Gold Fields to spend R2.3bn as targets 500koz/y for South Deep
THE latest iteration in getting Gold Fields’ South Deep mine operating to its potential has been unveiled by the firm following a 12-month review – the fruit of which is a five-year gold production target of 500,000 ounces a year produced at under $900/oz for a capital cost of R2.3bn.
South Deep has serially under-performed over its 20-years plus life for whoever has operated it, including Gold Fields. It was previously owned by Barrick Gold, Placer Dome and JCI before it. In the hands of the late Brett Kebble, who was running JCI at the time, the mine was slated to produce more than 800,000 oz.
Gold Fields bought the mine from Barrick Gold for $1.53bn in December 2006 and has, over the years, lowered the mine’s productive capacity. In May 2015, Gold Fields CEO Nick Holland’s 650,000 to 700,000 oz/year target for South Deep was in jeopardy as he dispensed with previous targets in favour of rescoping the entire mine.
Gold Fields today unveiled the results of this “rebasing plan” for South Deep in which it described how it identified four areas of focus: people and skills; fleet and management; underground working conditions, and mining method.
Holland said in a presentation this morning that the change in mining method was one of the main reasons why the new plan would work. “That’s the big difference,” he said.
In terms of South Deep’s plan, the mining method has been predicated on improving the overall footprint and layout of the mine. “Everything we look at with South Deep is [informed by] that it’s a volume game,” said Holland. “We’ve had a lot of targets at South Deep. The team is very sensitive to that,” he added.
After taking stock of these four areas, it outlined a ramp-up schedule for the mine in which it was targeted to reach 315,000 oz in Gold Fields current (2017) financial year, increasing to 440,000 oz by 2020 until it reached just under 500,000 oz two years later.
For the 2016 financial year – the operating and financial results which were also released by Gold Fields today – South Deep production came in at 290,000 oz – a year-on-year increase of 47%. The mine was also cash break-even in the period, a performance that Holland, described as “a watershed” moment.
But the risks of sticking to tight production guidelines were also demonstrated following a separate news release this morning in which Gold Fields said a miner had lost his life in a tramming accident. Holland said it was “a serious setback in our efforts to continuously improve safety at South Deep”. There had been one fatality in 2016.
Of the R2.23bn in “growth capital” that would be spent at South Deep, peak funding would be in 2019 when R582m would be spent. The bulk of the capital would be on underground infrastructure for just over R1bn and follow-on development (R724m).
Gold Fields said that most of these items were part of the original capital that was deferred at South Deep in 2013 equal to some R1.2bn in 2009 money terms.
‘WE’VE SEEN THIS MOVIE BEFORE’
Analysts were divided on the plan for South Deep.
“We’ve seen this movie before,” commented Johann Steyn, an analyst for Citi. Given Gold Fields’s “… disappointing track record” in respect of previous guidance at South Deep, investors should treat the new targets with scepticism. Citi has expectations of steady-state production of 400,000 oz/year at an all-in sustaining cost of $800/oz.
Macquarie said that based on its 2016 performance, South Deep was “on a roll”, adding that on the face of the rebase plan, its production ambitions “seem a conservative target given the recent annual run rates the mine has achieved”.
Analysts were also concerned that Nico Muller, who has led the South Deep rebase plan team, is leaving the company to become CEO of Impala Platinum in April. Might this lead to defections from Gold Fields to the platinum firm, they asked?
Said Muller: “I’m pleased to say that Terence Goodlace [the former CEO of Impala whom Muller succeeds] has a very good team in place. South Deep is close to my heart, but it’s in no-one’s interest to have departures”. He added that the team at the mine had roundly contributed to the mine plan.
Holland was also asked by Deutsche analyst, Patrick Mann, whether the company would ever consider selling the mine. “South Deep is a great asset; it is a key part of the portfolio,” replied Holland.
“In a world that is not exploring for gold, we have the second largest undeveloped gold asset. So the mine will only become more valuable. It will not only make money, but it is a call option for years to come,” he said.