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Gold Fields (NYSE:GFI)

Q3 2011 Earnings Call

November 10, 2011 9:00 am ET

Executives

Unknown Executive -

Nicholas John Holland - Chief Executive Officer and Executive Director

Willie Jacobsz - Senior Vice President, Investor Relations and Corporate Affairs

Analysts

John D. Bridges - JP Morgan Chase & Co, Research Division

Unknown Analyst -

Howard Flinker - Flinker and Company

Operator

Good day, and welcome to the Gold Fields Q3 2011 Results. [Operator Instructions] Please also note that this conference is being recorded. I would now like to hand the conference over to Willie Jacobsz. Please go ahead, sir.

Willie Jacobsz

Good afternoon, ladies and gentlemen, and thank you very much for joining us for the results teleconference for our quarter 3 results. Nick Holland is going to give a brief introduction to the results, after which we're going to open it up for questions. I'll now hand it over to Nick.

Nicholas John Holland

Thank you very much, Willie. With me today, I've got Paul Schmidt, Chief Financial Officer. I've also got Zakira Amra, Head of Investor Relations; Willie, you've already heard from; and then also Michael Fleischer, our General Counsel, is with us today. Let me briefly highlight some of the key features of the quarterly results, after which we'll be prepared to take any of your questions.

The group delivered a strong performance in quarter 3 reporting quarterly earnings of $293 million. That's a record quarter for Gold Fields and significantly higher than $186 million recorded in the previous quarter, the June quarter. Group attributable production was up 3% to 900,000 ounces for the September quarter. That's in line with guidance supported by the acquisitions in minorities in Ghana and Peru, which we concluded at the end of the previous quarter, and the 900,000 ounces and 3% increase was also achieved despite a 5-day wage related industrial action in South Africa at the early part of the quarter.

The international regions within Gold Fields contributed 52% or 472,000 ounces of the group attributable gold equivalent production and 63% to the group operating results. It's particularly interesting that the international portfolio of Gold Fields has increased over the last 3.5 years from 1.3 million ounces of production to 2 million ounces of production, and net production has come in at lower costs than the rest of the group and has had a positive impact on our overall cost. There was a 14% increase in the realized gold price for the quarter, which resulted in an 11% increase in revenue to 1.6 billion per quarter. Our business process reengineering initiatives across the globe continue to deliver, demonstrating sound cost control and improved efficiencies across the group.

Total rand denominated spend for the September quarter in South Africa increased by only 1.8% when compared with the September 2010 quarter, despite amongst other things increasing electricity tariffs associated with winter months where higher tariffs are levied particularly in South Africa, as well as wage increases over that particular period.

Total cash costs for the group for the quarter were $851 per ounce compared to $816 an ounce in the previous quarter. And round about a quarter of that increase was driven by higher royalties, which in turn increased because of the higher gold price.

Cash flow generated from operating activities for the quarter increased by 133% to $717 million, that's $717 million when compared with the September 2010 quarter. On an annualized basis, we are now generating almost $3 billion in cash flows from our operating activities across the portfolio. If we take capital expenditure off for the quarter, our deduction net from our cash from operating activities, then we also made a record $346 million of net cash flow compared with $99 million in the previous quarter, and that's an increase of 249% on the previous quarter.

The NCE margin for the quarter increased from 21% to 29%, exceeding our medium to long-term target of 25%. Remember, we are the only company that extensively reports our NCE margins for each of our assets and for the group, and believe that this is the important proxy for generation of free cash flow. Margin increases were driven by the higher gold price and a sound cost control. The South African operations NCE margin improved to 16% for the June quarter, and if we exclude the developing South Deep project, which is building up and not yet cash positive, then the NCE margin for the other operations in South Africa increased to 24%.

The delivery of our growth strategy is a key focus for Gold Fields. During the September quarter, a significant progress was made in support of this strategy. At the Chucapaca joint venture project in Peru, we announced a 35% increase in resources to 7.6 million ounces. Very important to remember that the vast majority of that 7.6 million ounces now reports into the indicated category, which is essentially reserved status ounces, and gives us increased confidence that we can successfully build a mine in this particular part of Peru. We continue to progress with a feasibility study and expect to finalize this during the first half of next year.

At the Damang Super Pit project in Ghana, and that's the brownfield expansion of an existing operation, the second phase of our drilling is now being completed, and we completed another 38,000 meters of drilling across the entire ore body. We are now in the process of constructing a geological model, taking those drilling results into account together with the earlier proof-of-concept drilling result that we finished around the middle of the year. And we expect to complete that work during the second quarter of 2012.

Metallurgical, geotechnical and environmental test work is running in parallel with engineering and design activities. As we previously indicated, our aim is to quadruple our reserves at the demand pit of 1 million ounces to 4 million ounces. And we intend to achieve that target within the next 12 months or so. We've made a second down payment of $66 million to acquire the 60% interest in the Far Southeast project in the Philippines, and that means to date we've funded $120 million of the total $340 million that will need to be funded to vest a 60% interest in that particular project. The proof-of-concept drilling results, which contains 27,000 meters of drilling over 17 holes, have confirmed our initial understanding of the scale and breadth of the deposit that we inherited using historical models. But beyond that, it's also demonstrating a significant upside potential, both at depth and laterally. We expect to fund the balance of the $340 million before the middle of next year, which would then vest a 60% interest in the project and so far, we can see a very little reason why we would not proceed to take our 60% interest in this very exciting project.

The 2 50-ton pilot plant test programs at the Arctic Platinum project in Finland have been completed, and the results from the test program broadly confirmed the bench-scale tests work, which indicates around about 25% improvement in recoveries to a range of 70% to 75% depending on the metal. Bear in mind, this is a polymetallic deposit, which contains palladium and platinum at 3:1 ratio of palladium to platinum. That makes up about 40% metal in the head. Gold is around 10%, with nickel and copper making up the balance of the 40% of metal.

We're now going to look at all of the different options. Now that we've been able to demonstrate that we can produce the metals on-site at acceptable recovery levels, and now we want to determine what is the right scale for this project. We want to look at additional ore sources on the area because in essence, we've looked at initial models on only the Konttijaarvi and Ahmavaara ore bodies. We're now going to look at the Vaaralampi, Tuumasuo and Suhanko North ore bodies on that particular property and work out what is the best production profile and mix for this project. We expect this work to take the next 12 months, and we'll be in a position to then make a definitive decision as to which way we go in the project.

The Yanfolila project scoping study is complete. And that's focused, as you could recall, on the Komana project in the South, which is a series of pits, and indicating that this project will require a minimum of 1.5 million ounces resource to satisfy project thresholds. We're about 2/3 of the way there at present. And we have started another drilling program now that the rainy season malaise is behind us, and we expect to finish that early next year. Put together the new models, and if all goes well, I believe that will fast-track this project towards the end of next year, get that into a feasibility study.

In South Africa, the South Deep infrastructure program continues to meet its key delivery dates, to support the build-up to production of 750,000 ounces per year. The new tailings storage facility was commissioned during the quarter, and that will provide sufficient capacity over many years to come. The ventilation shaft deepening program remains on track for commissioning before the end of 2012, along with the plant expansion from 220,000 tons a month to 330,000 tons a month. We expect that also be to commissioned at more or less at the same time as the ventilation shaft system. The distressed mining project, which in essence is the opening up and development of the ore body to facilitate long-haul [indiscernible] had a nice 23% increase quarter-on-quarter and, we're now starting to get some momentum on this very important aspect of the project to make sure that the additional hoisting and processing capacity can be filled with the requisite quantum of ore-bearing material.

Turning to the outlook for the rest of the year, which is almost behind us. Our production guidance remains unchanged at 3.5 million ounces despite the recent wage related industrial action, where we lost some 5 days of production plus the knock-on effects of trying to get back to full production thereafter, as well as safety-related stoppages that we encountered. Our guidance for cash cost for the year are $810 per ounce and $400 an ounce NCE.

With that backdrop, I'd now like to open up the floor to any questions, which I would myself and all my colleagues will endeavor to answer. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from John Bridges of JP Morgan.

John D. Bridges - JP Morgan Chase & Co, Research Division

I was intrigued to hear you're making progress with the PGM project. I wondered if you'd give us a bit more detail on that. That sounds very interesting. What sort of cost structure do you expect from it? And the way you spoke about the steps, but if you could give us a bit more detail on how you expect that to go forward, I would really appreciate it.

Nicholas John Holland

Sure. John, what we are going to be doing is we're going to be doing some additional drilling on some of the other deposits. If you can recall, we've said that the 12 million ounces that we have is made up of the series of different pits across the ore body, including the SK Reef’s as well as the ones I just mentioned. And we're going to look at what is the best level of production for the projects in terms of annual volume, what's the best mix. And then we're going to look at the associated cost structures, taking them into account. We've done some initial indications just looking at the Konttijarvi and Ahmavaara ore bodies, which are fairly well understood, and some broad indications are that this project would be around about the median of the overall PGM cost curve. And of course, given the 40% of the metals here are PGMs and having worked in the PGM industry myself, PGM positioning is always a very important cost positioning. So we've done some broad numbers, which obviously, will firm up as we get into the next phase. But this project looks like it could be placed around the middle of the cost curve, which is important, of course, to consider taking this to the next stage. So the next stage is we're going to be drilling some of the other satellite deposits, getting more in information. We've got some information but not enough. And then we'll be running a series of iterations and then coming up with what we think is the best outcome for the ore body. In other words, we'll also look at what the annual tonnage is likely to be for this particular project. And looking at how we can optimize strip ratios, how can we optimize mix, grade and feed into the plant and of course, the hydromet autoclave system, which the concentrate feed will feed into. So that's going to be the focus of the work, John, over the next 6 to 12 months. And I believe, we'll then be in a better position to decide what to do. I'm not fixated whether we build this ourselves, we can look at all sorts of different options. Do we partner with somebody else? Do we sell it? Do we spin it off? All of these options can be considered once we've optimize all of the different options, and we'll take that view later. But right now, we're sitting with something that frankly, I don't think anyone has attributed any value in any of these. I think our job is to see how we can valorize this project in whatever way.

John D. Bridges - JP Morgan Chase & Co, Research Division

Presumably, you've looked at the economics of platinum and palladium, and I'd be interested in your view particularly on palladium as the sort of independent arbiter of the industry being outside at present.

Nicholas John Holland

Well, certainly, the fundamentals for palladium have improved quite significantly. And that's given us the encouragement to do the test work. We've embarked upon a year of work. We've essentially replicated an entire hydromet process facility with a front-end concentrate. It's almost like a mini system of what the real thing would be like, and it's taking us a lot of time and effort to do so. And the palladium prices have given us the incentive to do that. So I'm reasonably encouraged about what we're seeing today. And if I look at the South African cost curve, John, at these sort of prices, it's very evident if you look at what's happening in South Africa that the type of industry in this country is not making much money. Now if you have to look at the NCE comparative for the platinum industry in South Africa, at these sort of prices, the guys are not making that much money. So I think there is potential for the cost levels in South Africa, which are going to rise even more as we see further electricity price increases, further wage increases. That's going to act as a catalyst for PGM prices. And we're sitting with a project in a country with more benign cost inflation and we could be a beneficiary of that into the future.

Operator

[Operator Instructions] Gentlemen, it appears we have no further questions. Would you like to make some closing comments?

Nicholas John Holland

I just want to doublecheck because last time we did the conference call, afterwards when we didn't get a lot of questions, we got some calls from people who were trying to press their buttons to alert your attention to a question. We just want to try and doublecheck that people aren't trying to get through to ask questions.

Operator

[Operator Instructions] I see, we now have 2 further questions. In the queue, the first comes from Adrian Hammond [ph] of KD Securities.

Unknown Analyst -

You've indicated that you'll be targeting 5 million ounces by 2015 either in production or in development. Could you please indicate what the ramp up to this profile will look like over the next 4 years?

Nicholas John Holland

Well, we've indicated that we are going to be in development or production. I can't give you categorically today what that split's going to look like, but I believe that we'll have Chucapaca and Damang in development. I think there's a very good chance that we'll have Yanfolila in the development and potentially APP. Far Southeast, I think it's going to take longer. It's going to be in particularly just spending on the mining men that we deploy. It's going to take quite a long time. But in terms of who's going to be in production, I think there's a reasonable prospect that Chucapaca and Damang could be in production. They may provide between them around about 500,000 ounces attributable production to the group. Of course, we got the South Deep project that's ramping up, which -- some of which might be replacement but certainly some of which is likely to be growth. So we haven't quite got a definitive schedule for you today as to what that's going to look like because of these projects are graduating up the curve. But we believe that we'll have the 5 million ounces either in development, in other words, bricks-and-mortar level, or we'll have them in production. And that's why we've decided to state it that way. In terms of actual production levels, we're going to give more thought to that and try and give you better resolution over the next months.

Operator

[Operator Instructions] Our next question comes from of Yana Merier [ph] of Bloomberg.

Unknown Analyst -

Nick, I just want to doublecheck something, the platinum/palladium project you were talking about earlier, that's the Arctic Platinum project in Finland, right?

Nicholas John Holland

Yes, that's the one in Finland.

Operator

Our next question comes from Howard Flinker of Flinker & Company.

Howard Flinker - Flinker and Company

Could you please give us an update if there are on any political changes in South Africa?

Nicholas John Holland

Political changes in terms of what specifically, Howard?

Howard Flinker - Flinker and Company

Any regulatory or legislative developments making it a little easier to do business there?

Nicholas John Holland

No, there hasn't been anything specific that we'd like to mention. The mining charter was revised around about a year ago, and that's still in force today. There's no real changes there. I've got Michael with me here, our General Counsel. Michael, I think you want to answer Howard's question?

Unknown Executive

No, I wouldn't say that there's been anything material. I mean the other legislative change was that we got a new company's act on the first of May, last year -- this year, sorry, and which has made probably company law a little more in line with the rest of the world. So I think that was a good change. But other than that, there haven't been any material changes that I can think of offhand that impacts on us in any material way.

Howard Flinker - Flinker and Company

Were there any specific -- general changes in the AMC or not?

Unknown Executive

Any specific changes in the AMC. Look, I think there have been some ministers. President Zuma has announced some ministers that were subject of various investigations have been removed from office. You might have seen the Commissioner of Police was suspended pending an investigation into some leases that have been entered into where it was suspected that he may have been a related party.

Howard Flinker - Flinker and Company

May have been.

Unknown Executive

Well, that's still an ongoing investigation.

Howard Flinker - Flinker and Company

Yes, of course. Of course.

Unknown Executive

But other than that, nothing material that I can think.

Operator

[Operator Instructions] We appear to have no one in the queue. Therefore, gentlemen, if you would like to make some closing comments.

Nicholas John Holland

Thank you very much, Donald. Well, thank you everyone for attending the call today. And we look forward to talking to you again in a quarter's time. And don't forget the Analyst Day in New York and in Johannesburg, on the 5th of December in Johannesburg and the 7th of December in New York. And we hope to see as many of you as we can face-to-face and look forward to interacting with you there. With that, I'm going to say goodbye and look forward to talking to you again in the future. Thank you.

Operator

Thank you very much, sir. On behalf of Gold Fields, that concludes this conference. Thank you for joining us. You may now disconnect your lines.

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