Gold Fields (NYSE:GFI) just announced its second quarter earnings results, and they were solid. Despite the fact that the gold price fell year over year, and despite the fact that the company's production fell by 2%, the company was able to cut costs so that its net income came in at $19 million, which is opposed to a loss of $129 million last year. This cost cutting came mostly from G&A expenses, environmental payments, and debt servicing, as the company's all-in operating cost fell just 2% to $1,093.
Part of the reason that costs came down was the recent acquisition of the Yilgarn assets in Australia from Barrick Gold (NYSE:ABX)--a point that I made last year when I argued that the company had reached a bottom (from an operational point this is true although the shares did hit a new low subsequently). The Yilgarn assets consist of three mines:
- Darlot, with costs of $1,228/oz.
- Granny Smith, with costs of $692/oz.
- Lawlers, with costs of $1,010/oz.
While it is good that the company is bringing costs down, it is by no means out of the woods yet. Costs at its largest and highest cost producing mine--Deep South in South Africa--rose from $1,597/oz. to $1,685/oz. from the March quarter due to lower gold sales, despite the company's long-term goal of bringing costs down at this high cost producing mine. Costs also rose at Darlot from $1,075/oz. in the first quarter.
Ultimately this quarter was a mixed bag operationally, but generally we are seeing improvements. Investors looking for turnaround plays among large gold miners that have underperformed could do worse than Gold Fields, which has made significant efforts towards restructuring its business towards lower cost assets in lower risk jurisdictions. It still has high cost producing assets in high risk jurisdictions (e.g. Deep South), but generally the transformation is working out. The stock appears to have bottomed, and the shares are highly leveraged to a rising gold price.
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