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Gold Fields (NYSE:GFI)

Q2 2012 Earnings Call

August 23, 2012 10:00 am ET

Executives

Willie Jacobsz

Nicholas John Holland - Chief Executive Officer and Executive Director

Paul A. Schmidt - Chief Financial Officer, Finance Director and Executive Director

Michael D. Fleischer - Executive Vice President and General Counsel

Analysts

David Leffel

Tanya M. Jakusconek - Scotiabank Global Banking and Market, Research Division

Operator

Good day and welcome to the Gold Fields Second Quarter 2012 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

Thank you very much. Good afternoon, ladies and gentlemen, and thank you very much for joining us here for the quarter 2 2012 results conference call for Gold Fields. The presentation will be done by our Chief Executive Officer, Nick Holland. He'll be making some high-level remarks on the quarter, and then we will open the call for your questions. I now hand over to Nick.

Nicholas John Holland

Thank you very much and good afternoon, ladies and gentlemen. Thank you for dialing into the call. With me here is Paul Schmidt, our CFO; our General Counsel, Michael Fleischer. And as you've heard, Willie Jacobsz, our Head of Investor Relations and Corporate Affairs. I trust you've seen our results announcement this morning. What I'll do is just give you some highlights and then we can go into your questions.

We'll look at the first half of the year and also the quarter. Here are some of the salient details. EBITDA for the quarter, essentially operating profit, $667 million and for the half year, just under $1.4 billion. Normalized earnings for Quarter 2 were $224 million and for the half year, $504 million. And just to put that into context, last year 2011, we generated earnings of $1 billion, so we look as though we're halfway to what we did last year at this stage.

Operating cash flow, very strong this particular quarter. $514 million generated from the operations and $874 million for the half year. Free cash flow, which is the ultimate measure of what cash generation ability we have in the company, $100 million for the quarter and $120 million for the half year. And the reason that the quarter is a lot more disproportionate than the half year is that in the first quarter of the year, we have our annual or half-annual tax payments, and also there were some working capital movements arising from the year end that usually affect the first quarter. So $100 million is what we've made in free cash for this quarter.

We look at production, 862,000 ounces for the quarter, which is up 4% on the previous quarter. Cash costs were down 2% to $851 per ounce, and that's well within our guidance for the year. And NCE, $1,308. Remember, NCE is the all-in costs capital expenditure, whether it's growth capital, whether it's sustaining or replacements, including all of the operating costs and G&A. That's all in there. $1,308 for the quarter. Again, that's also very close to the guidance we gave for the year.

The performance in South Africa has been a welcome improvement for the quarter. And KDC, the Kloof Driefontein Complex, we saw production rise by 12% to 280,000 ounces for the quarter. And also, if you look at the half year's production for KDC, in fact we were in line with the previous year. The first half of this year is very similar to the first half of last year. And that's a trend that we've not seen for some years. That's a pleasant reversal for us. KDC is now producing in line with what I've indicated a year or so ago of between 1 million and 1.1 million ounces per annum. So what you've seen in this quarter is what we said it would be.

We're also pleased with the progress made at South Deep with our critical power de-stress mining. That's really to open up the ore body at depth. It will be up and starting, which will be the bulk of the mining in the future. And we achieved record levels during the quarter, the de-stress mining going up by 52% quarter-on-quarter. And that bodes well for the future certainly.

Capital expenditure projects at South Deep relating to the key infrastructure being the ventilation shaft, the plant expansion, as well as the full plant tailings facility for the base flow are getting very close to completion, and we should see both the ventilation shaft as well as the plant expansion completed by the end of the year, with the full plant tails facility completed early in 2013. And those particular infrastructure projects will provide the backbone together with the tails facility that's already been commissioned last year for the buildup to full production to reach 700,000 ounce run rate by the end of 2015.

As some of you may know, we have issued a Section 189 notice to the unions during this quarter, in fact on August 2. The mediation process is now underway, and hopefully we'll get a final resolution on this situation over the next few months. So we're hopeful that we can try to find a solution on this particular matter. But there are no guarantees, of course.

Beatrix also had a steady quarter. That is now also producing at a steady-state within its medium-range guidance of about 325,000 ounces to 350,000 ounce range per year, which we provided around a year ago.

So that's pretty much in line with what we've seen over this last quarter.

Tarkwa and St Ives has also continued to perform well during the quarter. Tarkwa's performance has been really excellent. And just to demonstrate what a world-class mine this is, this particular operation made 33 million tons this particular quarter at a mining cost of $2 a ton, and that was actually right in line with the budget. So we're really getting our fleet utilization up to world-class levels on this operation.

And we also announced today that we are progressing with the pre-feasibility study for the completion [ph] of an additional 8 million ton per annum CIL plant at Tarkwa to replace the North Heap Leach facilities. This project will help to keep Tarkwa and in fact get Tarkwa up to around 800,000 ounces per annum. We're currently at a rate of about 720,000 ounces per annum. And that will be provided through improved recoveries as we divert material to Heap Leach, which is giving us about 60% recoveries, into the Carbon-in-Leach plant facility, which should be able to give us around about 94%, 95% recoveries, pretty much in line with what we get out of the existing CIL plant. This project has a healthy double-digits return and should have a short payback period. It should also help us to reduce the cut-off rate as we look to potentially move the exploration drill that's around the pits and look to expand the size and depth of those pits. And that could add further to the 10 million ounces of reserves we have at Tarkwa.

The 2 operations that do require some work is Damang in Ghana and Agnew in Australia, and in both of these operations, we're focused on restoring them back to production levels of around 45,000 ounces a quarter, and we hope to get to that level within the next 6 months. Certainly, the early signs at Agnew are encouraging, but we should have a better production performance this quarter.

The Cerro Corona in Peru has again had an outstanding quarter, achieving all of its physical and cost targets. This is truly a jewel in our crown, and it shows the kind of operation that Gold Fields is putting into Gold Fields for the future, having put this mine into commission late in 2008. We have therefore decided to proceed with feasibility studies on the extension of the sulfide plant, as well as a heap leach option for the stockpiled oxide that we have on site. That's about 300,000 ounces of oxides at Cerro Corona, and that's 7 million tons at about 1.4 grams a ton. So there's significant value in here that we want to release.

We hope to complete both of these feasibility studies during 2013. I guess if you look at the brownfields growth opportunities that we do have at Tarkwa and at Cerro Corona, together with getting South Deep up to full production, you can see that we have the potential between all of those opportunities to add significantly to the production base over the next 3 to 4 years, and that's even before we consider the greenfields opportunities.

Let me deal with those greenfields opportunities now. Chucapaca Project, that is the 7.5 million-ounce resource project in Peru, Southern Peru in [indiscernible] province. That feasibility study has been ongoing for around about a year, and we expect to finish that by the end of 2012. I don't necessarily think that's going to be the end of it because although we're getting a good return out of it, I believe we're going to do more work to value enhance that through re-looking potentially at the configuration of the project in terms of size and also looking to add more exploration ounces to provide for longer life. And there's more work we're going to do on that.

Arctic Platinum project in Finland. If you can recall we had a 7 million-ounce existing resource from the existing greater Suhanko Project right at the Konttijärvi and Ahmavaara pits. And we've started to also increase our resource potential here by going a little bit further north, about 7 kilometers north of that area to what we call Suhanko North. And we've done a drill program over the last year. And it looks like we're going to add between 2 million and 4 million ounces 2 PGE+ gold at similar grades to what we've got at Konttijärvi and Ahmavaara but potentially with lower strip ratios, which will provide an important blending consideration, which may optimize the economics, particularly in the short term with this particular project.

We are factoring all of these into the metallurgical test work we're doing on the platsol process, which remember, is just a derivative of an autoclave technology. We're also feeding it all into the pre-feasibility study, and we should have work on that completed by around the middle of next year. Still looks like a very interesting prospect for Gold Fields.

At the Far Southeast Project, pleased to tell you that we have our drill rigs turning underground. We've got 10 drill rigs at the moment, doing largely infill drilling but with some step-up drilling as well to test the extremities of the ore body. As we've said before, we haven't actually determined how big this is because it's still open at depth, and it's still open laterally as well. Having said that, we believe that we will be in a position to provide a maiden resource by Quarter 4, the end of this year, and that looks very promising for us.

Our licensing process application to provide us with approval for a majority ownership in this project continues, and we've got no reason to believe that it's anything more than a process issue at this point in time.

Leaving probably the most important consideration, certainly I hope investors see it that way, is our announcement that we've restated our dividend policy, and as a top dividend payer in the industry, we will in future provide shareholders with a prioritized dividend payout of between 25% and 35% normalized net earnings, irrespective of capital expenditure. And this is to assure the shareholders of the dividend during periods of high expenditure on growth projects. In essence, what we're saying is previously, we had a policy of paying out 50% of earnings but we knocked off proto-capital [ph] as it was called, but the net effect is we ended up with a payout of about 30%. We're going to be still paying out in that range, so it's not going to be a lower dividend, what we're doing before. But what we're doing is we're giving more certainty about our desire to maintain a strong dividend payout as a first priority for shareholders and then for us to look at the balance of our cash flow to be reinvested in, first of all, sustaining the current operations and then looking for value-accretive growth by reaching investment balance in creating a better Gold Fields into the future.

I also included in my presentation this morning, which you can see on the website, a section on our perspectives of the gold mining industry at large, which we believe is important because these thoughts do influence the way in which we see the future and therefore how we are positioning our company to benefit from the higher gold prices in the quarter. Actually, we'll be sending the slides and the transcript of that presentation out to all of you overnight, so I wouldn't dwell too much on it, except to say that the industry really does need to respond to the fact that although the gold price has gone up significantly over the last 5 years, the gold equities have not responded in kind. That means all of us have got something to do to turn that around, and we are going to be giving serious thought to what that means for Gold Fields as well.

I think with that, we've given you a fairly detailed synopsis. And I'd now like to turn it over to questions, which either myself, Paul our CFO, and Michael Fleischer, our General Counsel, who is also here, and Willie Jacobsz in between us will endeavor to answer your questions. Thank you very much.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from David Leffel of Deutsche Bank.

David Leffel

Just I guess specifically on South Deep. You've done a good job at keeping us informed, I guess, of your processes. You've tried to restructure your working arrangements with the labor. Can you give us some specific dates or when we might expect -- I guess more specific dates? Because I think you've done some filings in accordance with the Labor Act in South Africa. And then I guess I was -- from the previous call back in early July, I guess I'm uncertain of the actual costs, if you reached, I guess, a good resolution with the workforce, the steps, the changes, the jobs and I guess the total cost, if they do not. If you could share those things with me, that would be helpful.

Nicholas John Holland

Look, the process under the Labor Relations Act is 60 days for us, which commenced on the 2nd of August. So that process, unless it's extended, would expire on the 1st of October. So what's happening now is we are in the facilitation process. There's a facilitator that's been appointed by the CCMA, and the parties are obviously talking and determining each other's position and trying to find some kind of solution to this. So I would like to let that process run its course. I wouldn't want to try and predict any particular outcomes at this point in time, because we don't know what the outcomes are going to be. That's why we have to get to a formal process under the Labor Relations Act because we were in deadlock beforehand. So now that process has to be given a chance. And let's see where we end up at the end of the period and what the options might be for us and then take it from there, David.

David Leffel

Okay. But I mean, could it be possible that this process extends out from October 2 if the facilitator suggests that there's still further discussion room and you'll let it -- will be maybe into November or something like that? I mean, how set in stone is the 60 days in the facilitation process?

Nicholas John Holland

At this stage, it is set in stone, and that's our period. Until we hear otherwise, that's our period. And then we will see where we end up at that point in time. But we've been in discussions with the union on this since April and we've had detailed discussions on the operating model we want to put in place since November. This has gone on for a long time, so we do have to get to a point on it. So at this stage, we're working on the 60 days.

David Leffel

Okay. But the facilitator can't order in terms of the labor laws that you carry on negotiations?

Nicholas John Holland

No. That would have to be by mutual consent. And at this stage, we're not seeing any extension beyond this date. That is the date that we're putting down as a date by which we want to get finality on this.

David Leffel

And you've talked about some monetary consideration for a change in the work hours and the bonus structures. And I think you mentioned $300 million. Now, if you retrench the workforce and go to a new structure, I mean is the $300 million the right number or is it even more? Because I've heard rumors that you've offered -- like to buy out the current contract for like 9 months employment?

Nicholas John Holland

Yes. [indiscernible] If we did what you suggested, it would obviously be at incremental costs, which could be on a similar content.

David Leffel

So $600 million?

Nicholas John Holland

I think probably the retrenchment would be about $300 million. I think you're missing up the $300 million with retrenchment and incentives are not going to be that much, but they could over a period of time add up. But that would be spread. There would be additional benefits paid out for about a 2 to 3 year period that could add up to about maybe $200 million or so. But those would be limited to particular targets being met. So there would be some financing. But, yes, the number we did mention last time was around about $300 million if you have to do the full retrenchment.

Operator

[Operator Instructions] Our next question comes from Tanya Jakusconek of Scotiabank.

Tanya M. Jakusconek - Scotiabank Global Banking and Market, Research Division

I have 3 questions. The first one is just a continuation on the labor agreement. Just from a financial standpoint, how would that be recorded? Would it go through the cash flow statement as a $300 million payment and then any additional payments over the cash flow statement through the next few years? Is that a correct way of looking at it?

Paul A. Schmidt

No, the retrenchments would be a once-off cost [indiscernible] cash immediately. The other costs that Nick mentioned would be incentives paid as part of the normal monthly salary run. that's the way it would be accounted. So the full $300 million number that Nick said could be -- that could be once-off cost expense when it's paid.

Tanya M. Jakusconek - Scotiabank Global Banking and Market, Research Division

Okay. And that would be a cash flow impact?

Paul A. Schmidt

Yes. Yes, that would be a cash settlement, yes.

Tanya M. Jakusconek - Scotiabank Global Banking and Market, Research Division

Okay, perfect. That's an easy one. Just then the other 2, one is on Chucapaca. Just listening to you, Nick, talk about finishing the feasibility study by the end of 2012 and you want to have time to do more work in terms of the configuration and obviously the size and exploration. The configuration, are you thinking it to be smaller configuration? Because given if you're looking at exploration and the size, am I just interpreting it wrong that you're looking at it as a smaller operation?

Nicholas John Holland

No, we're just saying what is the best capital efficiency ratio of size to capital. It's a dictate. You should look at, is it 30,000 ton a day? Is it 25,000 ton a day? Can you get economies of scale or better capital ratio, if you make it smaller or bigger? But of course...

Tanya M. Jakusconek - Scotiabank Global Banking and Market, Research Division

Okay. So it isn't anything, Nick, that you've seen in the ore body that's making you readdress it?

Nicholas John Holland

The ore body's good. The question is whether we can get more. We know that there's a lot of exploration potential within the area of interest. There's at least 4 other targets in the 5X5 kilometer area of interest in the joint venture between the 2 companies. And we've done some targeting, but we haven't done enough drilling. So we believe that we should get an exploration program going probably around about the middle of next year and see what else we can find. I think that will create a more robust project. We've got a project that could go at this stage, but we want to be absolutely sure that we can make this thing fly in the face of robust gold prices and not just spot prices. And we've used lower prices for the spot, make no mistake. As you know, since I've spoken to you, we've indicated $1,500 as a long-term price. But I like us to make sure that we can really try to ramp this project here, so we'll probably need around about another year of work to get to all the facts [ph] and then we can give you the full details.

Tanya M. Jakusconek - Scotiabank Global Banking and Market, Research Division

Okay. All right. And then Nick, now that I have you on, this -- for the North American audience, just some of your views on what's happening in South Africa and the violence surrounding the platinum industry and how that's impacting you and so forth.

Nicholas John Holland

Look, it's not impacting us at this stage. The union that people are referring to is AM Coup [ph]. You may have heard of them, which is sort of a splinter union that broke off and was formed some time ago. We don't have them on the gold mines to any degree. They have been around, trying to get support. But at this stage, they haven't. They haven't been that successful. One of the benefits in the gold industry, contrary possibly to the platinum industry, is we have potential bargaining agreements. In other words, we negotiate all of our wages in the gold industry as a gold industry and not as individual companies. And platinum is actually decentralized. And that has a lot of benefits in the sense that we're able to, as an industry, agree things and not one company do something that might affect another company. And also, the union has never reneged on these deals. And usually, there have been 2-year deals, and they stuck to their guns, I must give them credit for that. So we haven't have them on our operations as of this point in time. That's not to say that we can rule out the risk of that happening in the future. And certainly, from a country perspective, what we've advised the Chamber, and we've been closely involved with this process over the last week, if there should be greater engagement and dialogue between all of the various parties to try and understand people's perspectives and try and get some sense and sensibility back into this whole process. So the Chamber is going to be talking to everyone and playing a leading role in trying to resolve this issue. Clearly, we've got to get stability back into the country and more importantly, into the platinum sector at this point in time. And so, a lot of the deals with structural operators in platinum that we're looking to try and get higher wages and possibly ended up being convinced by people outside the normal forums that they could be assisted in this process. And then you get into this whole culture of finger-pointing. And that's why the government has initiated a formal inquiry into the entire process. So we don't want to second guess how the whole thing really happened because there are so many different stories. Let the inquiry run its course. Let's learn from it. But in the meantime, we strongly urge the industry to enter into a proper dialogue and try to understand people's perspectives. I don't think we can create more polarization in this process. That's really observation as to where we are right now.

Tanya M. Jakusconek - Scotiabank Global Banking and Market, Research Division

Okay. And maybe just some other thoughts on the Silicosis case.

Nicholas John Holland

I got Michael here, our General Counsel. And it's quite a technical process in terms of the notice that was served on us 3 days ago. So let me hand it over to Michael, and he can explain specifically to you what the situation is.

Michael D. Fleischer

This audience will probably be very familiar with class actions in North America. In South Africa, the rules are not well established around class actions. The jurisprudence is limited. And I guess it's going to be a process that's going to develop with the Silicosis litigation. What's being served on us is an application to certify a clause. The application is effectively split into 2 sections. One is it defines a class on an opt out basis. In other words, you will be included in the class unless you decide to opt out. And it then has a phased approach. If the court certifies the class, then what this particular lawyer intends to do is to argue the common factual and legal issues on behalf of the class And then if he's successful on that basis, then the potential claimants, potential plaintiffs, will have to then opt in for the purposes of establishing their personal damages. So we've only just got this application about 48 hours ago. We've got a legal team that's actually been in place for a long time in anticipation of this litigation coming. We're considering what our approach would be. In the ordinary course of the rules of courts, you've got 10 days within which to decide to oppose or not oppose the application for certification. And then you've got another at least 15 days within which to file your papers. The important thing, though, is that there are no specific numbers of applicants or plaintiffs here because we haven't even defined the class yet, number one. And number two, there's certainly no mention of quantification of any type of damages. That's something that's way down the line. And really, in a nutshell, that's where we sit at the moment as far as official service of process on us.

Tanya M. Jakusconek - Scotiabank Global Banking and Market, Research Division

Okay. So I guess, we'll just have to wait out for your 10-day, 10, 15 days and then see where we are after that.

Michael D. Fleischer

Exactly.

Operator

[Operator Instructions] Ladies and gentlemen, we seem to have no further questions. Do you have any closing comments?

Nicholas John Holland

No. I'd just like to thank everyone for joining the call today. And for those of you who will be attending the gold show in September, we look forward to seeing you then or on our travels around North America and elsewhere in due course. Thank you very much, and goodbye.

Operator

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

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