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Gold Fields Ltd. (NYSE:GFI)

F2Q07 Earnings Call

January 25, 2007 9:30 am ET

Executives

Nerina Bodasing - Head of IR

Ian Cockerill - CEO

Nick Holland - CFO

Terence Goodlace - EVP and Head of South African Operations

John Munro - Head of Corporate Development

Analysts

Jacques Garibaldi - Royal Capital

Victor Flores - HSBC

Oscar Cabrera - Goldman Sachs

David Lathal - Deutsche Bank

Daniel McConvey - Rossport Investments

Heather Douglas - BMO Capital Markets

Presentation

Operator

Good day, ladies and gentleman, and welcome to the Gold Fields Second Quarter Fiscal 2007 results conference call. My name is Jeremy and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct the question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host, Ms. Nerina Bodasing, Head of Investor Relations. Please proceed ma’am.

Nerina Bodasing

Thanks, Jeremy, and good afternoon everyone and welcome to today's conference call. Ian Cockerill, our Chief Executive Officer will kick-up with an introduction followed by Nick Holland, our Chief Financial Officer on the finances; Terence Goodlace, the Head of South African Operations will review the operational performance for the group; and John Munro, the Head of New Business Development will provide an update on our new projects. Ian will conclude and then we will open for questions. And I will now hand over to Ian.

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Ian Cockerill

Good afternoon or good morning everybody and thank you for joining us here today. Firstly, I just like to open with a special tribute to Brendan Walker, our previous Head of South African Operations. So, as you know, he tragically died in a car accident over the New Year period. At this time, I think it is appropriate to remember Bren's contribution to the old Gold Fields in South Africa, which he joined as a fresh graduate from the University, as well as to the more recent contribution that he made to Gold Fields as we know it today. Whilst obviously, we are going to miss him terribly as relatives and family will, I didn’t get to say something about the strength within Gold Fields, it’s a day we are pleased to welcome Terence Goodlace as a new Head of South African Operations from the -- his previous role at the international [scene], and I’m sure you will join me in wishing him well in his new position.

Moving on to the corporate hand and I think probably at some stage in the future we will look back at this specific December quarter. I do believe that we have come to view this as a similar kind in the history of Gold Fields. We did have a very, very busy quarter indeed. Attributable gold production was up 1% to 1,015,000 ounces. Cash costs were flat quarter-on-quarter at $353 per ounce. Mainly it was also a very good cost control and this is despite the fact that we had to take onboard the South Deep operation, which currently is a much higher cost operation, albeit just four months in the quarter.

The operating profit was marginally down to $267 million, but that was very much on the back of the weaker dollar gold price. Net earnings rose slightly to $104 million or US$0.20 US per share. And yesterday, the Board of Gold Fields did declare, from the 19th of February this year, we will be paying a dividend of 90 SA cents per share.

Further, for this last quarter, we also successfully achieved conversion of our mining licenses to new order mining rights and that I think was a very welcome achievement. Also, the [buy odds] of the South Deep mine was concluded after we had purchased Barrick’s 50% stake in that mine, as well as achieving an effective -- and this is a number that we speak as of right now. We are now at 97.7% on shipping in Western Areas. And bear in mind, Western Areas held the other 50% of the South Deep assets. And the results that you are seeing today, also includes, as I said, one month of attributable production from the South Deep asset. Now, it is our intention to move towards a 440K closeout, which will result in a 100% ownership of this world-class assets, which should probably be completed within six to eight weeks.

Obviously, buying Western Areas and then we took onboard the toxic Western Areas hedge book, but as you will see from the presentation, this hedge book is now being terminated with the accumulation of a 1,005,000 ounce delta position, which was accumulated in a very speedy and a cost effective manner, and Nick will give you the details of that in the later part of this presentation.

And finally, today, we announced earlier at 10 o'clock South African time this morning that we have initiated a $1.2 billion global capital raising in Gold Fields to ensure that we have an optimal capital structure for the company going forward. I'm sure that you'll agree, this has been a very, very busy quarter indeed.

And I think just with that brief introduction, let me hand it over to Nick, who will take you through the financials. Nick, over to you.

Nick Holland

Thanks and good afternoon. As you heard earlier, we just started to retire the Western Areas hedge book and that was closed out yesterday. To put into perspective what the hedge book looked like, there was a whole series of put options quotes, call options sells coming up with a net delta of just over 1 million ounces plus a deferred premium of $187 million, which related to options which were previously taken up by Western Areas, but not paid for, and the payment of those options was deferred. In addition, the call options kept gold prices somewhere between $300 and $400 per ounce and you all know today we have spot this trading at of the order about 650 today. So, our view on this is that this represented a significant liability for the company. We didn’t even look at this as a derivative position, but we look that this as a liability and an uncapped liability up there, and we decided to settle it.

If you look at the numbers that we had when we took over Western Areas, we established control on the 8th of December. And the mark-to-market value at that time was $539 million. At the end of December, the figure was very close to that with the mark-to-market gold price round about $634 per ounce. What we've managed to achieve is to closeout the hedge book at average book price of $622 per ounce, and the full closeout cost including all cost and charges is $527.8 million.

So, we're extremely pleased that we've been able to exit this hedge position and achieve a lower effective price for gold that exists at the end of the previous quarter. And indeed, I think if you add some mark-to-market the book today at -- I'd seen on the screen before I came in here we had $652 per ounce. If we add some mark-to-market that stay then we’ll be looking at liability that is well-noted $560 million. So, already I think we've saved the company's substantial sums of money by taking up this action.

Of course, would be the closing out of the hedge book. It has had a major impact on our debt situation and our net debt at the end of the quarter after taking into account cash of $200 million was $1.36 billion. The hedge is going to be settled on the 30th of January. We will draw down on existing funding facilities, settle the hedge, and that will add another $527 million as I mentioned, which will take our net debt up to a level of $1.9 billion, which we believe is too high debt for this company. It's still well within our financial covenants, but we believe that is too high for this company and the hedge closeout which resulted and is accelerating a liability, which stretched all the way from 2007 through to 2014. We accelerated that whole liability right back obviously on a discounted cash flow basis, right back to today and that means that liability now has to be funded today as opposed to over the next eight years. That view has led us to the belief that we need to recapitalize the balance sheet, and hence that was why the capital raising was launched this morning.

Our net capital raising as Ian mentioned to you, is for $1.2 billion. That’s going to be a global private placement and we are hoping that pricing can be concluded by no latter than 30 January, 2007. If we are successful in that capital raising, that is going to reduce the debt levels on a pro forma basis using the 31% of figures down to round about $700 million. And those of you who have attended our presentations before when we've been in Europe, and also in Johannesburg, as well as, previous quarterly presentations will know that I’ve indicated consistently that we would not be averse to debt to fund growth, very clearly the debt that we are establishing here and have established is to fund growth. And $700 million is well within the range of a comfortable debt figure for us.

The important thing to mention is that, we still have substantial firepower for us, way beyond that, but retaining that debt does not limit us in anyway, and should the need arise for us to access funding for any kind of attractive growth opportunity. We would not be finding and doing that, we would certainly have the ability to do that. So, the capital that’s coming in will be used to payoff the bridge facility that was used to finance the South Deep acquisition.

That’s all I want to say on the hedge book and the capital raising. I think its surprise to say that on no-hedge policy meant that we should make this decision as quickly as possible. And the only other thing I would say that it certainly got to simplify our accounts and in particular the Western Area accounts that we takeover.

Moving on to the numbers for the quarter, you heard Ian say that our production was slightly up, if you look at our dollar income statement for the quarter, our revenue however is slightly down from $666 million to $657 million and despite the high production, the gold price reduced slightly from $622 an ounce to $609 per ounce. Our operating costs increased from $389 in the previous quarter to $403 million in the current quarter and that small increase is due to the inclusion of South Deep for one month of the quarter. A Barium mine at South Deep is not at the level of production that makes it cost effective and effective costs are round about $560 an ounce per quarter that means that those costs have gone up. Clearly, once South Deep gets up to the level of production that we should see over the next 6 to 12 months, we expect a significant decline in those costs.

As you heard earlier operating profit is slightly down to $266 million and if we look at finance income, finance income up significantly from $2 million to $33 million and that’s on the back of an unrealized exchange difference on the $1.2 billion loan that we took out to buy Barrick’s 50% shares of South Deep.

Net earnings then for the quarter are $104 million compared to $98 million in the previous quarter and if you strip out all of these unrealized gains, foreign exchange gains and also movements on the hedge which is reflected under our financial instruments line and the core earnings of the business was $76 million, that’s down from $98 million in the previous quarter. And that reduction is simply due to three main factors, the lower operating profit that I mentioned earlier, which is price related, slightly higher amortization which is linked to the mining mix during the quarter, certain assets carry a higher amortization charge than other assets and we also incurred $6 million of finance charges related to the debt established during the quarter.

Turning to cash flow, if we look at our cash flow from operating activity that declined from $226 million to $190 million, the main decrease there is due to temporary working capital build-ups that we anticipate will reverse during the following quarter. Capital expenditure is up $20 million to $187 million, most of that is at Tarkwa and that relates to some secondary machinery that we bought in, secondary trucks to assist in the mining process, and also some additional capital stripping, and also an increase in South Africa due to additional development which is an investment for the future. We are also starting to start on the drop down projects at Driefontein and Kloof and that expenditure is starting to come through and of course, we shouldn’t forget the inclusion of the South Deep capital for the quarter.

The cash flow also reflects the outflow relating to the payment to Barrick, but also reflects the inflow of the loan facility that we established in relation thereto, so those two are virtually counter off and that leaves net cash at the end of the quarter $200 million and as I mentioned earlier net debt then $1.3 billion, but obviously all of that will change once we know the results of the capital raising. With that I am going to hand you over to Terence Goodlace.

Terence Goodlace

Thank you Nick, and good afternoon everybody. Looking at the operations I think at first its important to say that safety remains very important for us and we were particularly pleased with the performance that we had in terms of our fatality rate for the quarter, which was at 0.08. If we look at the actual gold production, and I’ll talk through the South African operations first that was broadly in line with forecast and amounted to some 654,000 ounces including 27,000 ounces from South Deep.

Production at Driefontein was in line with as forecasted 270,000 ounces at the mine and this was on the back of a re-planning exercise at 4 shaft were we had to cater for seismic testing. Gold production at Kloof did decrease to 231,000 ounces and that reduction is primarily as a result of a poor mine gold factor. Beatrix was steady for the quarter at 150,000 ounces with lower volumes offset by high yields and better quality mining. We also had to stop many panels at 2 shaft to curtail unplanned mining.

Development remains the key driver for our business and we had provided quite a lot of detail in terms of development at the back of the quarterly book, so I do not plan on going through that other than saying that we will continue to accelerate development as it is such an important part of our business.

In terms of operating costs for the South African operations, the combined Driefontein, Kloof and Beatrix operations had an increase of 2% quarter-on-quarter and their total cash costs were $354 per ounce. The margin at the South African operations is robust at 39%.

Nick has been into -- has explained a little bit about the capital expenditure for the South African mines, which increased to $565 million for the quarter and the main areas of expenditure were the ore reserve development which was $211 million of that 565. Expenditure included in our 565 of $41 million was attributable to South Deep for the December month.

As far as the upcoming quarter is concerned, we are forecasting that Kloof and South Deep should increase gold production while Driefontein and Beatrix should produce marginally less. The seasonal break will have a disruptive influence on our performance, but we have -- we put mitigating effect and actions in place. Unit costs are expected to increase due to the full inclusion of South Deep, which will have relatively higher unit costs during the ramp-up to full production. Capital will also be affected by the inclusion of South Deep as well as the ramping up of activity at mining the Driefontein mine shaft project.

Moving on to South Deep into particular, I think we’re excited about this project. It has a very significant reserve position of 30 million ounces. It’s a modern, mechanized operation and we believe the significant optimization potential with our adjacent Kloof operation.

Looking at South Deep and just looking at its quarterly results and what’s actually happened at the mine, during the past quarter the mine has focused on the rehab work of the twin shaft complex and associated [winders] and it is pleasing to note that the South main shaft has now recommenced hoisting. The underground fire, which they have reported it in August, has also been extinguished, and we are moving back into those areas. Work has also commenced from the deepening of the ventilation shaft, which is part of the Phase I project to increase the mine’s throughput to 4 million tons per annum by 2012.

In terms of where we are going, what it looks like for South Deep, we have to attain something like 150,000 tons per month by the end of the current quarter, and thereafter build up to a consistent 220,000 tons per month by quarter two financial 2008. The expected yields will be of the order of 6 grams per ton. We do expect to produce something like 80,000 ounces for the coming quarter.

The way forward and what we’re looking at in terms of South Deep, we would like a smooth and safe ramp-up of the Twin Shaft System. We don’t want to make any mistakes and we will make sure that we get it right. We’re going to be focusing on integration into the corrective Gold Fields and we’re also going to focus on an evaluation of the big picture, which include synergy studies with Kloof over bulk of the niche areas, in other words, all 45 million ounces.

We've also commenced with the review of the Phase I expansion study, which gets the mine to 4 million tons per annum, producing 800,000 ounces per annum at a cost of R65,000 per kilogram by 2012 at a capital cost of 35 -- R3.5 billion.

Moving on to the international operations, it was a good quarter for the international operations and a total of 431,000 ounces was produced. Tarkwa did pretty well as far as we are concerned and produced 179,000 ounces on the back of good throughput to the CIL and high yield thorough the CIL plant. Damang surprised us with the 52,000 ounces and that was on the back of a concerted effort to fund and deliver increased fresh ore tonnages from the Damang and Juno 2 South West open pits. Choco 10 did deliver increased production, but strike action early in December, a SAG mill shutdown, and water shortages, all adversely affected production

Just on this note, we are pleased with what we have done. As far as the plant is concerned, it performed exceptionally well in October and November of the quarter, but the water shortages have put a [pay] to this. At the moment, water shortages will and are continuing into the quarter and the strategy to reduce reliance on rainwater is being advanced through a dedicated team of consultants. It’s nice to produce something, not just on the 124,000 ounces, which is a marginal improvement, and that was on the back of increased throughput and yields through the Lefroy mill.

At Agnew, gold production decreased by 10% as a result of a 15% reduction in underground volumes from the Waroonga Complex, where the Kim Lode is still delivering plus 16 grams per ton. Underground volumes were affected by restricted access due to poor ground conditions, where ton dependence currently is being experienced in haulages.

Costs at the international operations including GIP decreased by 3% to US$151 million for the quarter. The total cash costs at the international operations were $351 per ounce and the margin was 43%.

Moving on to capital, the main driver at this quarter for capital expenditure at the international operations was Choco, which doubled to $26 million and that was on the back of, as Nick has said, secondary mining fleet, capital waste mining, and initial expenditure on the CIL expansion project. All of Damang was similar to previous quarter. We had a tapering off at Choco 10 and we have similar expenditure at St. Ives and Agnew for the quarter.

Looking forward for the forthcoming quarter, we are forecasting a marginal increase in gold production, taking cognizance of the situation at Choco, which is expected to produce around 9,000 ounces earning.

Gold production at the Ghanaian operations is expected to be similar, while improvements are expected out of Australia. Regarding capital, this is expected to increase on the back of the mobilization for the Tarkwa projects.

Just a brief summary of the main capital projects in the operations at the moment, the Driefontein project, which we announced in September of 2006, we are on track as far as the shaft sinking and the commencement of shaft sinking is concerned. As far as the KEA project is concerned, that is also on track, and we do expect to commence sinking of the Deep plant and as we laid out during our announcement in September.

The exploration activity or expenditure at Choco 10 is ongoing, with an annualized rate of some $10 million per annum, and that is looking to the expansion that we hope to get to 300,000 ounces per annum, as we've said by 2009. And the preliminary numbers indicate upside at the VBK area.

There were two projects that have been advanced in the quarter in Ghana, as part of our mitigation strategies one, is to put in a supplementary power units along with the consortium of the other mining companies, and we’ve given approval for that to go ahead, that will costs us $10 million in other words that's our share.

We've also put in a reiterate facility we are -- we have approved the reiterate facility and that should be in commission by quarter four of financial 2007 and this is to mitigate the effect of the global tire shortages. We did announced on the 28th of November in 2006, the expansions at the CIL plant at Tarkwa and the heap leach Phase 5 for a total of $175 million and those should be commissioned by in 2008.

The other main projects, which we have advancing is the St Ives, Leviathan project. It’s in feasibility phase right now. The project will cost something like A$25 million to access 650,000 ounces, and this project will go to the Board in February.

Thank you and I would now like handover to John.

John Munro

Good day. I will just talk very briefly about the new development options that we have ongoing around the world. It’s useful to overlay these on the list of capital projects that Terence has just spoken about. The emphasis of which was on brownfield's expansion at existing operation.

Now, in terms of new development, most significant project remains the Cerro Corona, Copper Gold project in Peru. During the December quarter, the community blockade that we spoke about previously was resolved peacefully and operations as well as the project construction got underway again through the later part of November of 2006.

Mining operations are backed above the planned level of 1 million tons a month, so that’s back to normal. And towards the end of last calendar year the bulk of the surface earth was -- were also completed. As a result, the main construction contractor was mobilized to 2nd January and the actual erection of the process plant is now underway.

Engineering is largely complete, and we have got three large orders left to make, that’s trading down, the electrical facilities and the permanent man camp. But all ordering of other equipment has gone very well, and in fact some of the large equipments such as the grinding mills is already under transport from the construction facility that are on the world by ship across to Peru. In terms of the capital outlook for this project, we remain at our previous guidance of some $340 million to complete this project having spent around 120 million to-date.

In terms of schedule, this remains under pressure with the loss of time due to the blockade that we spoke about previously, that costs us just an excess of a month of actual construction time. And although, we are targeting to get those project into completion and into production in calendar 2007, that is at risk at the moment, but obviously the project team continues to work at ways of maintaining that schedule.

Our next most important project is the gold project in Burkina Faso known as Essakane, the bulk of the re-assay work that we spoken about previously was completed during the quarter, and the result estimate completed, that is being reviewed and checked at the moment and results from that should be available shortly.

On the back of that, the feasibility team has been assembled and commissioned, and will commence detailed feasibility work once some of the commercial operating agreements have been resolved with our partner Orezone Resources.

Another important deal announced during the December quarter was the alliance of Sino Gold. This focuses on the search for giant gold deposits in China. The various elements to it, the first part being the placement of some $28 million that we took down in Sino, increasing our stake to some 17.4%, then we have the exploration, I mentioned, where we combined our technical capability in exploration front with Sino's proven capability on the ground to search for giant deposits in China and clearly reflects a growing focus in that country for us, as well as the focus on large ore deposits, not small-to-medium scale ones.

Then the third, I mentioned of the alliance is significant, technical and managerial corporations in both directions for the benefit of both the companies. We also, in the quarter and just subsequent to the quarter undertook to sales of equity positions from our exploration portfolio, it was the first the [APP] resources and then second a Stake In Comaplex those two deals may see out some $42 million in a mixture of cash and shares from the various acquirers. Now these disposals do not represent just the harvesting of the fund from the exploration portfolio but rather the redeployments to other venture capital opportunities in that area of business development.

Finally, just to complete the picture on the major activities happening in terms new development worldwide, our explorations spend remains at previous levels Greenfield spend under Craig Nelsen’s group out of the Denver remains around $45 million on an annualized basis while our Brownfield spend on existing mines is some $40 million per year, the very -- vast majority of that going into the international operation.

So in the picture I would like to leave you with a company that is very active around the world and by no stretch of imagination has the focus of the South Deep deal taken away either by human or financial resources away from development of the international opportunities. Thank you and back Ian Cockerill.

Ian Cockerill

Thanks John. And firstly a little guidance on the upcoming quarter and now as South Deep begins to recover from the effects of the shaft accident and we absorb the impact of the post Christmas euphoria down here in South Africa and you heard Terence say that our international operations certainly continue to perform at or above levels that we have seen previously with the exception at Choco 10 that sadly will fall short of last quarter's production. We should experience a growth in output for the group as a whole in the next quarter, but somewhere between 2 and 4% which if you annualized it would mean that Gold Fields would be producing at or around 4.3 or just over 4.3 million ounces per annum. And certainly, so far we are anticipating costs will be at a similar level to those that we experienced in this past quarter. Now already as said, that we were now at just under 98% of Western Areas and that our offer is going to close tomorrow and then we will commence with the 440K closeout process, which should take six to eight weeks to complete.

So, to conclude then I think it is fair to say this indeed has been a very, very busy quarter. I believe we started on next phase of firmly positing Gold Fields as an un-hedged, globally diversified, top tier gold producer. Based upon the unique franchise which is Gold Fields of a few large high quality assets, comprising a solid South African foundation, a record expansion of our international asset base with a simple corporate structure and an optimal financial structure, and I also believe that this company is incredibly well positioned both operationally and financially, now to take advantage of what we believe is going to be a strongly rising gold market. I think a compelling story indeed.

I think with that I would like to thank you all for listening and let me hand you back to Nerina and we will open up the lines for any questions you may have.

Nerina Bodasing

Jeremy, you can ahead to the questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Jacques Garibaldi with Royal Capital

Jacques Garibaldi - Royal Capital

Hi, good morning everyone.

Ian Cockerill

Hi, Jacques.

Jacques Garibaldi - Royal Capital

I am taking back to the fall and when you first said that what scenario it is deal. My understanding was that you all were -- you were not going to raise equity that you knew the hedge book was around $500 and $550 million and if you close it out, you would close it out with debt and that you were comfortable with debt and in fact this pro forma 1.7 times debt to EBITDA that you'll have in January 30th is within your comfort parameters. So, given all that can you just explain what changed since the fall and why you are raising 12% of your equity basically?

Ian Cockerill

Jacques, I think there is a misinterpretation on your part. When we took out the or when we made the acquisition in when we were going to make this acquisition in -- as you called it in the fall, we at that stage knew that we would have $1.2 billion worth of debt and that was the debt level that we had. There was a mark-to-market position on the hedge book, but it had not been crystallized. So, it wasn’t that we said that we were going to take out the hedge book. We didn’t know what the hedge book was like at that stage. We had a rough idea of the level of the mark-to-market, but certainly not at that stage had any intention of crystallizing it. Once we've taken over the company and once we actually had a good look at this, it became quite clear that to get the support of the banks in this transaction, the hedge counterparties, but it was important that we actually looked to doing something constructive with this hedge.

Now, the best solution that we came up with was in fact we should actually close the hedge out as and when an opportune time came, take the pain in the short-term and then move on in a purely unhedged fashion. That meant that we actually had to, as you heard Nick say, we had to increase our debt level to 500 -- another $530 million. That took us up to, by the end, something in the order of $1.9 billion.

Now, whilst banking governance and banks will probably loan you on something like two times EBIDTA and we have an EBIDTA of about a -- plus or minus $1 billion a year. Clearly, $1.9 billion would be within normal banking general policies. However, we said in the past that we wouldn’t want to go too high, but we certainly would not want to leverage the balance sheet entirely on one transaction and close off other potential opportunities. And we felt that, having crystallized the hedge, moving from what we had before the hedge crystallization of about $1.2 billion and going up to $1.9 billion, we felt the shift move too far. And on the basis of that, we said, we believe it is prudent to reduce the debt level back to a point where we are comfortable. We have retained debt in this company. We are not unhappy with debt. And we are happy to live with that debt. But we believe it should be done at the level. That means that we don’t close off further opportunities to this company going forward. That’s why we have decided to reduce the debt levels.

Jacques Garibaldi - Royal Capital

And how did you determine 1.2 billion, I mean why not just raise [55,600] over the Western Areas hedge book?

Nick Holland

Well, we will see what comes in, maybe that’s all that we get in 550, but we are hopeful we will get to actually around $1.2 billion. We will see. I mean we don’t know what the appetite in the market is like. Is this is going to be a very sort of quick process, but we do believe that what it will do, it will leave us in a situation where we will ultimately land up with a much more optimal financial structure and a much stronger balance sheet.

Jacques Garibaldi - Royal Capital

Okay. Well, thank you, I appreciate you taking the questions.

Nick Holland

Good. Thanks a lot.

Operator

Your next question is from the line of Victor Flores with HSBC.

Victor Flores - HSBC

Thank you. Good morning, Ian. I would like to ask you three hopefully pretty brief questions. First, regarding Cerro Corona, could you tell us when the mill foundations were actually poured or if they have been poured?

Ian Cockerill

John will answer that question.

John Munro

Victor, I just finished a list and then while I am talking the guys can make sure they come up with answers

Victor Flores - HSBC

Sure. Second question goes to Kloof, and perhaps some explanation for why it seems that the grades continue to drop even though we were hoping that they would stabilize? And then the final question is just a bit more detail on what you expect in terms of cost and capital for South Deep, as you get it back up to where you want it to be to at 220,000 tons a month.

Ian Cockerill

Okay, thanks, Victor. In terms of Cerro Corona, what was completed at the end of last year was the bulk work. So that means that the moving of earth and the creating of the flat surfaces, the contour of flat surfaces was complete. Then the construction contract of [Ghani Montera] was mobilized to site in January. So, moving forward from here is when they would be moving into mill foundations, which is I think specifically your question. So that’s not been poured yet. That would be the process of moving into North.

Victor Flores - HSBC

Okay, thank you.

Terence Goodlace

Hi, Victor. It’s Terence. Just moving -- looking at the Kloof mine call factor and grade, I mean the deliberate grades are below expectation and these are on the back of the low mine call factor. There were a couple of things that affected us in the quarter. One is that, a lot of the high grades that we did attain in the quarter, the overall mine grade was equal between the two previous quarters. That occurred in the December measuring month. A lot of that gold didn’t come out from underground and that resulted in the lower mine call factor. Is there anyone ready to sell, I invite you to go and take that last door out and bring it to surface.

As far as the cost and capital are concerned at South Deep, first off, we had given some guidance in the quarterly book in terms of what the capital expenditures should be like over the next six months. I wouldn’t like to go beyond that because I haven’t had full sight of the numbers, but that number is R264 million. As far as the costs are concerned, we currently have a cost of R133,000 per kg. We're looking by the end of this quarter to be something like 120,000 and by June at about R100,000 per kilogram.

Victor Flores - HSBC

Just one follow-up. Where do you expect to see cost for South Deep, once you are at that 220,000 ton a month level?

Terence Goodlace

Once we do get to that level, it certainly will be below 100,000 and I would be hoping that would be below 90,000. If you look at way this mine is operating at historically before the shaft accident, it was operating with a throughput of something at 460,000 ounces and it had cash cost of R93,000 per kilogram. So, we would certainly be at full production at 220,000 tons per month, which would equate to something like 1.3 tons of gold at 6 grams per ton a month, you would be looking below R90,000 a kilogram.

Victor Flores - HSBC

Thank you very much.

John Munro

Victor, it's John here. I would like to clarify the bigger picture on South Deep because it’s a question we keep getting and its worth putting Terence’s comments in context. Just to reiterate prior to the shaft accident, the mine was doing about 450,000 ounces a year at R93,000 a kilogram. So, priority one, is to get it back to that level, and then to build of there to the ultimate production levels.

Now, in the due diligence, we focused on the blockade plan, and that blockade plan is to get those mines a full production by 2012, and that means that we get to 800,000 ounces a year from the twin shaft system and the capital to get from now to there is about R3.5 billion. The other dimension of that is that full production of 800,000 ounces a year from the twin shaft system, the cash cost that estimated at around R65,000 per kilogram, so quite substantial build-up from here to that point in time.

Now, that’s based on the public domain information that is previously being put out by the joint venture and in fact in the Western Areas circular and that was the basis of our due diligence and what we regard as the base plant for the twin shaft system.

Victor Flores - HSBC

Thank you very much.

Operator

Your next question is from the line of Oscar Cabrera with Goldman Sachs.

Oscar Cabrera - Goldman Sachs

Good afternoon guys. Good morning for us. Just a couple of quick questions and follow-up. In terms just pulling up on the South Deep, thank you for all the detail that you've provided, I mean at what point or what level is a comfort level with the debt? Is it two times EBITDA? Ian or -- can you stretch that and--?

Ian Cockerill

Yeah. Look the presentations that we've given over the last year or two, which we put on the web, where we got into a lot of detail about the level of debts, that we are comfortable with. And as I mentioned this earlier, in the presentation, around $700 million to $750 million of debts would be a comfortable level of debt for us to maintain. And our EBITDA, as you also heard earlier, is about $1 billion a year at current process. So, that’s about 0.7 of EBITDA.

Also it’s going to conflict when we did the South Deep deal, we also said that the consequence of that purchase, consequence of that acquisition. We could stretch that 750 a bit higher. And in the worst case scenario, we had delivered the $1.2 billion of debt, we could have done so. And that’s what we indicated at the time. But clearly adding the hedge on to that, changes the whole situation. Because what you've done is by closing out the hedge you've accelerated the liability by 6 to 8 years, which put the whole different complexion on it. So, if we get the equity or anything away, at the level that we've targeted, we will be at comfortable levels for debt going forward.

Oscar Cabrera - Goldman Sachs

Si, do you mean to say that its indication that you have given, is that two times EBITDA would be something that you guys are comfortable with, and I guess I'm just asking the question because as you go through the other expansion projects you have, you have in mind you develop South Deep, is there going to be need to, would you rather have another equity financing or are you going to use debt for that?

Ian Cockerill

Sorry, I just want to clarify or correct you if I may with respect. We've never said we'd be comfortable with debt of two times EBITDA, that’s never ever been said by this company.

Oscar Cabrera - Goldman Sachs

Okay, that’s fair enough.

Ian Cockerill

That’s a misconception. Each acquisition that we look at or each internal project that we look at, we make a decision on its merit, how best to fund that project. But I think the important thing is, if we get the debt levels down for the level I've indicated to you, it doesn’t limit us in terms of our ability to take on additional debt, should we need for further projects.

Terence Goodlace

Oscar, I think the other points as you mentioned, what about the financing for the capital at South Deep. One of the advantages is taking out this hedge position, is instead of applying the revenue that we are getting now as a R140,000 odd a kilogram, instead of applying that to working out this hedge book, we can only use it to internally fund, the capital program and certainly the work that we have done to date leads us to believe that at current prices and the current levels of performance and where we are moving towards for the next quarter or so that South Deep will be in a position that it is able to almost breakeven after its working cost and its capital. So it is one or the other reasons for wanting to take this hedge out and do not underestimate the physiological advantage to the guys on the mine where now all of a sudden we're actually seeing themselves making profits. There is nothing more demoralizing to people quarter-after-quarter not making money despite their best efforts. So, another three quarter softer regions for wanting to take out this hedge and turn this into a proper mine not just something that’s making the banks rich, we want to make our shareholders rich not the banks.

Oscar Cabrera - Goldman Sachs

Okay, I have a great answer. Thank you very much guys.

Operator

Your next question is from the line of David Lathal with Deutsche Bank.

David Lathal - Deutsche Bank

Yeah, thanks guys and good job. I think you have answered a few of my questions already. I guess Cerro Corona I just want to revisit them. Capital budget for that -- the capital budget continues to seem to be going up. Did I hear $340 million and I guess is that the center prediction of the capital cost and where are we with, I guess, the selection of the tailings dam in that location?

John Munro

Right, just to be clear that we have an under $340 million and that’s the number I think we have been reporting for the last two quarters and that follows once the really advanced procurement of dam quite a few months ago as well as some of the more detailed engineering. So, that number has been stable now for quite some time and we are starting to see numbers actually moving into contingency. So, although there is a lot of construction to be done in the coming 12 months and it's a tough environment, weather and terrain, we feel reasonably happy with that number, which is why we've maintained it there in terms of guidance. In terms of the tailings dam which is the biggest single driver of the capital and schedule, although it is not completely in the bag, the revised design is -- has not met any black hole so far and is in the very final stages of signoff including an independent review board of external experts, which really came back with a number of recommendations that are being worked through. So, at this stage we do expect to go with a simpler dam and the result we look at all the capital in schedule. But it's really one evolving equation, but overall we feel that the $340 million capital guidance is the appropriate number at the moment and as I said we have got some numbers moving back into contingency which give us a better room.

David Lathal - Deutsche Bank

Okay, thanks. My second set of questions especially in South Africa as we look at a higher capital program. What sort of capital cost escalation might we be experiencing right now and also on operating side, should we still use PPI type inflationary numbers for your working cost estimates over the next 3 or 4 years?

Nick Holland

Dave, Nick here. If you look at published year-on-year PPI over the last 12 months, that's been bordering on double-digit and if you look at the last 5 or 6 months it's round about 7%. Now, again if I background at our South African operations we've achieved an overall increase, weighted average increase in our contract prices of about 4%, so that’s what we've achieved. So, we've beaten inflation and we manage our capital contracts in the same way that we manage our working cost contracts that was managed under a coordinated supply chain program, because we don’t really take the view when we know best capital, so we are not going to have the same controls of operating costs, not the case. You are spending money and when you are spending money you need to have controls. That’s what we've managed to achieve so far. Whether we can achieve that going forward, obviously, is difficult to say, but we'll certainly be attempting to outperform the general inflation in the country. We've managed to do that consistently over the last four years and certainly we hope to achieve that going forward. I don’t think inflation is the biggest risk on these projects. The biggest risk on these projects is actually making sure that you get them done on time and that they don’t actually get delayed. I think we can manage the inflation aspects. The scheduling and making sure we do things on time in a proper sequence is a much bigger risk for me.

David Lathal - Deutsche Bank

Nick just one last follow up. So, are you talking about CPI inflation or PPI inflation as a target to be below?

Nick Holland

I think you should look to what we've achieved. We've achieved around 4 or 5% as I mentioned and I would be hoping that we can achieve that going forward. That’s obviously a stiff target, but we certainly do want to outperform inflation, that’s our target.

David Lathal - Deutsche Bank

Okay, thanks.

Operator

Your next question is from the line of Daniel McConvey of Rossport Investments

Daniel McConvey - Rossport Investments

Good morning Nicky and everyone. Oscar answered my first question, just a bit of a gold market question. Nick, when was the hedge book bought back roughly. Was it back in January and over very recently or when did most of that activity take place?

Nick Holland

Look we -- Dan, we started the process before Christmas, but that’s the process we started and that culminated in a whole series of steps, which I don't really want to go into, because it is the partial information. That culminated in a final close-up division being agreed yesterday afternoon and the underlying agreements within times. I think the positive side that you can take out of is that a lot of the gold price run up that you have seen over the last week or so. We don't believe it's got anything to do with what we have been doing because of the fact that the process started a lot earlier. But for obvious reasons, I don't want to go into specifics about the (inaudible) with all the strategies we deployed in this.

Daniel McConvey - Rossport Investments

Okay. Thank you very much.

Nerina Bodasing

Jeremy, will pick one last question.

Operator

Certainly. Your last question comes from the line of Heather Douglas with BMO Capital Markets.

Heather Douglas - BMO Capital Markets

Hi. Good afternoon, everyone. I just have two questions either one well its kind of a compound one but the power -- can you give us the situation both in Ghana and South Africa? Can you give us a little bit more details about the new power plant in Ghana and when you think it will on stream in the foot so that we can see cost coming down?

Terence Goodlace

Heather, it's Terence. We -- there is a consorting of four companies that's Radius, AngloGold, Newmont and Golden Star. We plan on putting a national 100 megawatt plants into Ghana which will provide us with an up tick of something like 80 megawatts. And so that to supplement the growth, it will run on normal fuel in the first instance and then ultimately we will move it on to make it a gasified power station. In terms of the overall position in Ghana right now. The Volta is still very low. It's at 998 levels and extra below and the offset is high. There's been growth in that country and basically the power grid can't keep up. What does it mean for us the full members of the consortium? It means that we put into the grid and in that part such that if we are ever to be asked to reduce our power by 50% that would be sufficient. In other words, the 80 megawatts would make up for that 50%. So, we would be protected up to a 50% reduction in power which emanated from the VRA or Volta River Authority.

Heather Douglas - BMO Capital Markets

Okay. Thanks. And what --

Terence Goodlace

And in terms of cost, the plant that we put in initially will run it about $0.15 per kilowatt hour, ultimately when we convert it to gas and that's one the fire plant that's shipped from Nigeria. It would be able to run it below $0.10 per kilowatt hour and that versus the unmanned power generation cost have run about $0.26 per kilowatt hour.

Heather Douglas - BMO Capital Markets

Okay. And how is the situation now in South Africa? I understand that had some blackout first week -- last week?

Terence Goodlace

That's I think that's just about being resolved and we have had minor interruptions, we have been cooperating with you and we have got to a position where we have had minimal interruptions as far as that's concerned. A lot of the power generation units that were offline as a result of maintenance and unplanned maintenance all being brought back on stream.

Heather Douglas - BMO Capital Markets

And are you concerned about the long-term power situation in South Africa at all? Because last year you had the same blackout thing happened in June?

Terence Goodlace

Yeah that was probably more of a winter phenomenon. I mean that's happened in summer, when we -- in natural effect, a lot of the power stations are actually being repaired for winter. The power situation in South Africa is going to be a challenge. I think it has been said that overtime we are running at just about full capacity mid winter and there is quite a lot of measures in place by a mixed effect they are coming to see us next Tuesday to give us the full plans going forward. But in essence, they are going to recommission some of their power station and in addition, we are advancing quite a few projects, which are collectively core DSM projects or demand side management projects and we're implementing those on the mines. What actually happens with these projects is, if we are managed to reduce power during peak times, we actually get a 100% capital subsidy from Essakane, to actually put those projects in. If it's off peak, we actually get a 50% subsidy. So, we're working hand-in-hand with Essakane to try and reduced our power consumption as well and this is happening across the country with many of the other industries.

Heather Douglas - BMO Capital Markets

Okay. Thanks and my second question is for Nick. How does today's capital raising impact (inaudible) the South Africa operations?

Nick Holland

Sorry. I couldn’t hear the question, Heather. Could you repeat that?

Heather Douglas - BMO Capital Markets

Sorry. How does today's capital raising which you'll be using to repay the debt, impact and [well attendant] interest in the Gold Fields of South Africa.

Nick Holland

What the agreement would have developed on the does provide the ability to undertake share placements at a certain discount and provided we stay within that discount then its business as usually. If we move that five bits that discount we may have to review the slower and the capitals in place there. So, I can't tell you what the impact is going to be at this stage. I will be very surprised if the impact was material

Heather Douglas - BMO Capital Markets

Okay. Thanks.

Ian Cockerill

Okay. Well, ladies and gentlemen, thank you all very much for listening in today. We look forward to seeing you in three months time. Thanks very much indeed and thanks for listening. Bye.

Operator

Thank you for your participation in today's conference, ladies and gentlemen. This does conclude the presentation. You may now discount. Have wonderful day.

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Source: Gold Fields F2Q07 (Qtr End 12/31/06) Earnings Call Transcript
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