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Gold Fields Limited (NYSE:GFI)

Q2 2006 Earnings Conference Call

January 26th 2006, 9:30 AM.

Executives:

Ian Cockerill, Chief Executive Officer

Nick Holland, Chief Financial Officer

Mike Prinsloo, Head of South African Operations

Terence Goodlace, International Operations

John Munro, Business Development

Willie Jacobsz, Head of Investor Relations

Analysts:

Heather Douglas, BMO

George Lequime, RBC Capital

Barry Cooper, CIBC World Markets

John Duty, Gold Stock Analyst

Sam Robbins, Robbin, Flan and Company

Mark Rohr, MSR Capital

Presentation

Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Gold Fields' Second Quarter Fiscal Year 2006 Conference Call. My name is Carlo, and I will be your coordinator for today's presentation. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today's presentation, at which time, if you would like to ask a question, please press star one on your telephone. If at any time during the call you require assistance, please press star zero, and a conference coordinator will be happy to assist you.

I would now like to turn the presentation over to your host for today's conference, Willie Jacobsz, head of Investor Relations. Please proceed, sir.

Willie Jacobsz, Head of Investor Relations

Thank you very much, Carlo. Ladies and gentlemen, thank you for joining us for this conference call. We've got five speakers today. Ian Cockerill, our Chief Executive Officer, will kick off with an introduction. He will be followed by Nick Holland, the Chief Financial Officer, who will talk about the finances, followed by Mike Prinsloo, the head of South African Operations, who will give an overview of what happened in South Africa. Terence Goodlace thereafter will talk to the international operations, after which John Munro will give a brief overview of business development. Ian will then conclude. After that, we will take questions.

May we please at this early stage ask that when we get to the questions-and-answer session, you limit your questions to one question per person so that everybody gets an opportunity. I now hand it over to Ian.

Ian Cockerill, Chief Executive Officer

Willie, thank you very much indeed. Welcome, everybody, today, and, firstly, let me apologize for the state of my voice, but I hope you'll bear with me. Today, I have the pleasure in welcoming Terence Goodlace, as he will be reporting on international operations for the first time, having recently taken over that role from John McDove. Now, for all those fans of John out there, don't despair because he's still with us, and he'll be giving us some feedback on our growth projects.

So how did we do last quarter? Frankly, much more at the performance you've all come to expect from Gold Fields and totally in line with previously stated guidance. All out, our operations performed well, particularly in South Africa, off the back of the previous quarter's wage strike. Our margins have been restored not only due to a better but also due to output improvement, as well as continued good cost control. I'll leave a more detailed explanation of operations to both Mike and Terence.

Overall, a safety performance of improvement, was much improved. Gold production was up 5% to 1.04 million ounces. Cash costs were down 2% in dollar terms to $341 per ounce. Net operating profit was up 73% to $147 million. And net earnings were also up six-fold to $40 million. And if that's expressed in U.S. cents per share, that equates to $0.08 U.S. per-hare earnings. We also successfully completed the Seoul, Korea transaction, and certain mobilization is now underway, and John will give us some more details on that.

And, finally, it's a great pleasure to announce that we will be giving an interim dividend of 40 South African cents per share, and that is a dividend, which has been declared for the first half year. With that brief introduction, let me hand you over to Nick for more details on the financials.

Nick Holland, Chief Financial Officer

Thanks, Ian. You heard earlier that production is up from 993,000 ounces to 1,040,000 ounces. Virtually all of that increase has come from our South African operations. The price achieved for the quarter went up substantially from $437 an ounce to $482 an ounce, with the Rand virtually steady at 6 Rand 53 as against the previous quarter. As a consequence of this price increase and with the 5% higher production, we're pleased to report that our revenues increased by 15% to $533 million for the quarter.

Our operating costs increased by 3% to $390 million. However, there are a number of factors behind this increase. Three-quarters of this increase came from our South African operations and related mainly to the impact of the strike last quarter, whereby we lost a number of shifts, somewhere between four and six shifts depending on the operation. And together with the fact that we have four number of shifts at work this quarter and the impact of the 6.5% wage increase, that contributed to most of the increase in South Africa.

Briefly, though, we've also increased our volume by 16% in South Africa and our development by 18%, and you can see that investment also coming through these cost increases. In the Australian operations, we had an increase of some. That was mainly due to higher volumes and also the impact of the power credits of 3 million Australian dollars received in the previous quarter. Other than that, costs of all of the other operations were pretty flat.

Operating profits, as a consequence of the higher revenue, increased substantially from $85 million to $147 million, and net earnings for the quarter increased to $46 million from the quarter. And there is really no more funnies in our earnings, as opposed to in previous quarters when we've had volatility caused by financial instruments. Most of those have been closed now, so essentially, the operating profit flows through to the bottom line, all to provision for taxes.

The operating profits from the South African operations was up from $26 million in September to $71 million in the quarter. That's almost a three-fold increase. And our operating profits from South African operations is now 48% of our total operating profit versus 31% in the September quarter. And it just goes to show how important the South African operations are to this group and the investment we're putting into those operations, both in terms of the increased development, volumes, and capital expenditure are important for the future.

Cash flow from operating activities also increased from $47 million to $90 million and would have been higher but for one soft working capital movements of around about $30 million. Our capital expenditure increased from $50 million to $62 million, and that reflects more investment into South African operations, with net cash at the end of the period just under $500 million. And if you take into account liquid investments that we have most of them are listed as well as deferred Australian dollar hedge receipts, our cash and near-cash is $761 million. And net of our debts, which all relates to another transaction, cash net of debt and including near-cash is over half a billion dollars.

I think it's appropriate at this stage just to very briefly indicate to you the changes you'll see on our balance sheet as a consequence of the growth projects that we've announced recently and on the assumption that the Bolivar acquisition is closed. The Bolivar acquisition itself is slated to cost about $361 million. And the Cerro Corona purchase, which we've now concluded, and John will talk about that later, cost $40 million, and the construction costs of that project over the next 18 months or so are around $277 million. That gives total funding requirements for this group of $678 million, and we're going to finance this as follows.

We've established a corporate debt facility of $250 million, which is a three-year revolver with a balloon payment at the end on what I think are very good terms versus the market. We've also decided to finance $150 million of Cerro-Corona's requirements by our project finance facility, which will leave the overall Gold Field balance sheet our incumbent once that goes on recourse. And then we're going to use that $278 million of our internal cash sources to fund the balance of this growth, which will still leave us with a comfortable financial position.

If we look at a restatement of our cash costs as a consequence of the practice applied by the peer group, not just in South Africa but throughout the world, whereby development is capitalized, and when I say development, I mean essentially waste development to actually get us to the actual ore body itself plus associated share of overheads. We've shown in the results this time around a restatement of cash costs on a pro forma basis, assuming we adopt the same practice as the other entities around the world, and that would mean that the group costs that Ian mentioned earlier, the group cash costs, would drop about $341 an ounce to $314 an ounce, and the costs of the South African operations would drop $366 an ounce to $323 an ounce.

I'd stress we have not changed our policy of capitalizing this development, which we could well do. At this stage, though, we feel to make sure that we have comparable results with the rest of the market, that we need to provide this restatement. Very briefly, Project Beyond is an area that a lot of you have asked about. A very quick update. Total expenditure we focused on was about 2.7 billion Rand, which we started back in September 2003. We've reviewed about 1.1 billion Rand of that. We expect to have completed 1.5 billion Rand by the end of June 2006. So far, we've contracted savings of about 127 million Rand, and of that, 60 million Rand has been realized in cash flow, of which 30 million Rand has come through this year. And if you take into account what else we're going to realize this year, we should realize, though, another 60 million Rand; alternately, about $10 million for the year. So these kinds of cost initiatives are continuing. They're picking up momentum, and we'll have more to tell you in the forthcoming quarters.

With that, I'll hand you over to Mike.

Mike Prinsloo, Head of South African Operations

Thanks, Nick. Good afternoon, ladies and gentlemen. As Ian mentioned, the South African ops had a strong quarter, lifting gold production by 8% to 21.7 tons, or just short of 700,000 ounces, compared to 647,000 ounces in the September quarter, performed largely as expected with slightly lower underground offset by improved underground ore volumes. As predicted in the previous quarter, Kloof and Beatrix experienced a much improved performance mainly due to the increased underground volumes as a result of the shifts lost due to the industrial action in the September quarter.

Development was up at 18% at 27.6 kilometers. We maintained a strong grip on costs, which resulted in a 4% decline in title cash costs from $381 an ounce last year to $366 an ounce this quarter. Net and operating profit up nicely to 71 million U.S. dollars compared to 26 million U.S. dollars in the September quarter, with a margin more than doubling from 9% in September to 21% this quarter. That's at these price levels, capital expenditure amounted to $26 million compared to $20 million in the September quarter, and a significant portion of this expenditure was directed at the major projects and key development at the long-life shops. This increase was in line with our policy to increase capital expenditure and the revenue stream increases, so overall, a strong quarter.

Now, turning to Driefontein, Driefontein's gold production was steady at just about 9 tons, or 290,000 ounces. Operating costs increased 3% due to lower grades and increased volumes and was fixed at $343 an ounce. Driefontein's costs increased sorry, our Driefontein property increased 31% to 36.4 million U.S. dollars, 25 million in the September quarter, giving Driefontein an operating margin of 36%. Capital expenditure was higher at 9.3 million for the quarter.

In terms of Kloof, Kloof's production increased 16%. They had a good turnaround and achieved 253,000 ounces against 219,000 ounces in the September quarter. Total cash costs decreased by 10%, down to $378 an ounce. Operating profit improved to 22.2 million, compared to an operating loss of 6 million in the September quarter, giving Kloof the operating margin of 18%. Capital expenditure for the quarter was 8.2 million, compared to 6.5 million in the September quarter, and this increase was all at the number-four shop on key development for the future.

Turning to Beatrix, Beatrix had a strong quarter as well, with gold production up 12%, from 139,000 ounces in the September quarter to 155,000 ounces this quarter. Total cash costs decreased by 6% to $391 an ounce. Operating profit increased to 12.1 million from 8 million in the September quarter, giving Beatrix a margin of 16%. Capital expenditure was also higher by 25% and reached 8.4 million ounces, and all of this was a conscious effort to accelerate redevelopment projects at the number three and four shop.

So, overall, the outlook for the March quarter, we will decrease slightly at Kloof in terms of gold production as they had a slower start-up after Christmas. Driefontein and Beatrix had good start-ups both at Christmas and leading into the Christmas break, so they've had good Januarys and producing those mines going forward as if they will be steady state into the March quarter compared to December quarter, both in gold production and costs, with Kloof slightly down. We expect growth to be down about 6% of gold production for the March quarter.

Furthermore, we will continue to focus on our quality volumes and key developments at all the shops. Our productivity projects are starting to gain traction, and we should see some of the benefits spilling through on to the bottom line. And, furthermore, we'll continue with our cost management, which are being there. And with that, I'll hand it over to Terence.

Terence Goodlace, International Operations

Good afternoon, everybody. The international operations have provided a consistent overall performance for the December quarter, with attributable gold production at 342,000 ounces and managed gold production at 407,000 ounces. Costs for the quarter were $299 per ounce and 3% higher at $124 million. The production in cost performance, along with the 10% higher gold price of $482 an ounce, has meant a 29% increase in operating profits to $76 million.

Operating margins are good at 39%, with Tarkwa and Agnew both in excess of 42% and Damang and St. Ives at 32 and 34%, respectively. Capital spend for the quarter was $34 million, and the primary spend was at Tarkwa and St. Ives. Tarkwa had a recently good quarter with a solid operating margin of 42%, albeit that gold production decreased by some 4% to 167,000 ounces. This gold production was affected primarily by changes in gold in process at the heat bleach facility, partially offset by increased gold production from the CIO plant. There were two main contributors to this change, the first being the commissioning of the Blue Ridge heat bleach, and the second, the speccing on the forklift at the North heat bleach facility. I must say, however, that over the last six weeks, it looks like this has changed, and we have had very good gold production coming out of Tarkwa. Operating costs were in line with the September quarter at $49 million, and total cash costs increased by 1.8% to $282 an ounce.

Insofar as the March quarter is concerned, the mine will reflect an increase in gold production, along with lower unit costs, to below that reported in the September 2005 quarter. Damang continues to perform well, as seen by the 5% increase in gold production to 60,000 ounces. Gold production improved through increased open-pit grades at 1.7 grams per ton and the stockpiles, which delivered 1.32 grams per ton. Volumes through the plant were constant at 1.3 million tons for the quarter. Operating costs remained at $19 million, and the net effect of gold and fleet costs was a 12% reduction in total cash costs to $330 an ounce.

During the coming March quarter, it is expected that gold production levels will come off slightly, while costs remain at current levels. St. Ives has improved quarter on quarter, and gold production was 5% higher through improved underground volumes in grades, offset by lower volumes mined from the open pits. Open pit results were affected by a redesign of the East Ecamendment open pits, where grade control drilling exposed high-grade oil, necessitating a new cutback. Heat bleach performance was unchanged for the quarter. Operating costs increased by 5.4 million to 54.7 million, and these costs reflect higher open pit waste volumes mined, with a strip ratio increase from 2.6 to 3.5, low maintenance, and a 4% increase in oil processed. In addition, the previous quarter reflected a par credits of $3 million. Total cash costs increased by 3.8% to 431 Australian dollars an ounce.

The March quarter is planned to reflect an increase in gold production, which will improve unit costs to around September 2005 levels. Moving on to Agnew, this mine continues to perform well and in line with plan. Gold production this quarter is 11% lower due to reduced Kim volumes and grades and the Songvang open pit grades, which were half a gram lower at two grams per ton. This led to the 18% increase in total cash costs to Australian $351 per ounce. Operating costs were well controlled at $20 million, and the higher gold price has ensured a consistent operating profit of $16.1 million and a very good 45% margin.

We are forecasting a slight reduction in gold production for the March quarter, which will result in a marginal increase in unit costs. Overall, the international operations should deliver an improved performance in the coming quarter. Margins and cash flows should continue to be robust, with increased production, a current high U.S. dollar and Australian dollar gold prices, and good controls on costs. And with that, I'd like to hand you over to John.

John Munro, Business Development

Good morning, and good afternoon. Moving on to the area of growth within Gold Fields. Obviously, we'd like to talk about the body of our transaction and the asset itself, but given the litigation that is pending in Canada at the moment, it's prudent that we don’t go into too much detail there. So then moving on to Cerro Corona, which has clearly had some exciting developments at the end of the December quarter, you'll be aware that we announced that we both received the final permitting for this project in December, it was from the Peruvian authorities, as well as the Gold Fields' Board committing to proceed both with the final acquisition of the project and with the construction of the new mine.

The acquisition of the project was completed in January, and just to be clear, so far, we've acquired 80% of the economic interest in Cerro Corona at a total cost of 40 million U.S. dollars. That's the deal we had struck two years ago with the Gubbins Family. They still remain another single private shareholder out there who also has a voting interest, and then they are there are the investment shares that are traded on the Lima stock exchange that have a 12% economic interest but no voting interest in this project. That corporate structure for this project is on our website.

So moving on back to the timeline then, with the acquisition complete, we expect to start construction of this project in the month of February, and with the construction timeline of around 18 months, we'll complete this through the latter part of calendar '07. And that timeline remains very much on track. Earlier last, or late last year, we proceeded with the ordering of the mold and the crusher and some other heavy-duty equipment, and in fact, during the month of December, the mining fleet was shipped from Florida. And the mining fleet will be used in the early stages of construction of this project. So timeline remains very much on track.

Just focusing briefly on some of the KPIs of this project, it will cost some 277 million U.S. dollars to construct. That's on 100% basis, as Nick indicated; $150 million of that will be sourced from non-recourse project financing. As I indicated, the consideration for acquiring this was $40 million for 80% of the project, implying a total price for the entire project of some 50 million U.S. dollars. Mine total cash costs for Corona are estimated at around 250 U.S. dollars an ounce. In terms of the scale of the project, at $3.75 gold and $0.90 a pound copper, which are the current gold reserve prices, this mine will produce some 4.5 million ounces of gold-equivalent over a 15-year life, but in fact, if you were to recalculate that at today's metal prices, that would be just short of some 6 million ounces. So this is a very substantial project.

We have set up in the quality presentation, which is on the website, some of the acquisition metrics, and apart from referring to those, another way to give you some sense of the significance of this project for us is to look at what our operating profit would have looked like in this quarter had Cerro Corona been operating. And, in fact, on the 80% basis, our operating profit would have been some 17% higher had we included Cerro Corona and had it been operating. So this remains a significant asset for Gold Fields going forward, and we're very pleased with the progress that's been made there.

Our other significant development project is the Essakane gold project in Bukino Faso in West Africa. While work continued through the December quarter and progress was good, we've had some disappointments in terms of being able to finalize a pre-feasability result. That's in back of the assay quality issue that we reported in the September quarter, and that's caused by an extremely high nugget effect that has been identified in the assay. And some of the assay, in fact, exacerbated that. So we've had a delay in completing that result and now only expect that late in the '06 calendar year. And that's because we effectively had to re-assay a very large proportion of all the drilled core that is in what we regard that is contained in what we regard as the olzyme. So that will continue really through to the September quarter of calendar '06. And parallel with that, we'll be continuing the pre-feasibility work, and other basic engineering and social work, as well as also continuing with the exploration, which at this stage is focused on expanding the Essakane and main zone but also looking at some of the satellite deposits that are located around the main zone. So Essakane continues to move forward, albeit with a bit of a delay due to the assaying issue that needs to be resolved if we are to get to a final on this project. Thank you, and back to Ian.

Ian Cockerill, Chief Executive Officer

Thank you. Now, all of you know through time Gold Fields has followed a three-prong strategy of operational excellence, growth, and securing our future. I hope that from what you've already heard today, you get a sense of a company that has delivered on its promise to make existing, grow organically where we can, and acquire and develop new assets that will certainly add value Gold Fields shell. Whilst we made good progress on the cost-containment front, the sense of the project team is there are many more opportunities that can and must be exploited.

On the South African productivity project, we have gone a long way, so we have a long way to go, certainly before we can say we're happy with the results. What I am convinced of, though, is there's a passion at the operating level to deliver the necessary improvements that will drive profitability and enhance the life of these truly world-class efforts, irrespective of where the gold price is.

You've heard from John the good news about Cerro Corona and of the start-up project that start-up of that project and also the progress that we've made in Bukino Faso. Also during the quarter, we did make to the shareholders of Bolivar Gold so we could acquire the majority interest in the Choco 10 mine in Venezuela. Now, a significant majority of the common stockholders, at 77%, as well as 82% of the warrant holders, voted in favor of this transaction. However, one shareholder, Scion, voted against and has followed suit in the Ontario and Yukon courts against the transaction. A status hearing that was due to be heard on January 19 was adjourned until February 7, 8, and 9 as a result of the filing by Scion of further claims. Though obviously we're disappointed by the delay, we're confident the courts will favorably resolve the matter and the will of the vast majority of shareholders will be respected.

Many of you, I know, are going to be interested to know of the progress that's been made with our license conversions. I'm certainly happy to report that now all of our applications are in and are undergoing the necessary adjudication. These contain the most advanced of these applications, and we believe in due course, we can expect that these applications will be successful, and we will comply with an important component of the mine charter. Now, no report back this quarter would be complete without at least some commentary on the gold price. Whilst we're not surprised with the continued up trend in the price, there's no doubt that recent advances have been faster than usual. Consequently, whilst we do believe that the secular trend is still firmly up, short-term pullbacks certainly would not surprise us. Too rapid a rate of price increase can certainly lead to nervousness in the traditional jewelry markets, which is an important component, demand. And if that dries up, then we certainly could expect some price reversal. However, even if we do have a pullback, we believe that the trend is still supportive of better dollar prices in the medium term.

Fortunately, the strengthening of the Rand these past few months has been ameliorated by the better dollar price, but even with a drop in the Rand-per-kilo price, our operations are now well positioned to withstand lower price environments. In fact, this quarter certainly shows why investors want to be exposed to the quality leverage play that Gold Fields is when the price begins to merger. For the next quarter, you heard the guidance from Terence and Mike. And certainly for the group as a whole, we will be looking for gold production in quarter three, it will be similar in both quantum and unit cost terms to quarter two but certainly some variations as to source of that supply.

Overall, shareholders should expect, particularly at Kloof, a decline in South African production due to the extended Christmas break. We believe this is going to be counteracted by the potential improvement we're seeing in output from the international operations. So all in all, a very good quarter. I would like to thank all of our employees for putting in the effort to enable us to engineer this turnaround. Whilst the return to work post Christmas here in South Africa has not been without its normal trials, I believe the Company is in good shape and very well positioned to continue its stated goals of operational excellence and growth. In other words, we're going to continue to deliver.

Finally, this is going to be Mike Prinsloo's last report back to you. I've asked Mike to apply his wealth of mining experience, knowledge, and passion for people to a newly created role of heading up Gold Fields' Business Leadership Academy. A major issue for us in the years ahead will be consistent supply of top quality, competent, and well-trained personnel to manage and lead Gold Fields over the following decade. In a world when mining skills are becoming increasingly recognized as scarce, it is vital companies such as ourselves secure our future with quality manpower.

To this end, I'm delighted Mike has accepted the challenge of running this strategic and important facet of our business, and I'd like to thank him for his many years of successful input to our operations, and I look forward to him producing quality product, albeit as a human rather than a metallic kind in the future. Brendan Walcott, currently Head of Operations in Ghana, will be resuming Mike's role next month, and I'd like to wish both of them good luck. And with that, let me hand you back to Carlo, and we'll take questions from here. Thank you.

Questions & Answers

Operator

Operator Instructions Our first question comes from the line of Heather Douglas, BMO.

Q - Heather Douglas

My question has to do with this change, actually, I’m not going to ask that question since I only have one. I have a question on the progress of some of your development projects at existing mines. When your reserve numbers came out, you suggested that Driefontein deeps would be going to the Board for consideration in November 2005. I'm just wondering what any decision was. The second one is KEA. How's the feasibility going? And the third is at Tarkwa. Is there any thought to increasing the throughput at the mill? And, also, we noticed that the guided CapEx has increased at Tarkwa, and we're wondering if you can then tell us why.

A - Ian Cockerill

Yes, on the deep line project at Driefontein and I'll answer the Kloof one as well, we've done further work in terms of pre-feas and towards feasibility on these projects. We've revised the costs on these. And with the increased gold pricing and kilogram terms, we are now at this page where the teams are looking at whether there are any other options that might suit that deepening project. More specifically at Driefontein, we're reviving the exercise we'd done about two years ago on the deepening of number nine shop to see if that's feasible or more feasible at these price levels. So, yes, a lot of work is going into those projects, and a lot of renewal in terms of costs in those projects will be taken forward to a point where we will take it to the Board in the near future.

Q - Heather Douglas

And KEA?

A - Ian Cockerill

Similar to KEA. It's, KEA, I would like at the two options. The first option was to deepen the sub shop with the work that was done at Driefontein within a deep plant option on the KEA project, and that shows that we'll cover less answers but much more profitably. So it looks more like the KEA would be a deep plant option, and at this stage, we're testing a vertical option on Driefontein.

Q - Heather Douglas

Did you have any revised sort of CapEx arm-wave number for it?

A - Ian Cockerill

The last numbers we shared with the market haven't changed much in terms of the deep plan options. At Driefontein, we're looking at about 2.1 billion for phase one and two of those declines, and at KEA, slightly higher, about 2.5, 2.6 billion Rand straight over a period of between four and five years. In terms of the capital at Tarkwa, the increases really that have been shown were due to one of the problems that we expressed last quarter was the flaming of oil as we supplied into the moat. We've gone ahead and repurchased some vehicles to do that, and that's probably the prime reason why we've had an increase over the last quarter. Next question?

Operator

Our next question comes from the line of George Lequime, RBC Capital.

Q - George Lequime

Heather asked quite a few of the questions I was going to ask about the expansion. Michael, you said in due course it's going to go to the Board. Can you just get a little bit more precise on the timing of it, and if the Board does approve these projects, how quickly are you going to be spending the CapEx on KEA and at Drief?

A - Mike Prinsloo

George, I think within the next two quarters, we'll probably be at a position where we can take a full proposal to the Board. And then in terms of start-up, initially a project like that would probably take three months to put the whole initiation together. And because initially by the projects we'd start up with just development of the mine decline and other infrastructure, it will be a slow start-up. It's not going to be an overnight, you know, a lot of money thrown at the project. That's why the two deep decline options look attractive at this stage because in a rising gold price environment, you can accelerate them. In an environment where the price drops, you can slow them down or even switch them off. And the decline options are explained in phase one and phase two. We've been necessary taking it in level, you know, two-level intervals as we did the extend, so you would sink down for two levels, go out on development, and start before you start at the phase two, which is sinking the next two levels.

Q - George Lequime

That's not really going to impact the FIO-7 numbers that much, maybe at the tail end on the numbers?

A - Mike Prinsloo

No, yes. Look, a lot of that five shop, one shop different than in the four shop projects and three shop projects. They all start getting to conclusion over the next four to five quarters, and then a lot of CapEx is then freed up a bit because those projects are complete. So it wouldn't be at any levels of CapEx higher than what got it. Thank you.

Q - George Lequime

I just want to ask Nick just one question. Just to clarify on the CapEx, you mentioned the CapEx numbers for the three projects. What is the total CapEx for '07 and '08 FY, rough estimates at this stage?

A - Nick Holland

Are you talking about capital or growth projects, George?

Q - George Lequime

Total capital, Nick.

A - Nick Holland

Okay. Total capital in our operations this year, you can work on about 1.5 to 1.7 billion Rand. That's capital on our ongoing projects. The projects, as John mentioned, will start construction now at $277 million that has to be spent over about 18 months. That's superimposed on top of that 1.6 billion Rand, which is roughly 400 million Rand a quarter.

A - Ian Cockerill

Can we move to the next question now, please?

Operator

Our next question comes from the line of Barry Cooper, CIBC World Markets.

Q - Barry Cooper

Yeah, a few questions for John Munro. John, could you just give us an idea what the actual copper and gold production individually will be for Cerro Corona? And then you talk about locking in some of the smelter terms. I'm assuming that's on volume? You've not lined up anything on costs? If you have locked in on costs, what kind of numbers are those?

A - John Munro

Barry, in terms of gold and copper production, the best way to look at it is that over the life, it will produce 2.3 million ounces of gold and 412,000 tons of copper. So to give you a round number, you can divide that by 15, and then you can work it out in whatever ratio you want, depending on if you want to do gold-equivalent or not. Obviously, we've indicated previously that at the front end of this mine produces slightly more than the back end because there's some higher grades, so you could take it up about 10, 15% in the front end and 10, 15% of that average at the back end. My reference to smelter terms obviously was in the space of volumes judiciously manage to make sure we don't commit more than we can possibly produce. But it's also in terms of terms or actual smelter terms, TCs, RCs, the bulk of which, though, have been done a percent-of-copper-price basis. And the reason for that is that it provides a relatively natural hedge against copper price movements.

So the higher the copper price, the more we can afford higher terms and vice versa. We didn't want to get into a situation where we were negotiating annually TC terms, being a small player in a very big, very rough market and with the danger of those markets, particularly the early years of Corona's life, being in favor of the smelters. That's why we opted for the percent-of-copper-price-type term, which, when you look at the economics, is quite favorable because you get the terms moving with the copper price.

Q - Barry Cooper

Right, okay, so that's wise. Can you share with us what that percentage is?

A - John Munro

No, we can't, Barry. It really is the commercial, significant commercial term between us and the smelters and something we'd like to avoid.

Q - Barry Cooper

Right, okay. Fair enough. And then on Essakane, sort of what I sense, a good news/bad news story, good news in the sense that it sounds like there's more gold there in terms of grade, but bad in the sense that this is taking a year. I'm just wondering, that seems like an excessive period of time for re-assaying. Maybe you can just tell us why and what have you found to date in terms of what the potential upgrade is there?

A - Ian Cockerill

Barry, first of all, on the time, that's driven by two things, first, on logistics in that part of the world, given that into a decent laboratory, but it's also driven by the way we are now having to do this assaying. Because of the incredibly high nugget effect, we effectively have to pass a very large sample from each into core intersection through a mini-fault and concentrator or gravity concentrator to remove the gravity components and then use conventional assay techniques in the balance. So not only are we having to handle very large volumes, but as you're aware, the more you do splitting, the more you may risk exacerbating the nugget effect, which is what we've seen before. So, first of all, we're handling very large volumes of core and then in a fairly time-consuming process. But I guess we wouldn't be committing to this level of work if we didn't think it was worthwhile. I'm not going to tell you the extent of the upgrade and the downgrade because it's not at a level that is of enough confidence to talk publicly on it. But, generally, what we are seeing, because we've done limited re-assaying using this technique, is that the high grades came down but the low and very low grades came up, surprise. But it really requires a complete rework before we'll get some decent numbers out of this thing, Barry.

Q - Barry Cooper

Would you be forced to do redrilling?

A - Ian Cockerill

No, because we've got more, we've got the sample, and it's generally in the right place. So it's not the availability of sample; it's the way the first was handled, and as a result, we are rehandling the other half of the core. You know, they normally split core in half. So it's not so much a re-drilling exercise. The bulk of the exploration going forward will be to target extensions to the Essakane main zone, as well as satellite to the Essakane main zone.

Q - Barry Cooper

Right. Okay, thanks a lot.

A - Ian Cockerill

Next question?

Operator

Operator Instructions. Our next question comes from the line of Heather Douglas.

Q - Heather Douglas

Sorry, I had a second question, double-dipping. Are you going to be increasing your exploration spending at Tarkwa and St. Ives to catch up with what reserves might be at these higher levels? I think you last did them at 375.

A - John Munro

Heather, this is John. I'll field this, your curveball…. The level, I'll deal with the two mines separately. The level of exploration spend at St. Ives is pretty much driven by what makes sense in terms of a need there, the size of the human results space, and what you can practically do, so I don't see that changing in this environment. At Tarkwa, that reserve is pretty much proven. There's an odd bit of drilling that we do each year to gradually extend the results into reserve as we move to it. So I think one of the, just to put the whole, the bigger question in context of how our reserves will respond to these much higher prices, I think two points to make. The first is that our annual declaration of reserves is determined by the average for the last three years, and that's in terms of SEC guidance. There's no discretion on that.

But I think, more importantly, we're also being quite cautious about ensuring that we don't have an explosion of our effective reserves on particularly mines like Tarkwa, where we can see at 555. You know, we can see a much bigger reserve position, but it would be at a much higher strip ratio and a much lower average grade. We're not convinced that that's the optimal way to exploit that ore body. So, first of all, in terms of near-term reserve needs, you don't need to do that, and Tarkwa's largely drilled out, and St. Ives has the right sort of schedule of drilling program.

Q - Heather Douglas

So you won't be changing your mine plan at Tarkwa, is that what you're saying, to drop the cut-off grades?

A - John Munro

Not substantially, Heather, because what we would rather do at this stage, and obviously, we've got to watch this market and get a feel for where it's going, but at this stage, we'd like to stick with the current stripping ratio level, similar sorts of head growth, which gives you similar total cash costs, but obviously at $500 an hour and 550, a much bigger operating margin. And we are trying to walk that delicate balance between producing more gold over the life but also making much more profits today. We're concerned about making copper into a 30-year mine when it's already something like 22 years and just making it a low-margin asset over that entire life. So it's a balance that we've been working on for quite some time, in fact, long before this market took off, recognizing for, well become a challenge for us. And we're trying to find a judicious balance between loss of mine answers and near-term profits.

Q - Heather Douglas

And then that actually had the last part of my earlier question had been is there any thought to increasing the mill throughput at Tarkwa? Again, I had mentioned in the past.

A - Ian Cockerill

Yes, Heather, we have. We said when we designed the original mold that it was specifically designed on a base case to be doubled in size. Now, that work has been underway to look at the best options there. What has complicated that is, in fact, the mold being a lot better than we thought it would and so is the heap. And so some of the trade-offs that are being done is what's the optimal size for Tarkwa in terms of total throughput with its heap or mold, and if we were to double the size of that mold, would we shut down the south heat bleach? So that work is underway and hasn't gotten a definitive answer, but the one rule of thumb you can use is that the higher the gold price goes, the more sense you have in having a mold available to you because you make more money at these prices by fixing things through the mold than through the heat bleach, with the recovery trade-off against the unit cost.

Q - Heather Douglas

Okay, thanks very much.

A - Ian Cockerill

Next question?

Operator

Our next question comes from the line of John Duty, Gold Stock Analyst.

Q - John Duty

Good morning. Thanks, and great quarter. I've got a couple of questions that relate to the basis on which you're reporting now and will be reporting in the future. The first has to do with this peer group basis reporting. Are you able to give us some back data on how your numbers would compare to how your peers are reporting? And I assume by that you mean the Gold Institute's standard?

A - Ian Cockerill

Yes, John, what we've done in the results is given you the current quarter and then the previous quarter benchmarks against how we understand the peer group to do it. But we haven't gone back further than that for the simple reason is that we haven't actually made the decision to adopt a change in policy. We're purely giving pro forma information for those analysts and for those fund managers, etcetera, who want to try and model the numbers on a more comparable basis with the peer group. So we're not going to go back further than that unless we decided to change the policy, in which case, we have to go back and restate the whole of 2005 and do an opening balance adjustment as well. So it's quite a lot of work and probably not for a lot of benefit.

So what we will do, though, going forward, we'll continue to give you the comparison, and then you can use that as you wish. But another thing that I would just warn you against is that if you want to actually model the full impact of this, you need to actually pick up the extra capital expenditure because over this quarter, we would have capitalized about an additional $30 million of capital expenditure, which, in turn, has the spin-on effect in terms of the amortization that comes through. Now, we haven't done all of that modeling. We've merely just restated our cash costs to give you an indication of what it would look like. So I think that's all we're going to give going forward, and at least it gives people an idea on a cash-cost basis what this means. I think, bottom line, over the longer term, there's not going to be any difference in earnings because this has to come through earnings over time. It's purely a timing delay. And instead of coming through earnings as working cost, if you capitalize all this development, it comes through your earnings and your amortization line.

Q - John Duty

Okay, thanks. I'm sure that you're well aware when investors go to pick a gold stock, they do it on a comparative basis. And if everybody else is using a standard that makes them look bigger or better on a cash-cost basis, you're at a disadvantage. And I appreciate knowing what your numbers are. I appreciate your reporting it at this time, and I hope you'll make that change so that we can compare apples to apples and not apples to oranges.

A - Ian Cockerill

Well, at least you could compare the cash costs, which previously you couldn't do, so I think we've given you more information. But now, we'll take your comments on board, and I have to say this is the first quarter we made the change, and we'll see how it goes heading forth.

Q - John Duty

Okay. And one other question, if I might, and that has to do with how you're going to report Cerro Corona going forward. Gold equivalent, putting the copper in gold terms, is not what most people do. Most would take it as a co-product. Are you going to record your cash costs on a gold-equivalent basis or a co-product basis?

A - John Munro

Hi, it's John here. I think at a headline level, we would use the gold-equivalent basis. What we find is the co-product tends to make some, you know, the gold production from Corona look a lot better than it necessarily is when you just see the gold production. So at a headline level, we would do it on a gold-equivalent basis given that there's not much copper in our Company at this time. However, we would always provide the detail behind that sort out what's actually happening in the numbers, but we do think the co-product method can slightly misstate gold production costs and give you an artificial sense of profitability.

Q - John Duty

Okay, thank you.

A - Ian Cockerill

Carlo, we'll take two more questions, and then we'll wrap up.

Operator

Our next question comes from the line of Mark Rohr, MSR Capital.

Q - Mark Rohr

I hope it's okay to just ask one question still. The question I have is when you put all this together, pro forma for the Cerro Corona and Bolivar acquisitions, can you share with us what you think Gold Fields' production may look like over the next two or three years?

A - Ian Cockerill

I'll answer that question, and it's not the higher level, if you don't mind. We avoid very detailed forecasts of gold production. The Cerro Corona project and the Bolivar acquisition were part of a very clear strategy of growing the international side of our business by an additional 1.5 million ounces. Now, that strategy included, offered the expansions at our international operations. Now, those have pretty much kicked in. So if you take current sort of production levels, the Bolivar and Cerro Corona would add between the two of them, at least initially, between five and 600,000 ounces per year of gold and gold-equivalent production. Obviously, we've indicated that Cerro Corona can be quite variable, high in the front and low in the back end. It will be in full production in 2008. But, also, we've indicated that over time, we will look to the scale of Bolivar. So order of magnitude, the front end is between six and seven, we'll not say/well, let's say seven and 800,000 ounces.

Q - Mark Rohr

Just from those two projects?

A - Ian Cockerill

Yes, that's right.

Q - Mark Rohr

Okay. But you're not willing to share a broader profile of the company at this stage?

A - Ian Cockerill

Yes, I'm sorry, just to go back in, that's in the back of the total company being at about 4.5 million ounces per annum at our current sort of levels, and that's after the full incorporation of the international expansion projects, which are pretty much in the bag now.

Q - Mark Rohr

Thank you very much. That's helpful.

A - Ian Cockerill

Carlo, final question?

Operator

Our next question comes from the line of Sam Robbins, Robbin, Flan and Company.

Q - Sam Robbins

Thank you for doing such a superb job. I have one perspective question, and that is this. A lot of us are puzzled. We know you have complete understanding of what you're doing. We know you know what you're doing . We know that you understand all the risks in South America. But the question is this. We hear in the newspapers and the media that there is a trend toward the left, toward an anti-capital, towards socialistic perceptions. And, yet, you are undertaking major projects there. Obviously, you have decided that it's safe. Can you spell that out a little bit so that we know you're not treading where angels wouldn't tread?

A - Ian Cockerill

Sam, obviously, it's all about risk and reward. Let's take Peru as an example. The mining sector in Peru constitutes a very significant percentage of that country's GDP, so the thought that the mining sector is going to get shut down, you may as well close down the country as a whole. So our view is that, sure, there may be a change in political persuasion in some of these countries, but I don't believe that it will fundamentally change the need for those countries to still carry on producing, interacting with the outside world. Frankly, wherever you go in the world today, you're finding that there's risk wherever you operate. And I think what we're doing is that we are carefully positioning this company around the world, such that we don't have undue exposure to any one particular area. And by doing that, you're building a degree of risk amelioration.

I think having all of your operations in one country is, irrespective of where it features on the risk profile, is probably more risky than having your operations in a variety of countries. We're driven, first and foremost, with our operations in areas where we think there's good potential. We carefully evaluate where we go. We say, do we believe that we can operate in those areas? Are we happy to have operations there? And if the answers to those questions are positive and we believe that there's a good return, then we will take that. But, clearly, we don't want to have all of our operations in risky areas. And when we have gone in to the new countries, clearly, we take soundings with the government rulers of those countries. We take value judgment. At this stage, we believe that we have not, undue exposure to any one particular area, and we're very happy with where we are, and I hope that in a few years' time, people will recognize that.

Just as a final comment, many years ago, when we first went into Ghana, Ghana was considered extremely risky. Today, Ghana provides us with a very significant proportion of our operating, or of our earnings. And we look through the present day, and we try and look over lifecycles of our operations and say, where do we believe this place is going? And that's how we make our investment decisions there.

Q - Sam Robbins

Thank you, a brilliant answer.

Ian Cockerill, Chief Executive Officer

Okay. Ladies and gentlemen, thank you very much indeed for listening today. It's been a pleasure presenting these results. Once again, I apologize for my voice. Hopefully by the time I will talk to you again at the end of April, I will have found it again. Thank you all very much, and cheerio.

Operator

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect.

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Source: Gold Fields Limited F2Q06 (Qtr Ending Dec 31, 2005) Earnings Conference Call Transcript (GFI)
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