendan and Terence, overall next quarter the group will be looking at a similar production output from our mines will be with the caveat of a slightly lower output as from the Driefontein mine. However cost pressures will continue to plague us as they do everyone else in this industry. But I’m confident that the cost saving initiative that we have put in place, this stand is in good state to effectively tackle this cost monster.

With those closing remarks, let me open this call to any questions that any of you may have, and back to you Kobe.

Question-and-Answer Session

Operator

(Operator Instructions]. Your first question comes from the line of Victor Flores with HSBC, please proceed.

Victor Flores - HSBC

Thanks, good morning, I assume that the change in accounting procedure isn’t going to have any tax impact, so the question is why do it? Why not continue with the policies that you're currently using?

Nick Holland

Victor, hi, it's Nick. We gave another thought to this. Victor, can you hear me?

Victor Flores - HSBC

Yes, I can. Thank you.

Nick Holland

We gave another thought to this, and as you probably know, we showed a pro forma discloser over the last number of quarters. And we’re with you on this that it would be much simpler to continue with what we’re doing. Unfortunately, we get compared against our peer group in terms of things like cash cost and production cost. And people say that your costs are much higher than other entities, what are you doing wrong? And we try and point out, but hang on a minute, the policies are not the same. And, I don’t think a lot of people really grasp that, so I'm afraid that if you're going to report in this industry, you have to report on a uniform basis. To ensure that analysts like yourself can get information that you can compare on apples-to-apples basis with the other company. To answer your earlier question, no, there is no tax implication of this. The cash flow impact obviously is zero as well. So it's just a question of presentation of figures between the balance sheet and the income statement.

Victor Flores

Thanks Nick, although I suspect that you may have just initiated an arms raise, so to speak to work the numbers down amongst the industry. But I appreciate your answer. Thanks.

Operator

(Operator Instructions). Your next question comes from the line of Heather Douglas with BMO Capital Markets. Please proceed.

Heather Douglas - BMO Capital Markets

Hi, good afternoon everyone. I have I guess two questions, first can you give us an update on the power situation in Ghana.

Terence Goodlace

It's Terence. As part of the water level in the Volta is concerned, it's risen from some 9 feet from where actually it was towards the end of the quarter. It's currently at 245 feet. It has just got to the critical level of 236 feet. At this stage, they are having blackouts and they haven’t turned up the test there. We do expect that once the level possibly reaches 250 feet, there might be a change in our view in terms of the Volta River Authority and that will generate some power again.

As far the other generating units are concerned, the Takoradi power station, the mining industry has facilitated the return of the Volta, two sites which is being repaired in the United Kingdom and that Volta should be up and running in two weeks time and that will supply another 160 megawatts of power. The other thing that’s come out of this is that the supply of power from the Ivory Coast, which was down to around about 50 megawatt has been increased to more than 200 megawatt and that is supplying the grid at present.

As far as the industry is concerned, they have got together. We are looking at supplying alternative means of power into the grid on our own basis. But at this stage, it's early days and we'll keep you informed of any progress in that regard.

Heather Douglas - BMO Capital Markets

I too wanted how the full impact of the power increases? Can you tell us what your cost estimates for Choco and Damang will be with the first quarter?

Ian Cockerill

Yeah, what we had -- we already had an impact over the last month, and that month of the quarter increased our cost by some $1.4 million. So, one can simply multiply that by three because we are generating it about the same rate at present, and that's on the premise that they don’t increase or lift the load shedding arrangement.

Heather Douglas - BMO Capital Markets

And my second question has to do with Cerro Corona. I noticed in your quarterly, you've mentioned that CapEx is going to be 340 million. I think our previous guidance was 277. Can you tell us where the overruns have been?

Nick Holland

It was 341in previous disclosure, but to give you a sense of it, there are about three or four big drivers. The one is the -- the biggest single lock item is the tailings dam where it's really the cost of getting the rock move into place as well as all the other construction activities around that. So that's a degree reflects the availability and cost of services for very large construction activity. So tailings dam is number one. Number two, you could include the broader services as they include in EPCM and various other aspects of providing professional services to a project like this. The third item then is regular commodity and in terms of steel and plastic and to give you a sense of that plastic piping that is used extensively on projects like this, has gone up 300% since the feasibility studies. So, we've seen some very large moves on some of these commodities, and that actually reflects substitution as some of the other commodities get used into other industries. And then, the fourth item is just some changes in scope particularly around some environmental, social, and community issues, particularly in terms of road location. So those four items really contributed to the move to around $340 million.

Heather Douglas - BMO Capital Markets

Okay, good. And now I want to put in a third question, just overall can you give us the specific guidance for 2000 fiscal year for production, total cash cost, and CapEx, especially the changing -- the change of the accounting policy, we'll have to recalibrate our model.

Nick Holland

We can't give you guidance on that at this stage, Heather.

Heather Douglas - BMO Capital Markets

Okay, but maybe at another stage?

Nick Holland

Maybe at a later stage, but not today.

Heather Douglas - BMO Capital Markets

Okay, good. Thanks very much.

Operator

Your next question comes from the line of Peter Townsend with BJM. Please proceed.

Peter Townsend - BJM

Hello, everybody. Two questions for Nick, especially on the tax rate, you're paying an effective tax rate a little bit over 40%, can you just explain to me why that’s -- that has increased substantially in the last six months?

Nick Holland

Well, when you say the effective tax rate is 40%, are you including or excluding the royalties -- the government royalties, which are show as a part of calculation?

Peter Townsend - BJM

Yeah, including those.

Nick Holland

Including those?

Peter Townsend - BJM

Yes.

Nick Holland

You should actually strip those out, because what you found is with the gold price having gone up significantly and the royalties -- government royalties been based on revenues, you'll find that the tax also goes up quite a lot, and it can push up your effective rates relative to pre-tax profit. So, what I would do is strip out the royalties and you and I can have a discussion offline if you like and take you through the calculations.

Peter Townsend - BJM

Okay, thank you. And then just in terms of the debt that you will be taking on with requiring 50% of South Deep, is that $1 billion, still something that you are comfortable with because it certainly appears to me that some of the relative weakness in the Gold Fields share price is probably because the market expects you do -- to do a share pricing. Can you put us a lot of your misery, are you comfortable with the $1 billion and you [think they're done in] services?

Ian Cockerill

Look Peter, what we’ve said to you earlier in strategic presentations and quarterly presentation is that prior to the South Deep deal, we're comfortable with debt up to around about $750 million, I think we have gone public on that. Clearly taking on this will take us to a higher level of debt but at this stage that’s how (inaudible). We're very comfortable with the underline cash flows of the business and -- I mean as I said earlier if you look at the cash flow has been generating off the capital expenditure even including the Cerro Corona project, the current debt levels in the company and the doubles as a period of 12 months in terms of the operating cash flow, we can generate relative to that. So, I am not unduly concerned about taking on that level of debt and certainly if we continue with gold prices where we are today and certainly the rand exchange rate above 140,090 kilogram, we would be comfortable with that.

Peter Townsend - BJM

Thank you very much.

Operator

Your next question comes from the line of [Muneer Ismail] with Deutsche Bank. Please proceed.

Muneer Ismail - Deutsche Bank

Hello, hi guys. Just looking at Driefontein, I mean it is a little concerning looking at the guidance that you've put through. You're suggesting a reduction in tons per quarter of gold produced to 7.5 over the next two quarters and then increasing to 7.8. My question is beyond June 2007 when you move beyond 7.8, 7.8 considered a new sort of normalized level in the periods that follow. I mean given this one is around at 8.8 tons of gold produced per quarter. And I appreciate that you are cutting back on the surface stuff, but it just seems like it's way off it's capability in that sense, is that - am I reading it correct that it should grow about 7.8 tons per quarter?

Brendan Walker

Muneer, it's Brendan here. I would agree with you that it should go above that. But we haven’t completed all the detailed planning, so it should be - I will be hesitant to give you a figure of where we will end up.

Muneer Ismail - Deutsche Bank

Brendan just to follow through then, I mean it looks like it's a reduction in grade not really in volumes mine. Am I correct in making that assumption? I mean that just roughly looking at your reserve grades in the area on the full shaft on a weighted basis proving improbable about 10.72 against reserve grade for Driefontein of about 8 grams per ton. So can I assume that it's grade on grade that's coming through in the following quarters that will take it down to 7.5 tons per quarter?

Brendan Walker

Well it's the high grade that comes out of the 4 shaft area and that's having that’s having that effect. Four shaft is very high grade and without that tons coming through the grade.

Muneer Ismail - Deutsche Bank

Okay alright. That's fine. Thanks a lot.

Operator

Your next question comes from the line of Barry Cooper with CIBC. Please proceed.

Barry Cooper - CIBC

Yes, good day, a question mostly for Nick I think here. Nick and I’m going to mix up apples and the oranges here if you look at your cash cost both in the September quarter and in the June quarter with the restatement they drop by $31 announced yet in terms of the earnings impact, it's quite a bit different and even, when you look at the $31 per ounce roughly 1 million ounces per quarter there is no correlation between the difference in the cash cost and the impact on the earnings. And I am just wondering how this new transparency that you are promoting is really tied to the income statement in terms of getting us to the bottom line?

Nick Holland

Barry, if I understand your question correctly I think what you are saying if you could compare the restarted figures against last quarter and it's about the impact, you are seeing this similar impact on overall earnings. And one for the reasons for that is that we stepped up our development this year. There was a conscious effort to increase developments at these South African operations. And of course because that's extra development, which is now waste development, which previously would be expensed is now capitalized as you capitalize more development it takes longer for that to unwind itself through the income statement in the form of additional amortization. So, effectively by increasing development you end up increasing your earnings in the short term. And you would have the corresponding impact if you reduce development. In fact, you would show that your earnings went down. But it is important to recognize that as a period of time, Barry, the income statement as I said will be neutral. Its purely a timing impact between capitalizing that development to cut the expenditure and then bringing it back to the income statement through amortization. You all are going to have these timing differences as you are passing up development versus mining changes. I hope that’s a short clear answer to the process that can be lot more complicated.

Barry Cooper - CIBC

All right, okay. Well that’s fair enough, given the guidance that we get I guess, this is just one other pledge that we have to make. Thanks.

Nick Holland

Got it.

Operator

Your next question comes from the line of John Doody with Gold Stock Analysts. Please proceed.

John Doody - Gold Stock Analysts

Hi, good morning. A couple of easy questions I think, first is are you going to post the historical cash cost that online if we can find for quite periods under the new revised method.

Ian Cockerill

In fact John, if you look at the quarterly book you will see that we give a reconciliation in fact if you look on page 16 of the book scheduled in October cash cost, we give a reconciliation there so that you can work back to the old prices before we do that, that's on cash cost.

John Doody - Gold Stock Analysts

Okay. This is -- so, I could work at all the way back or a year or two.

Ian Cockerill

We turn it back to the last quarter, but I don’t think we will have any objection to continuing that process and then we got the same on cost per ton if you look at -- page 21, we have done the same on cost per ton.

John Doody - Gold Stock Analysts

Okay. I will see, how I do in the [payment equations], I will get in touch with shareholder. And my second question as to do with two changes if you really may do show, you are bringing your reported cash cost in line with others in the industry and you have changed your reserve reporting to the year end, calendar year end. Does this mean that we should expect in the coming period of time a change from the fiscal year to calendar year?

Nick Holland

Now, what we do as we -- we do our reserves at the end of December and then we apply new basis of amortization from March. That doesn’t mean in any way that we’re going to change from June to September. So, I think you should assume fiscal year ending June for the moment.

John Doody - Gold Stock Analysts

Okay for the moment thank you.

Operator

Your next question come from the line of Terence Ortslan with TSO & Associates. Please proceed.

Terence Ortslan - TSO & Associates

Thanks, good afternoon. Thanks for the details. Just going to the balance sheet and the CapEx, what can you do in non-recourse in terms of financing?

Nick Holland

Non-recourse to what?

Terence Ortslan - TSO & Associates

To Gold Fields like Cerro Corona appointment?

Nick Holland

Well, we are in the process of actually establishing a project finance facility already for Cerro Corona. Two part finance that's the construction and we're going to raise $150 million of project financing, which on completion which should be towards the end of 2007, once we achieve technical completion and the economic completion, we are going on recourse. There is one example of non-recourse that is raised in the Gold Fields.

Terence Ortslan - TSO & Associates

And coming back to South Africa, the acquisition and the investments required, what can you do non-recourse on that?

Nick Holland

We haven’t checked with that yet.

Terence Ortslan - TSO & Associates

Okay, to come back to the comfort level, which was indicated about the -- in the balance sheet, why is that number such a magic number? 750 before the announcement?

Nick Holland

What it comes back to is if you look at our EBITDA over a range of gold prices, we said that's $500 million to $750 million of debt over a range of gold prices which represents around about 50% of annual EBITDA. In other words, the kind of debt levels I've mentioned to you at the higher end of the gold prices that we used would be about 50% of what we produce on annual basis EBITDA and typically that's a very conservative number too because typically the banks will allow you to borrow up to 2.5 times at number. So we've taken 50% of the benchmark figure, was typically banks will let you go way beyond that. So it is a prudent level, but it's also safe in recognition of the fact that we are not scared to use our balance sheet to front project. And that also guide us on the fact that if we're generating significant cash flow going forward then we're in position take on debt because we know we can side off, but we're in a situation where we weren't generating a significant cash flow and we took a lot of date. We feel a lot more worried, so in arriving at that level whole of our taxes have been taken into consideration.

Terence Ortslan - TSO & Associates

And, thank you very much.

Operator

Your next question comes from the line of Leon Esterhuizen with Investec Securities. Please proceed.

Leon Esterhuizen - Investec Securites

Hi guys. I have a just a quick question on the South Deep acquisition, I mean clearly that's a very, very lots of chunk and a big bite for you guys to take. Has anybody just taken a step at to see what the impact on earning would be assuming 100% or South Deep purchase given the fact that it's making loses currently. Just in order of magnitude and what's the impact would be on earnings, if it was effective in the last quarter?

Nick Holland

Leon, I think one has to remember -- Nick here again -- that's a South Deep first of all is a mine in a [hold up] phase. And we don’t know that it's currently producing no way near, where it could produce at full production. And I think that's the first point and I think if you also look as the financing effect of this particular acquisition and you factor in the interest costs against the fact that you are not getting a significant amount of return at the moment from the assets that also has an impact. So, there is no doubt that that is going to be dilutive on earnings in the short term. But I think the reason it won't affect us isn’t because it is going to be dilutive to earnings in the short term but because of the long life asset, the 50-year operation and we are taking a very long-term view on this thing. But until this market ramp up to anyway near to sort of production level that it should, it tends to be dilutive on earnings. I don’t want to give you specific advantages that it's going to be at some stage tune sometime to the information coming to the market on that. But until we see that I think just assume that it will be dilutive and you will see more clear numbers on a pro forma basis pretty soon, I am sure.

Leon Esterhuizen - Investec Securites

Yeah, that’s fine. I mean it is sort of based on my own numbers that number comes out in access of 50% that’s why I sort of wanted to just check with you. But regardless of that it’s a way for me that yes, clearly it’s a good asset and yes it will obviously deliver at some point in the future. But, you can compare it to the Ashanti acquisition by AngloGold, which was I guess also good asset, but I really put the break on AngloGold for quite sometime in terms of share price performance.

Nick Holland

Regarding the challenges to get this asset up to (inaudible) but that’s not going to happen in the short term. So, yeah, you are right, I am not going to start writing numbers on the telephone here and getting to that price but it will be dilutive in the short term. There is no doubt about that.

Leon Esterhuizen - Investec Securites

All right, thanks.

Operator

Your next question comes from the line of [Carl Durum] with HSBC Securities. Please proceed.

Carl Durum - HSBC Securities

Good afternoon gentlemen. Just actually flashing out a question that Ismail had earlier about the 4 shaft, can you tell us how much gold is actually tied up in that extraction pillar in terms of tons and grades and ounces please?

Ian Cockerill

I can give you it to you in ton. It was about 20 ton. In fact we are not walking away from it.

Carl Durum - HSBC Securities

No. No, I didn’t suggest you were.

Ian Cockerill

That's about the figure in the pillar. In the total areas around that shaft closer to around 30 tons. [Superior] shaft is about 20.

Carl Durum - HSBC Securities

And my understanding of what you said about the ground conditions, you said they might necessitate coming in from a different shaft or different shafts. Could you just elaborate a tiny bit on that for me as well please?

Ian Cockerill

Normally when we check shaft pillars we actually use the shaft that's in the pillar.

Carl Durum - HSBC Securities

Yeah.

Ian Cockerill

Plus the area. But what we saw in this particular shaft is that the conditions in the shaft lining are deteriorating, which might necessitate to feel a bend in the shaft. So with that possibility, we just started to develop accesses from a 5 shaft and a 1 shaft area. And that's probably the fact that what we has do. And we want to get that through before we begin into the nuances of pillar.

Carl Durum - HSBC Securities

Okay. Thank you all so much.

Operator

Your next question comes from the line of [David Lathal] with Deutsche Securities. Please proceed.

David Lathal - Deutsche Securities

Yes. Thanks. Nick, just a question I think on Western areas and Southeast transaction. Where are we with the regulatory approval process and then how does the payments to Barrick occur? Do they occur on the final approval of the Competitions Commission, I'm just trying to know when the cash flows that might occur this quarter or next?

Nick Holland

With the -- by the approval process is ongoing. We have made all our submissions to the competition authority. It is a mayhem so we don’t know when they are going to final on that. But that would be the last remaining conditions to be satisfied to go unconditional on the transaction. And once that's in hand, we would have around about five days, five business days to close the deal. And I think as Ian said earlier, we don’t know it's going to be early 2007 or late 2006. It really is in the hands now of the regulators. We have done everything that’s been required of us and now we are ready for them.

[David Lathal] - Deutsche Securities

Okay, thanks gentlemen. And second question is likely for Ian, you may have been misquoted in the press this morning. I saw in press clippings that Ian you'd said, you would have trouble keeping your South African costs below the PPI inflation rate in the South Africa at least that's what the quotes said. Do you mean PPI or CPI?

Ian Cockerill

PPI, that’s P for Pizza, P for Pizza, I.

[David Lathal] - Deutsche Securities

Okay.

Ian Cockerill

The reason being, the PPI is a much more indicative number in monitoring inflation and really what we're saying is that the we have turned to see the build up of cost pressures days particularly with the input cost on our mining. And we are saying this that it's going to be a challenge to keep it there. Clearly, we're going to try and beat it. It's along with everyone else. We are seeing an escalation, I am not sure where we've seen all those costs flow through. And as the rand start to weaken, we feel very interesting and when the rand strengthened, we didn’t see the knock on impact was slightly lower cost inflow. As soon as the rand weakens 5% or 10% immediately the suppliers try South and they want a big increase in cost. So that’s one of the negative sides to slightly weaker rand.

[David Lathal] - Deutsche Securities

And maybe I can just follow up then with 50% of your costs are more or less being wage related, do you still say that PPI is the right number?

Ian Cockerill

That’s correct.

[David Lathal] - Deutsche Securities

Okay. Thank you, Ian.

Operator

Your next question comes from the line of [Bob Medway] with Royal Capital. Please proceed.

Bob Medway - Royal Capital

Hi, gentlemen. Just a quick follow-up question based on some other callers. On the South Deep acquisition you are going to be financing $1.2 billion of cash to pay, and could you just clarify what you've said about debt versus equity and also what you said the banks would allow you if you wanted to finance with that.

Nick Holland

What we've said is that previously prior to the South Deep transaction being announced, they were comfortable with debt up to around $750 million. And the way we calculated that was to look at a range of gold prices and work that back inside what percentage of EBITDA would 750 be, and it comes back to around about 50% of full cost EBITDA. In other words, you are going to take on more debt then would be half years operating cash flow effect.

Bob Medway - Royal Capital

Did you say 50% as in half?

Nick Holland

Yeah.

Bob Medway - Royal Capital

Okay.

Nick Holland

So as the banks were typically aligned to go up to two and a half times. So, it's just a level of crude introduced into that. And I think that gives you an indication as to how robust that number was and why it's not that difficult if we needed to move a bit higher particularly as we have another asset in this table over and above the assets we currently have when we initially calculated that ratio.

Bob Medway - Royal Capital

And just to clarify actually, I just want to make sure I understand. You're saying the banks are about -- you've got a two and a half times EBITDA?

Nick Holland

Absolutely.

Bob Medway - Royal Capital

So your current run rate of EBITDA roughly a $1 billion give or take. So you think the banks would let you if not that you would do this, not that you think it's prudent have $2.5 billion of debt potentially?

Nick Holland

Yeah. I’m saying to you I don’t think that's prudent. Okay, we are saying that’s way beyond what we would go. That's -- there are banks that will lend it to you, and we note just for a moment that we push the envelope at that point.

Bob Medway - Royal Capital

Okay. Great. Are you suggesting that at US$17.34 for GFI that you are not going to be issuing equity?

Nick Holland

What we're saying to you is that we've announced our funding of this transaction. We are saying to raising around $1.2 billion. And I certainly hear anything else that what you should assume.

Bob Medway - Royal Capital

We should assume what? That you're going to do equity and debt or that you're going to do debt?

Nick Holland

You should assume that we're going to do debt at this stage.

Bob Medway - Royal Capital

Okay. That's all I wanted to know. Thank you so much.

Nick Holland

Thank you.

Nerina Bodasing

We'll take one last question.

Operator

Your next question is a follow up from the line of Sam Robbins with Robbins Planning Company. Please proceed.

Sam Robbins - Robbins Planning Company

Thank you. My questions are long-term worrying about sustainability of reserves. And I remember [Robin Plummerz] years ago telling me that when the price of gold went up, underwater gold mining off the coast of Africa could be a new substantial gold field. Have you looked into this or are you looking into it on a long-term planning basis?

Ian Cockerill

Sam, it is Ian. To be honest with you, at this stage, I’m not aware that our exploration guys are looking into any offshore gold mining activity and to be honest with you, I think the only place in Africa that you would likely find something like that will be off the West Coast of Africa. I am aware of some places where that could take place. There is also some places out in Indonesia. But at this stage we are not currently looking at that. To be honest with you, I am not convinced that Gold Field is particularly well equipped to handle that sort of mine where we rather stick with more conventional sort of mining. But I think to take Robin's comments a little bit further clearly as the gold price increases, the potential output from the [Wits] Basin could certainly -- there could some more potential here. And obviously it’s a highly leveraged to the gold price and potentially the deeper ores. And some ores outside of the existing mine uses could potentially become viable. So, I think that would probably offer far more opportunity for a company like Gold Field at this stage offshore mining.

Sam Robbins - Robbins Planning Company

My second question is in the extension of the mining at East Driefontein and Kloof did you intend to go deeper or side ways or both? It seems to me that the deeper you go, the higher are your cost. So, I am wondering if there is a point of depth at which it does -- it no longer pays.

Ian Cockerill

Well, it's not a question of the depth, Sam, because interestingly enough, we wanted general decline in grade with increasing depth. It is not necessarily the case, could you still get areas of very good rate despite depth, and you have areas that are shallow that are lower grade as they are not viable. But the main essence of the two projects the Kloof Extension Area and the Driefontein Drop-down are by definition accessing lower ore, but certainly on the basis of the geological information, the drilling that we've got, we believe that those projects are viable. You'll see in the quarterly report that we've evaluated these projects at R100,000 per kilogram long-term prices and despite that much lower pricing in current spot, you can see that these projects give a reasonable return. So, we are reasonably confident that with the grades as we know them, with costs as we know them and even assuming a much lower planning gold price, these projects are still viable despite their depth.

Sam Robbins - Robbins Planning Company

Thank you.

Operator

There are no further questions at this time.

Nick Holland

So, we thank you very much indeed and thank you everybody for listening in today, and we look forward to meeting up with you again early in 2007 when we will do the December quarter results. With that thank you all, good afternoon and thanks very much indeed.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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Source: Gold Fields F1Q07 (Qtr End 9/30/06) Earnings Call Transcript
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