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Gold Fields (NYSE:GFI)

Q2 2011 Earnings Call

August 11, 2011 3:30 am ET

Executives

Zakira Amra - Head of Corporate Affairs & Investor Relations and Senior Vice President

Peter Turner - Head of the West Africa Region and Executive Vice President

Paul Schmidt - Chief Financial Officer and Executive Director

Nicholas Holland - Chief Executive Officer and Executive Director

Analysts

Johann Steyn - Citigroup Inc

Steve Shepherd - JP Morgan Chase & Co

Allan Cooke - JP Morgan Chase & Co

Unknown Analyst -

Zakira Amra

Interim Results Presentation this morning. My name is Zakira Amra. We will be taking you through a revised format of the presentation, and you will notice it is a much shorter presentation than previous years. Nick Holland, our CEO, will be taking you through the overview and going into growth projects, and we will then follow on to the question-and-answer section.

Just in terms of safety, in the event that we do have an emergency, could you kindly evacuate to your right. The exits are to the north of the building, and I would please ask you to congregate on the lawn.

I will now hand over to Nick Holland.

Nicholas Holland

Thank you very much, Zakira, and good morning, everyone. Welcome today. I think before I go into the presentation itself, I'd like to take you through a couple of management changes that have taken place, and I'm delighted that Peter Turner is with me today. Peter, I think most of you know, has been in the mining industry for over 30 years, in the gold mining industry in particular. And he has taken over responsibility for the South African operations with effect from this last Monday.

As you will remember, Tim Rowland had acted in that role for around about 8 months, and Peter previously, very successfully, I must add, ran the West Africa region for Gold Fields for almost 3 years. So he's returned from West Africa and has now taken over the role of East African operations. Tim Rowland is going to head up Group Technical Services for Gold Fields.

One of the things I've decided to do is to put together a group technical function for Gold Fields, which will be a small nucleus of highly qualified, highly skilled technical people, particularly given the fact that as you'll see later on, we not only have a whole series of operations across the globe, but we have around about 5 or 6 major projects coming down the track at a hell of a speed at us and felt that we needed to get a group technical function together. Peter's replacement is imminent, and I expect to be able to finalize that, all being well, within the next week or 2, certainly very soon.

The other change we've made is given the genesis of our projects throughout the group over the last year or so and given that most of these projects, in fact, are an ingredient, if you like, or an output of the exploration effort, the other thing that I've done is to combine capital projects with exploration. So we put that all under Tommy McKeith, who couldn't be with us today because of a personal matter that he's had to deal with. But he is now going to be responsible for running both exploration and capital projects, which we think is going to create a much more seamless process as projects graduate from initial drilling to advance drilling, through to initial scoping studies, through to concept studies and of course, through pre-feasibility and ultimately feasibility and construction.

And having all of that housed under one area, having that skills base under one area is going to make, I believe, the process much easier for us to manage. And Tommy already has quite a lot of skills that are compatible with project delivery in his area.

So those are the principal changes, and last but not least, Zakira Amra, who introduced the presentation today, has joined us around 2, 3 months ago as Head of Investor Relations and Corporate Affairs. So you'll get to see a lot of her. And she's taken over that job from Willie Jacobsz, who, thankfully, is still going to be with the group. In fact, Willie's here with us today. He'll be going back to the U.S. tonight because he looks after the U.S. shareholder base. But thankfully, Willie will still be in the group and together with Nikki Catrakilis-Wagner, who's also here today, Zakira and Willie, and I think we've got a knockout team here that will take help us take our Investor Relations to a new level.

So I think it's useful that we just highlight these changes, and some of them you'll see are actually described in the book. Now the other thing we've done is change this format because one of the things that I've seen in having done the last 12 quarters or so like this, I think a detailed presentation that goes on for an hour or so, I find that people start fidgeting and get restless after a while. And having too many speakers talking I think takes too much time.

So what we'd rather do is I'll just give a presentation of the highlights. Paul, of course, our CFO, is with me today. Peter is here today. Unfortunately, Richard Weston, Head of Australasia, could not be with us today, and also Juancho Kruger from Peru could not be with us today.

But this afternoon, as we do our conference call, we do a 4:00 conference call to the international markets when the U.S. wakes up. And Zakira, I believe they will be on the call this afternoon. So if there are any questions that you want to ask them directly or get some more clarity, please tune in for the second edition of this, this afternoon. It's 4:30, in fact, I think. 4:30 for the conference call. And it's always a good opportunity for some of you to hear it again possibly and ask any questions you might have.

Good. Well, without any further ado, let me get into the results, and hopefully you've had a chance to see some of it today. Our production for the quarter up 5% to 872,000 ounces. And of course, we did expect to improve against March, given the fact that the March quarter always has the Christmas break in South Africa, which has a number of public holidays. But I think we shouldn't forget that the June quarter also has a lot of public holidays. In fact, it has almost the same number of public holidays as over the Christmas period, and unfortunately, they are interspersed over a period of time. So you have a stop-start process. In fact, in this last quarter, there were 6 public holidays in the country, and it does tend to play havoc sometimes with the operations.

So we're up 5% to 872,000 ounces, notwithstanding that we had almost the same number of public holidays. And a lot of that increase, of course, has come out of South Africa. Our operating margin very healthy at 47%, and our NCE margin 21% for the quarter and of course, for the half year to June. Remember, we changed our fiscal year. Our fiscal year now is in line with the calendar year. So the results for the 6 months to June also the 6 months of the fiscal year.

I did say some time ago it was my target to get to at least a 20% NCE margin, and we already achieved that around about 4 quarters ago, and our intent now is to move on and see if we can improve that further. Good cost control across the group. And if you look at our total rand-denominated costs, and if you look at this quarter ended June, compared to the quarter in June of last year, you'll find that on the income statement, you'll see that our total rand operating costs in rand millions have only gone up 1% year-on-year. And that's despite having to absorb over that period electricity increases of 27%, having to absorb wage increases of around about 10% and also power increases and fuel increases across the globe.

And I think that does bear testimony to the Business Process Re-engineering exercise that started around about 15 months ago in earnest, and we're making good progress. Quarter-on-quarter, we're up 5% on our costs. And again, just to give you a very quick way of trying to understand these numbers, if you take the electricity increase out, which was 27%, which applied from the 1st of April and you also take out the 1 month of winter tariffs that we get levied -- we get levied winter tariffs in June, July and August. And if you take those out, in fact, our costs quarter-on-quarter only went up 1%. And that's despite all of the other cost pressures that exist across the business. And believe me, there are cost pressures not just in this country, and I think that's the one thing that I find that many people make a mistake on.

The cost pressures in this gold industry are not just in this country, and you should look at the compound annual increase in costs across the gold industry worldwide over the last 10 years, and you'll see, in fact, that the cost increases are an issue affecting all countries at this point in time. So the net effect of all of that is our net earnings on the back of the slightly higher gold price and the increased production went up by 15% to ZAR 1.3 billion or SA 184 cents per share.

If we look at cash flow for the quarter, and my definition of free cash flow is really to look at what the core business has generated. And if you take that note at the bottom there that you can't read too well on the screen, but you'll see it in your book, you can see that if you take cash from operations, which is essentially EBITDA cash flow, and you deduct our ongoing capital expenditure, then the core business generated almost ZAR 700 million of cash flow during the quarter.

And of course, if you look at the cash flow, you'll see, in fact, that we spent a lot of money also on acquiring minorities. But my perspective on this is we need to look at what the core business is generating because that will dictate whether or not we can afford to make those acquisitions. And clearly, with this kind of cash flow, we can. We're making good progress on the growth portfolio, and I'll talk about that in a moment. But we've also declared an interim dividend of SA 100 cents a share, which I think is a good indication of our ability to deliver cash flow to shareholders and for shareholders to benefit directly in the form of dividends as a reflection of the higher gold price.

This is a graph I've shown you before, where we indicate the NCE margin as against the gold price and against the cash costs. And really gone back 3 years, and you can see 3 years ago, we didn't really have a margin. We weren't making any money. That's when the philosophy of moving to generating an NCE margin came to the fore. And I think before that time, a lot of companies in the gold industry were quite happy to generate cash of ZAR 500 and spend ZAR 600. And it's only when this discipline really got into people's minds that we all started thinking, hang on a minute, our job is to actually make money, to make cash. And so slowly but surely, we've increased that margin. Yes, of course, it's increased because of the gold price. But in the past, we've often seen despite the gold price going up, people have still not made money. So at least we generated that gold price increase to the bottom line. And we hope to be able to continue that.

And certainly, if we're going to be able to afford to fund our projects going forward without recourse to shareholders, which is certainly first priority for us, we need to do that off the back of positive cash generation and on the back of a strong balance sheet. And right now, we're moving into a period where we have both, and we certainly want to try and use all of that cash flow to fund our projects without having to raise any additional funds in the form of equity if we can avoid it.

Also where did we come from 3 years ago? I talked to you when I got into this job about wanting to create a truly globally diversified company, and where did we sit at that point in time? South Africa represented the bulk of the portfolio, about 63% of our production and international ops 37%. Well, over that 3-year period, we have added 650,000 ounces of international production to the portfolio in the form of bringing Cerro Corona to full production over that period of time, and just recently in the form of acquiring the minorities in both Peru and Ghana.

And the impact of that now is that on a pro forma basis, if you take the results for the half year just finished, you'll see, in fact, that the international operations now make up over 50% of our total production. And on the actual reported numbers for the 6 months, which is the column next to it that you see there, it's 50%. So it's moving in the direction that we indicated it would. And this is not a reflection of losing confidence in South Africa. This is more of a reflection of creating a truly globally diversified company that we've been striving to do and shows you that execution is well underway.

And here is the international portfolio. Let's look what it looks like. And slowly but surely, our international production, our attributable international production right now is a shade under 2 million ounces a year. And 3 years ago, that was 1.4 million ounces a year. You can see that these are figures that are given in half yearly periods, and you can see also the NCE margin of that production up to around about 40%. And that certainly bodes well against the total portfolio and the rest [ph] of the overall portfolio.

Let's look briefly at some of the regions and where we've got to. In Australasia, we've had a steady quarter, production basically flat quarter-on-quarter. We did have the mill outage in St. Ives, which took the mill out for around about 2 weeks, one of those things that sometimes just happen after almost 8 years of uninterrupted operation. We, unfortunately, had a small problem in the plant. So it took us out for 2 weeks, and we probably lost about 12,000 to 15,000 ounces in the quarter.

Notwithstanding that, Agnew came to the party big time, and they had a 33% increase in production up to 50,000 ounces. And that's really on the back of improving their productivity underground. They've recently gone owner mining. We completed that transition around about 6 to 9 months ago, and we're now seeing the benefits of higher efficiencies and productivity of owner mining. And most of you have heard me say before that I really do prefer us to actually do the business that we're supposed to be good at as opposed to farming it out to other companies.

Now I think this is another example of owner mining being a better option for us. I think you'll see more from Agnew in the future as the [indiscernible] open pit operation comes to full production over the next quarter. So I think we can maintain similar levels of production at Agnew going forward. And certainly, St. Ives is doing reasonably well.

We've also converted the underground operations at St. Ives to owner mining. That process has been done, and watch out in quarters to come for us to show the benefits of that in both cost and in terms of improved efficiencies as well. The 2 exciting projects at St. Ives, which is the Athena and the Hamlet underground mines -- and for those of you who've been to St. Ives, you'll know that when you go into the portal, that if you go left, you go to Athena and if you go right, you're going to Hamlet because it's the same portal entrance from the base of the pit that you go into.

Athena is virtually at full production and achieving its goals, and Hamlet's construction is well underway. Why I'm excited about these particular mines is they're going to give us the potential for 2 long-life underground operations, which we haven't had at St. Ives since we bought the operations in 2001.

We had an underground mine called Junction, which was almost an analog, if you like, for what we're looking at in terms of Athena. We haven't had that for 10 years, and that's been one of the reasons we've had more volatility on the production. Now in fact, bringing these underground mines into production and giving us a base load of good high-growth production at St. Ives is going to make a big difference to reducing the volatility on that operation. And again, I'm sure we're going to put back into reserves at the end of the year what we've depleted during the course of 2011.

If we look at South Africa, we've had a 9% increase in production to 447,000 ounces. What's particularly pleasing is a great performance from Beatrix that had a 32% increase in production. They're up to almost 100,000 ounces a quarter, an NCE margin of 23%. That's pretty good. I'm very happy with the performance of Beatrix this last quarter. In fact, it's been a top performer in the South African stable this last quarter.

Our Business Process Re-engineering is delivering good results, and we've absorbed a lot of inflation over the last period. And again, if you look at our operating costs year-on-year, 6% up, and that's despite having to absorb electricity increases, as I mentioned earlier, 27%, wage increases of double digit.

Our Shaft Full Potential Programme at KDC is really aimed at stabilizing production in the long run. And I guess in the long run, we're talking 5 years. We want to stabilize production between 1 million and 1.1 million ounces a year. If we can achieve that and do it safely, I think we can achieve our goals at KDC.

If we look at South America, this is truly a major cash generator with NCE of $526 an ounce. And if you look today with gold a shade under $1,800 an ounce, then you can work out the potential of this operation going forward. I do now feel that we will get our money back on this investment, and we'll get it back probably 3 to 4x, if not more. So it's proved to be a wonderful operation for Gold Fields. I'm delighted that we were able to buy the minorities at the price we were able to do. And we can benefit from this tremendous performance at a mine that I think you'll see more from.

We've got 300,000 ounces of oxides stockpiled at the moment, and we're looking at different ways of processing that, whether we build a small oxide plant or alternatively, whether we actually decide to do a mini heap leach operation. And good grades in there, almost 1.5 grams a ton. So this can be a very nice project for us. We're also continuing to drill at the base of the Cerro Corona pit for 2 reasons: to firm up our view on the positive metal reconciliations we're getting right now against the model and what we're mining; and secondly, to see more opportunities at the base of that pit.

And as you all know, there's around about another 30 million to 40 million tons that sit in resources right now because we don't have tails capacity. We are working on that, and again, I'm confident that the team, over the next year, will find the solution for us to bring that forward. And that could potentially add another 5 years of production to this tremendous asset.

If we look at West Africa, again, I'm absolutely thrilled that we've been able to complete the acquisition of the minorities in these operations and take our ownership from 71% to 90%. And you can see assets that have an NCE margin of $885 an ounce and again, almost $1,000 margin per ounce if you rebase it compared to today's price. And as you'll see a little later, there were other good reasons why we were particularly keen to make the acquisition of these minority stakes.

Again, on owner mining, an excellent job has been done by Peter Turner and his team in converting Damang to owner mining. And we bought brand-new fleet there, and we've got that all commissioned in March, a seamless transfer of activities from the contractor to ourselves. And as you can see, we're dropping our costs from $4 to about $2.70 a ton. And you might say, "Well, what's the big deal there?" Well, the big deal is we're going to be mining about 25 million to 28 million tons at Damang this year. So there's a saving there of already $28 million before a 30% fuel increase or -- sorry, after a 30% fuel increase is factored in, which would have actually had to be factored into the $4 anyway.

So this is going to be one of those projects that I think we'll get an 18-month payback on, on a project on a long-life operation like this makes a lot of sense. And at the time when we're increasing our strip significantly to open up Huni and Juno, it's been the right timing for us to change to owner mining.

Let's look at the growth portfolio and see where we stand on this. South Deep, first of all, on track and the infrastructure projects, in particular, are going well. The refrigeration plant on 94 level has been commissioned, and that's operating and it's brought down the temperatures to the required levels. The ventilation shaft we expect to have completed and commissioned in the second half of 2012. So that's on schedule, and that will mean that we will have the full hoisting capacity in place for the 330,000 tons. And it will be around about a 6- to 12-month ramp-up period to get to that. But we'll have all of the infrastructure in place.

The tailing [ph] storage facility that we needed to support full production has been commissioned. That is in place, and we've started the work already on the plant expansion. Remember, the plant expansion entails adding some more thickeners, leach tanks, a ball mill. All of those key activities are in process, plus a new conveyor system. All of those processes are well underway, and we expect that to dovetail with the completion of the ventilation shaft system in the second half of next year. And then new mine development will obviously continue right through to 2014. And pleasing to see that in fact, the mine development is ahead of budget in the what we call new mine, which is the sub 95 level area.

De-stress is obviously the activity that needs to pick up significantly. And you can see we've had an 11% increase in de-stress to over 5,000 square meters over the last quarter, and that needs to more than double over the next 3 to 4 quarters. So that's the biggest area of focus right now is to make sure that we de-stress the ore body. And the reason we de-stress the ore body is, remember, we're trying to mine big open stopes at 3,000 meters. In order for us to do that, we need to actually simulate an operation that is between 700 and 1,000 meters. And by de-stressing the ore body in these 30- to 40-meter cuts across the ore body, we essentially simulate a shallow operation, and we can then get into the big open stopes, the 25 x 25 x 25 open stopes, which will be the heart of the mining operation -- around about 2/3 of it, in fact, when we get to full production in 4 years' time.

If we look at the Damang Super Pit, we have done a lot of work over the last 3 or 4 months to drill out the area and understand the potential below the base of the existing Damang pit and also to the north at Huni and to the south at Juno. And if you look right now what we've got, if you look at the June 2008 [indiscernible] You'll see that our reserve at that particular point in time was only 1.3 million ounces. And I thought this mine was on its knees.

I thought that we only had about 4 years or so of production, and then we were going to tail off. And we were only spending a couple of million dollars a year on exploration, and we made a conscious decision as a team to spend $10 million a year on exploration, see what we could do.

Well, the results as you can see, by 2010, which is the third block there that you see, you can see already we not only put back everything we depleted, but we also took the total reserve to 2 million ounces at a very low cost of exploration. And since then, we've done more work, and we are targeting for certainly March next year or very soon thereafter for us to take the Damang pit 4x up and get that reserve -- not resource, reserve up to 4 million ounces. That's what we're looking at. And don't forget, there's another 1 million ounces that already exists in places like Rex pit, the Amoanda pit and various other ore sources.

And there's significantly more potential because this ore body is open at depth, and it's still open on strike. So we are halfway through another 45,000 meters of drilling after having done what we call 25,000 meters Proof of Concept Drilling. And on the back of that, the team brought me a motivation to spend $20 million on a pre-feasibility study and a second round of drilling, largely in-fill drilling, so that we can try and get this into the indicated category -- which is what we need to do, obviously, to get into a reserve. And we are halfway through that already.

So we're making very good progress, and we expect to finish that pre-feas study and that second round of drilling by the end of December. And we'll hopefully have that pre-feas study ready to share with you when we give the half yearly results. So this provides an opportunity not just for life extension. I mean, let's be realistic. If we're going to take this up to 4 or 5 million ounces, we don't want to be mining this at 240,000 ounces a year. Now we need to look at expanding our production base. So part of that feasibility study is evaluating whether we build a brand-new plant on-site and doubling production at Damang.

And here's some of the drill results that you can see. The existing dark blue here is the existing pit outline that you see. And you can see a lot of the drill results. And it's in your book, I'm not going to dwell on them. But just to let you know that this is not closed out in mineralization. It's still open. So there's a lot more that we can see coming forward here, and here's a good way of describing it to you, the potential.

Here's the existing pit over here. Now for those of you who've been there, you'll recognize that area. The green over here -- so that's what we're mining. The green over here is the reserve pit shell, okay. That's what you see over there, what we are going to mine -- the reserve. And here's the potential of the Super Pit if you add all of the purple there. Now the current strike of the pit is about 1.3 kilometers. The total potential strike here is 3 kilometers and goes down much deeper. And again, this is open at depth.

At some point, you can only optimize a pit to a certain depth, and there may well be the potential for underground operations going forward. And these have been done at very conservative gold prices, as you can see. I think if you rebase these at today's prices, the potential here is significantly bigger. So very, very exciting opportunity for us.

If we move on to Peru. The Chucapaca joint venture project that we own 51% of, and we are the operators. We are well underway in terms of the Phase 2 drilling. We've got 12 drill rigs on-site right now and massive drill program doing both in-fill drilling, so that we can move more of the inferred resource to indicated; step-out drilling to continue to test the extent of the mineralized envelope; and then, of course, geotechnical drilling so that we can understand the ground conditions for when mining commences.

90,000 meters of drilling has been done to-date, and we continue to get positive results from Canahurie, which -- let's not forget, Chucapaca is a series of targets within a 5 x 5-kilometer zone. And our area of focus is on Canahurie, which is a target in the top-left corner of that 5 x 5-kilometer zone. So there are other targets here. This is just the most advanced of those targets.

Now this target is open to the West, and it's open at depth, and the grades are continuing to improve. We're going to give an updated resource during the course of September. That's what we're hoping to achieve, and we're well advanced on that. Our metallurgical test work continues, and so far, the results are positive. We're not seeing any particular deleterious elements that we need to worry about and the environmental baseline study and feasibility study continues. And we expect to have the feasibility study complete by the middle of next year. And hopefully, we can move rapidly thereafter to a construction decision.

So what have we got? If you look back to May 2010, most of you can remember the 5.6 million ounces that we spoke about as the initial inferred resource, which was this blue line here. And one of the things we'll do one day is get people down there. But if you stand on top of the ridge and you look down this valley, you'll see that there's these rolling hills either side of you and you're looking down this valley over here. That's what you're looking at.

So this basically outcrops here on surface. Surface is not there. Surface is there, but you've got these rolling hills on either side. So that's what we had -- 5.6 million ounces, and this is what we're seeing since we've done that. Now obviously, we've got to model all this, put a pit shell around it and see what it comes out at. But that's not all. I mean, it's extending further out here, and the ore body is dipping, outcropping from surface in the East, dipping about 14 degrees across to the West, and we're seeing further mineralized zones over here as well. So we're not sure yet what the size of this is going to be, but we'll give you an update in August -- sorry, in September on that.

If we move on to Arctic Platinum project in Finland. And I've just got back from Finland, having visited the project. I was there 2 weeks ago. Gone to have a look firsthand what was on the site. And we are in the process of finalizing metallurgical tests on a new hydro-metallurgical process called Platsol, whereby we've taken two 50-ton cuts from each of these deposits, Konttijarvi and Ahmavaara, and we produced a flotation in Finland. And we took around about 3 tons of that concentrate, and we shipped it off to Canada to actually replicate an entire mini version, if you like, of the entire Platsol process.

And in essence what Platsol is, it's an autoclave system, which I think you're all familiar with, pressure oxidation where we introduce chlorides upfront so that we can actually leach in the autoclave compartments themselves and we can actually liberate the PGMs and the gold upfront -- liberate them upfront, and then we continue further down through the process and extract the copper in a copper cathode form, and then we extract the nickel in a hydroxide form. And that's essentially the process that we're testing right now.

And why this is significant, and for those of you who have followed Gold Fields for some years, you'll know that we looked at this project about 8, 9 years ago, and we didn't do it. We had feasibility and we stopped. That's because we were producing a concentrate that we were going to ship to the smelters, and we were getting about a 55% recovery and at a head grade of 1.8 grams a ton. And the price deck that existed at that time, the project didn't make sense.

Today, what's happened? The price deck in all of the metals has rocketed. And remember, nickel and copper make up 40% of the metal in the head. It's palladium-rich as well, and I think we've seen a structural change in the palladium market. So the prices have all moved up. And early indications are that this new process of producing the metals on-site can get our recoveries up into the 70s from the early 50s. And I think most of you know, too, that recoveries are very, very sensitive in terms of their impact on economics in these models. So we should finish the work before the end of the year and firm up one way or another whether it works.

There's still some work to be done, but it looks very, very exciting. And we have a pre-feas study underway on this. I believe if the metallurgical test work works, we'll get full scale into a feasibility study on this property, and we'll look at the optimal size. And there is opportunities beyond Konttijarvi and Ahmavaara, which are the 2 main open pits. There's opportunities further afield of our lumpy Tuumasuo and then also in something we call the Suhanko 2, which is up here. So lots of opportunities for us to increase this beyond the 12 million ounces. And having just come back from Finland, I'm even more excited than I was before I went there.

Yanfolila in Mali, a very large ground position. We have about 180 kilometers x 60, and we split this into 2 areas because it's so big. And Yanfolila, as we know today, is south of the Sankarani river, and we've renamed north of the Sankarani river as Kangari. And we do some drilling up there as well. It's an enormous property with a whole bunch of different targets. We are concentrating our results in the South in Yanfolila, which is near the border with Guinea. And we have a number of targets that we're drilling right now. We've done 38,000 meters of drilling, mainly on Komana East and Komana West.

We did announce a resource in our declaration in March of 740,000 ounces. As we sit today, we've got about 1 million. So there's more work to be done. I think we need to get to somewhere between 1 and 1.5 for us to get something going, but you have to remember this is a property that will increase in size over time. And we'll see a lot more both in the South and in the North. And so I think we need to just keep drilling on this. It's not ready yet, but I don't think we're that far away from this being a project that we can get going.

And what's really nice about this -- it's surface, it's basically outcropping on surface. We've got a oxide cap of about 100 meters. The grades are good, as you can see here from the drill results, which are renewable. [ph] This is Komana East. And you can see the original pit shell that is based on the resource that you see in the book, is based on this blue line over here, and you can see the drilling is extending beyond that. So it is getting bigger. And the grades are pretty good. Some exciting opportunities here, and this won't be difficult to mine. This will be free milling probably for the first 3 or 4 years. More work to be done there.

Far South East in the Philippines, we've now got 8 diamond drill rigs turning on that. Remember, we have a 60% option here, that we have to make a series of stage payments on. The next payment is due at the end of September, $66 million. We paid $55 million to date, and the final payment to vest to 60% will be $220 million, which will be the later of March next year or when we have what we call the FTAA, which is a mining tenure agreement that allows foreigners to own a majority interest, in fact, 100% interest in Philippines projects.

We've started gearing up for the surface drilling, which is largely driven by the need for geotechnic information. So that's the reason for that. I must say the early drill results to-date support both the existence and the extent of a known core of mineralization and further extensions both laterally and at depth outside of that core.

And let's try and understand what we mean by it. If you look at the ore body itself, here's surface. It's an underground ore body that starts at about 700 meters below surface, extending down to 1,700 meters. That's what we call the known core. And then the latitude goes across about 1,000 meters as well. That's mined out previously by the [indiscernible] partner. There's an indication of the scale and extent of this thing. That's already mined out. This is still being mined, but it's a vein system. This is a porphyry, gold copper porphyry. This is a series of epithermal veins. So it's a different style of mineralization.

But this is what we'd understood was the mineralized core in this particular ore body. So we've got a drill platform here at 700 with a series of drill paddies that we've put in place. And we're drilling out a series of fans across the ore body because the previous drilling that was done, that was about 118 diamond drill holes. Well, those drill holes were all done vertically. So what we're now doing is we're doing a series of drill holes, fanning across the ore body to test the continuity of the mineralized zones, and that's the program we're currently involved in right now.

So if we look at what that means, here it is. You can see here is the drill level over there, and you've got a series of drill holes going out. And our initial drill program is to do 17 holes. And I'm giving you really just a quick taste, if you like, of what's to come. The first 3 drill holes have been completed. You can see them over here where I've marked those drill holes. So if you just capture that in your mind for a moment, and you move on.

Now let's look at one of those drill holes, 5003. And in essence, what we've given you here is the full extent of the drill hole. That's the core as we've previously understood it to be, okay. And if you look at the drill hole going across here, you can see that we've given you 2 intersections: One at a copper cutoff, copper equivalent cutoff of 0.5%. And you can see there's 872 meters at 1.06 grams gold and 0.55% copper. And then if you want to use a 1.5% copper equivalent cutoff, you can see over here we have 552 meters at 1.49 grams gold and 0.73% copper.

But in both cases, significant mineralized zones stretching over a long distance. But what I thought was really interesting and -- as did the team, is that this started in mineralization before it got to the core and ended in mineralization. In other words, this could extend even further. So it's quite possible that the so-called core of mineralization that we're seeing could be a lot bigger than what we initially thought it to be. And the grades are looking good as well. And those are the drill results of the 3 holes that we've given you so far. And you can see we've given it to you at -- sorry, I did say copper cutoff. Apologies. It's gold equivalent cutoff. So gold equivalent cutoff of 0.5 grams a ton and 1.5 grams a ton. We've given you those drill results for those 3 holes that you can look through.

It's early days, and we have to finish all of the drilling. And then we'll have to block model all of these results and see what it means in terms of the potential target we have in front of us. And that's going to take us through to at least the end of this year and possibly into early next year. But there's enough here for this to be a very, very exciting addition to the Gold Fields group.

So in conclusion, our growth projects are moving along in leaps and bounds. I believe that by the end of next year, we should be in a position to have feasibility studies for at least 3 of them and possibly even construction decisions. So that's really good progress from where we were. You've seen from our results that the international portfolio is really starting to gather momentum, and we've achieved critical mass in those areas. And the higher gold price is generating improved margins and greater cash flow for shareholders, which is reflected in an increased dividend.

With that, I'm going to ask Zakira to come and deal with the questions, please. Thank you.

Zakira Amra

Thank you, Nick. We'll now go to questions.

Question-and-Answer Session

Allan Cooke - JP Morgan Chase & Co

It's Allan Cooke from JPMorgan Cazenove. Just a few questions on KDC to start with, if I may. Could you let us know what the safety stoppages cost in terms of ounces or tons or shifts lost in the first 2 quarters of this year? I noticed that some of the incidents, in some of the safety stoppages, the whole complex had been stopped. For example, you had a tramming issue and tramming across Kloof and Driefontein was stopped. Is that something that you're experiencing post the restructuring that you did there? That whole complex -- all shafts are shut when you have a Section 54, for example, and is that an unintended consequence? What are the losses and the trend there, if you like, now that you've changed the way you report and manage that complex? And then also the BPR has been on the go there, Kloof and Driefontein for some 12 months now. Could you give us some color on the changes that have been made and how things are progressing there? I noticed that the underground yield you said is temporary and localized, but the reduction is some 10% nearly, to 6 gram a ton across the complex. What is the outlook for underground yields at KDC?

Nicholas Holland

Well, I think first of all, yes, first of all, if I may say that on 54s, we haven't had 54s imposed across the entire property in all cases. Yes, there have been occasions when there has been a 54 imposed across the whole of KDC. But most times, it's been localized to the area involved or particularly the shaft involved. And in fact, with one accident that we had recently, in fact, I made a decision with the management that we would shut KDC ourselves and actually go back and reassess some of the safety standards. So in fact, we took a decision internally to shut down the whole mine and go and redeploy all of the crews to go and recheck certain areas, given what happened during the quarter. If we talk about what we've lost in terms of -- I wouldn't say safety stoppages. Let's call it accidents because safety stoppages are by and large consequences of the accidents. We've lost about 750 kilos in the June quarter, and we've probably lost around about 500 kilos in the March quarter. That's been the impact on our production. So it's not insignificant and is another key reason why if we're going to sustain these operations, besides the very important moral issue of safety, it's a business imperative to improve safety. In terms of the underground yields, as you can see, we've had a dip in the overall yield for KDC. And unfortunately, part of the problem with accidents is they often happen in the high-grade areas. And you tend to have to then fill your mills with lower-grade material as a consequence of that. But we've also not been getting the right volumes that we should be getting in the high-grade areas, and that's another big focus. Since quarter end, we're already seeing a good improvement in those underground yields, so I do expect those underground yields will improve. But I don't see any reason why we can't get the underground yields at or around 7 grams per ton. I think that's certainly a target we should shoot for. And if you look at the ore reserve, the ore reserve is telling us that if we mine at the right rate in the right areas and we get the right mine core factors, that we can certainly do better. And that's a big focus of the team right now. Business Process Re-engineering, Paul, I don't know if you want to talk to that.

Paul Schmidt

They look at about ZAR 294 million since we started in June. A lot of it revolves around labor reductions, control of overtime and the total cost of ownership looking at the purchasing of some of our equipment, as well as some of our goodwill. And sometimes the cheapest thing is not necessarily the best thing if it you look at it over the life cycle of the products. So I think it's going well. I think ZAR 294 million basically in the year is a good start to the project, and we're well on track to achieving our target.

Allan Cooke - JP Morgan Chase & Co

Sorry. Just a follow up. You mentioned mine core factor at KDC. What is the mine core factor running at now, and where would you like it to be?

Nicholas Holland

Well, this last quarter, we've got the mine core factor up to around about 81%, 82%. We believe if we look at the long-term averages, which is what we generally use -- the 5-year averages, we think there's scope for another 4% or 5% on that. So I'm sure that, that's one of the things Peter will be focusing on. And Peter, I know it's only been one week. I don't know if you want to add anything to these responses.

Peter Turner

[indiscernible] No, sure. I mean, mine core factor's really about quality and getting the basics right. And certainly, Nick, that will be one of mine core first, going in really. I mean, what can you -- to improve productivity, cleaning out all the areas and really doing the basics of mining right.

Steve Shepherd - JP Morgan Chase & Co

Steve Shepherd with JPMorgan. Nick, you've highlighted the attractive opportunities you've got in Peru, and I'm sorry to ask you the question, but could you give us your take on the politics and how that might affect your decisions going forward?

Nicholas Holland

Well, certainly, I think if you look at the cabinet that's been appointed in Peru, the signs are very positive. Now the people that have been appointed are certainly people that we know and we understand and are people who are very keen for business to prosper in the country. And the other thing is one has look at the total constitution of the Congress and who else is in there. And I think that gives you a reasonable idea of what's going to go on. But also I would point you to the inaugural speech of President Humala, where he's reiterated again what he said in his acceptance speech is -- that he's not looking to interfere with any international bilateral investment agreements. He's going to respect law as it stands today and the order of law. He wants the mining industry to prosper, and we have to remember that this is a country that has been the fastest-growing economy in South America for the last couple of years, and mining has played quite a significant role in that. And in particular, as we've worked out, there's about a $40 billion of mining investments waiting to go in Peru, and it's right up there in terms of copper production, right up there in silver production and important in terms of gold. So our view is that we think a sensible solution will be found to this, and we're certainly, both as a company and as part of the local mining industry, are playing a key role in collaborating proactively with government to find out how we can help them solve their issues. So I'm reasonably comfortable that we're going to work through this without any particular issue. The impact on our operations right now, no impact. Cerro Corona is in full production already, so that continues to operate. We've had no interruption at all. We've had no disruption during the elections at Cerro Corona. And Chucapaca, which is in the south of Peru, which was an area that was largely dominated by Humala supporters, we took a proactive decision to suspend operations at the project for 30 days just as an abundance of caution, if you like, to make sure that our people were not placed in any jeopardy. As it so happens, there were no real issues around there, and we're back in. And our relationship with the communities is good, and people are keen for the project to go. So we'll continue with our feasibility study in our in-fill drilling campaign. And that will take us through to June next year. And before we make a final decision on whether we go ahead with the project, we will have had another 9 months, 10 months or so to digest whatever's coming down the track. So I think for us we don't have any particular key decisions to make right now. But obviously, we'd like to try and get a lot of the uncertainty out of the air because it is a concern that we're hearing on the road.

Johann Steyn - Citigroup Inc

Just a quick question -- sorry, Johann Steyn from Citigroup. You maintained your guidance for the year at 3.5 million to 3.7 million ounces. If we look forward to 2012, '13 and '14, what are you guys thinking about? I know we've got the 5 million ounce on the production development. But if we can just look further than this year, how does it stack up for this?

Nicholas Holland

Come to the Analyst Day on December 5, and then we will reveal all.

Johann Steyn - Citigroup Inc

So at this stage no additional guidance?

Nicholas Holland

I'm not going to give anything new at this stage. What we want to do is give you a much better profile over the next 5 years. At that time, we want to give you a better indication as to when the projects might come in, what they might look like. So if you could bear with us. But I mean, to give you some idea, going forward, obviously, you can now rebase your estimates on the assumption of 100% of Peru, 90% of Ghana. I've given you an indication as to what KDC is going to look like. You've got the buildup in production at South Deep. Beatrix should be able to continue where it is, and the rest of the international operations I don't see much change over there. So I think using the information that we've given you, I think you can take that data, Johann, and you should be able to assimilate it. And if you want us to look at it before you go, we would be glad to.

Johann Steyn - Citigroup Inc

You've done already, so I'm not going to send it again. Just quickly also on Beatrix, what's your strategy with Beatrix at this stage? Isn't it a good opportunity to get rid of it at this stage?

Nicholas Holland

Well, I think at this stage, we're very happy with a mine that's making ZAR 200 million of free cash flow a quarter. So right now, I'm happy to continue having that in our portfolio. It's pretty good. As of right now, 5 million to 6 million ounces at a gold price of ZAR 400,000 a kilogram, it's one of the most leveraged mines in the country to the gold price. And unless someone was going to pay me for that, then I'm very happy to keep it in our stable and generate nice cash flow for shareholders and for the group.

Johann Steyn - Citigroup Inc

Okay. And what do they need to pay you before you...

Nicholas Holland

A lot of 0s on the check.

Johann Steyn - Citigroup Inc

Okay. And just one last question on Cerro Corona. Obviously, it's a fantastic mine. Long-term, what further potential is there at Cerro Corona? I know that tailing is the key bottleneck for the foreseeable future, but what is the potential that you guys are hoping you're going to find?

Nicholas Holland

Well, as I said earlier, all the long-term grades are going to be the grades that we expect to see, based on the positive metal reconciliations we're seeing right now. It may be a little bit better. Who knows? It's early days, but that's one of the reasons we're doing more drilling on that. There may be potential to extend the mineralization out to the sides. It may extend laterally, and so we are looking at opportunities around that property. But I think the big thing is if we can get the extra tails capacity, whether it be looking at trying to increase the level of the dam, whether it be looking at dry tailings, which would give you typically 6 to 7x more capacity. A critical component over the next 12 months is to find a way of converting potentially another 30 million tons. And that would give us 5 years of life extra to the already 14 years of life that we have. So let's see how we go on those and then take it from there.

Unknown Analyst -

I am going to refer to the cash flow statement, please and also the balance sheet. The cash flow statement shows 2 payouts, ZAR 1.24 billion for La Cima noncontrolling and ZAR 4.52 billion in Ghana. Incidentally why do you call it noncontrolling when before the payouts you were holding, respectively, 80.7% and 71%? I don't quite follow what is meant by noncontrolling, given those percentages that you were holding. In any event, the total paid out is ZAR 5.762 billion, which accounts for 90% of your total increase in net debt. Now it's rather intriguing to look at the ratios between these 2 payouts. In each case, there was an additional 19% in West Africa and 18% shareholding in South America. The ratio of the payouts, 4.52 and 1.243 is 3.64x. Now by itself, that's meaningless. But when we have a look at the same ratio for EBITDA contributions, the ratio comes to 2.1. Now when you were discussing the buyout for South America, you stated clearly that you were very, very pleased with the additional shareholding that you were able to obtain. You weren't as enthusiastic in describing that same buyout in Ghana, suggesting that possibly you may have overpaid, given the much higher price you paid measured against what you paid in South America. Now would that be a fair conclusion to reach or can you contribute something else to what I might have missed?

Paul Schmidt

Let me answer. Let me go through all your questions, first of all. The one on the noncontrolling interest, when you have a company that you don't own 100%, the percentage that's owned by outsiders is called a noncontrolling interest. So when we bought out the minorities in Peru and in Ghana, they are called noncontrolling interest and hence, we call it purchase of noncontrolling interest. That's the name. It doesn't refer to the stake we already owned. It refers to the stake that we bought out. When you go to your calculation, you need to look at the cash flow. You need to look at the 2 quarters for the purchase in Peru. The 1.2, we split it over the quarter because it was a process where we bought some of them in the March quarter and some of them in the June quarter. If you add the 2 together, you get to ZAR 2.8 billion, which then comes back to -- and if you compare that to be 4.5, it's closer to your ratio of 2.21, not to the 3.21 that you talked of initially that you get to, but it ties up to the EBITDA ratio. So I don't know if that answers your question.

Unknown Analyst -

It certainly does.

Nicholas Holland

In terms of did we overpay, we are very comfortable with the price we paid for the Ghana assets. If you look at it, we effectively, on a reserve ounce basis, we paid around about $300 an ounce. On a resource ounce basis, we paid $200 an ounce. If you look at what ounces are trading -- before this big jump up in the gold price, resource ounces were trading at around an average of $200 an ounce, resource ounces. That's often a deposit with a few drill holes in, if you're not too sure that it extends, whether it's going to be a mine. Those kind of things are trading at $200 an ounce. And we can give you the data if you want it. And it's not our data, it's external data that we've used. So to buy in-production ounces at $300 an ounce with all of the upside that we have on Damang -- and there is upside on top, as well, that we'll talk to you about later on, maybe on Analyst Day. Even before the big run-up in the gold prices, it was a great deal for us, and I'm very pleased that we've done it. So if I didn't sound enthusiastic on the second deal, let me now sound enthusiastic for you.

Unknown Analyst -

Okay, and lastly, one more question, please. The current portion of long-term debt's at ZAR 3.72 billion. The description suggests that you intend repaying that within the next 12 months. Is that correct or is it not correct?

Paul Schmidt

That is just the current portion of debt. A lot of the debt is rolled over -- we have a $500 million facility that needs to be terminated in March next year, and that's basically the number that you are seeing. That will be rolled with the new facility.

Unknown Analyst -

[indiscernible] I just wanted to find out how the recent wage strikes will affect production figures for the next quarter? And if you can just give us how much you lost production-wise sort of per day and then overall the whole period, please.

Nicholas Holland

Well, the strike lasted around about 4 days overall. But the strike notice was received 3 days beforehand. And one of the things you need to do when you know you're going to shut down operations is like the Christmas break, we need to actually make safe and make sure that we're supporting. And the guys start ramping down. It's a natural consequence, I'm afraid. And similarly, when you skip back into production, it takes some time before you get back to steady state. You just don't get the crews in, and they start producing again, like they were. So I would think for us, the strike is going to cost us between 1 ton and 1.2 tons of gold. When I say cost us, we haven't lost the gold, and the gold is still there. We'll mine it. But we're not going to see the benefit of that 1.2 tons this particular quarter. Paradoxically, maybe we'll see it in a subsequent quarter at a high price. But the bottom line is it's about 1.2 tons of gold. And notwithstanding that we have reiterated our guidance at the back end of the book, taking that into account. But I guess we should be grateful that it's behind us. And we've got a 2-year arrangement, and I think for the union, for the workers and for us, it's a relief that we have 2 years where we can get on and all do our business.

Zakira Amra

There are no further questions on the floor. Can we open up the questions to the people on the telephone and the webcast, please?

Operator

Your first question from the webcast comes from Jonathan Burroughco [ph]. Based on the initial drill results for the [indiscernible] project, how many million ounces of gold reserves can we produce out of this project? Also what is the probability of producing 500,000 to 1 million ounces annually from this project?

Nicholas Holland

Okay. Well, my answer is it's too early to tell you. And again, once we've put together an initial resource statement, we should have a better idea of the potential size of this ore body together with the potential grades and also the potential mining profile. So it's early days, but we're showing you these drill results today to give you an indication of the work that's been done over the last 6 months. And obviously, the next time that we all get together here, which we hope will be in 6 months' time, we hope to be able to give you more information, if not before, in the Analyst Day.

Zakira Amra

Any further questions?

Operator

No further questions.

Zakira Amra

And any further questions from the floor before we end the morning?

Unknown Analyst -

Quick one, technical [ph] impact of the wage settlement actions.

Paul Schmidt

For the group, it's about 2.7%, about $22. For the SA offices, it's about 4.5%, about $46. So for the group, 2.7%. Not a massive impact.

Zakira Amra

Okay. Well, thank you very much, ladies and gentlemen, for joining us this morning. Refreshments will be served in the room to the back, and we will kindly ask the media to join us in the roundtable at 11:00 a.m. Thank you.

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