Gold Fields Limited (GFI) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Gold Field's operating update for the September 2020 quarter conference call. [Operator Instructions] Please note that this conference is being recorded. I'd now like to hand the conference over to Mr. Nick Holland. Please go ahead, sir.

Thank you very much, and good afternoon, everybody, or good morning, depending on where you are in the world today. I'm joined by Paul Schmidt, our Chief Financial Officer; and also Avishkar Nagaser, our Executive Head of Investor Relations. As some of you might have seen, we put out our quarter 3 bridged results this morning. As you know, during the intervening quarters between the half year and the year-end, we give a bridged operating information. We don't give a full financial information. But of course, we'll provide full financials again when we give the year-end results in February. I'd like to start by just describing briefly what we've done on COVID. And I think if you'll look at the book, you'll see that over the year, we've done over 40,000 tests. Now that's the PCR diagnostic tests, which are the definitive tests that you do to detect the presence or otherwise of the virus. I'm pleased to say that as we sit today, we only have around 20-odd active cases, which in the scheme of things is pretty low. Unfortunately, 3 people did pass away during the course of the year from the virus, which obviously is extremely sad. That said, though, the good news is I think we seem to be over the worst of the impact of the pandemic. We're still testing our people. The 2 operations that were really hardest hit from our side was South Deep and Cerro Corona. Both of those mines were shut for extended periods and then operated for extended periods at probably around about half capacity. I'm pleased to say that as we sit now, South Deep is back to over 95% of the total workforce and we're at very similar stats in Peru. Peru is just over 90%. But to all intents and purposes, we have everybody back to work that we need back to work. As I've mentioned in the half yearly results, the impact of the pandemic over the year was estimated to be about 3% of production. And essentially, all of that's come from South Deep and from Cerro Corona. We've not adjusted the production numbers again, as you've seen. So we're reaffirming our guidance that we gave at the half year between 2 million and 2.3 million -- 2.2 million to 2.25 million ounces of production and at the same cost that we gave you before. So let me just make sure those numbers are right, 2.2 million to 2.25 million ounces. And we're saying our costs are between $1,070 and $1,090 and that's all-in cost. So we're reaffirming the guidance we gave you at the half year. So as we sit, we're looking good to achieve those numbers. I think the impact at South Deep has not been that severe in the sense that it's not that we've missed out on a whole lot of activities we should have done. And if you look at the production results for quarter 3, we've got up to about 65,000 ounces, which is very, very close to what we were expected to do anyway even before the COVID situation. And that's meant that our costs have come down quite a lot and South Deep is making some good cash for the group. So South Deep, I think, is in a really good position to achieve the revised guidance for the year. That doesn't look like a major risk at this point in time and we're well set up for 2021. A different situation at Cerro Corona, however, because we couldn't do a lot of waste stripping that we were going to do this year. Remember, we're into a strategy of accelerating the mining over a period of about 5, 6 years so that we can actually create additional tail storage capacity in the pit. So we have to mine out the pit a bit quicker and stockpile some of the ore and then feed that ore over another 5 to 6 years once we've shut the mining. So we've had to accelerate our stripping in terms of that plan. So of course, with the COVID situation coming to the fall, we have not been able to do a lot of that stripping. That will mean that it's going to be pushed into 2021 and 2022. It will take us probably about 2 years to catch up that stripping. And we've mobilized some additional fleet. We've mobilized some additional people so that we can catch up that stripping. And the other effect of the shutdown at Corona because of COVID is that we've not been able to feed the highest-grade ore possible to the plant. And so because we haven't stripped, we haven't exposed some of the ore. We've had to feed ore that was available and we've not been able to get the highest-grade ore into the plant. So that's really why the production is down at Corona. We've been able to fill the process plant but we've not been able to fill it with the best ore possible. So this will come in time. The integrity of the long-term plan is still intact but it will just mean that there will be some additional stripping next year and the year after. And of course, that's going to mean a question going through your minds at the moment. That will mean that our costs will be higher than what they would otherwise have been because some of that stripping that was going to be done this year hasn't been done. It's got to move out. Some of the higher grades that we would have processed will be deferred. So we'll probably see an impact on costs over the next year or 2 probably to levels similar to what we're seeing at the moment. So broadly, that's the situation on COVID. Is there going to be a second wave? Or is there going to be further issues in the countries? It's impossible to know. We are not going to drop our guard. We're going to continue with our vigilance, social distancing where people can work remotely. We're encouraging people to do exactly that. Obviously, we'll continue testing. We'll continue making sure people are aware of the dangers. And then we'll just have to see where we are. If we have to pull back production because of the second wave in certain areas, we'll have to just give consideration to that, hopefully not. And the fact that we're testing people means we should identify issues pretty quickly and be able to address those concerns, isolate those people, quarantine the effective people and make sure we protect the rest of the workforce. Incredibly, we've had no infections at all in our mines in Western Australia. And although we've had infections in Ghana, the recovery rate in Ghana is particularly high. We're up to about 99% recovery rate. So it looks like people are able to be quite resilient to all of that. Just moving on to the overall production results for the quarter. Pretty much in line with what we would have expected, 557,000 ounces attributable. All-in costs of $1,070 per ounce. That includes obviously the expenditure on the Salares Norte project. Not to be confused with all-in sustaining costs. Maybe at the producers, unfortunately, don't give full disclosure of their costs. We are one of the few companies that give you everything. So we give you the full all-in costs. We give you all-in sustaining costs as per the World Gold Council definition. But we give you the full number so you know exactly what you're looking at. So that includes all capital, all exploration, including Solares Norte. I think it's probably worth starting at Solares Norte first. Normally, we talk about that at the end. Let's talk about it first. The project is proceeding extremely well. The COVID situation hasn't slowed us down at all. We've been able to do a lot of the engineering work remotely. The contractor that will be doing the mining has now been mobilized. And they're preparing the area for the mining, which is what we call the pioneering work: access roads, areas where they can dump waste, areas where they can dump the ore, getting ready for the pre-strip that will start in earnest in around about 6 weeks' time. So we're getting very close to that. At the same time, the bulk earthworks contractor has been mobilized to prepare the site for the process plant and for all of the ancillary buildings that will go with that as well. So they're mobilized and they're starting to prepare certain of the areas where we'll do some of the early works, in particular the crushers and parts of the front end of the plant as well. So they're getting that area ready first because that will be the first part of the process plant construction. We've also lodged around about 78% of the procurement orders for the total project. And what does that really mean? So it means that we've priced about 78% of the project, excluding contingency. So we've got firm prices for that. So the only thing that would impact us going forward then is escalation between now and finishing the project in about 24 months. A lot of that is subject to the local Chilean inflation index, which is a very mechanical formula. And if you look at the last 3 or 4 years, the average inflation in Chile has been somewhere around about 2% to 2.5%. The other key piece of work that is almost finished is the diversion channels around the footprint of the operation, obviously, to isolate it from climatic conditions, water control, et cetera. So that's proceeding well. So at this stage, I think we're really in a good space on Salares Norte. And we know that next year is going to be a big year for us, where probably around about 60% of the total capital on this project will be spent as we get into the pre-strip in earnest and as we get into the process plant construction as well. Moving then to the operations very briefly. South Deep, as you've seen, has had a tremendous recovery in quarter 3 as we got our people back. And we showed very good results, up to 65,000 ounces and cost just over $1,000 per ounce, all-in costs. So as you can see, that's an operation now that's looking really competitive in our group. If we look at Ghana, I think what's noticeable about the Ghana region is that demand is now getting into the really good stuff in the ore body. As we said we would in quarter 3, we've seen production get up to over 60,000 ounces. We've seen our costs get down to just over $700 per ounce. In fact, in this quarter, demand is now the lowest-cost operation in the group. So I think we are starting to reap the benefits of the significant inward investment into the pushback that was started around about 2.5 years ago. Tarkwa continues to be very steady, so no particular concerns. And that's really a function of a very consistent ore body in terms of ore thickness and grade that we're lucky enough to have in our group. Asanko has -- I think had a more difficult quarter in the sense that it had to do a lot of stripping ahead of what it would ordinarily have had to do with the premature closure of the Nkran pit with the wall failure that was announced late last year. And so as they try to recover ounces elsewhere, they've had to do quite a lot of pre-strip in some of the satellite pits [indiscernible] in particular to try and make up some of those ounces. And pleasing to see that you would have seen that Galiano put out their results indicating they're still expecting it to be within a range of 225,000 to 250,000 ounces for the year. So hopefully, we'll see a good recovery in quarter 4. The costs, by and large, are a direct reflection of the extra strip that that's put in place, plus we've ramped up the exploration activities on the lease as we look for new ore bodies to sustain production into the future. In terms of Australia, I think overall a good performance. To produce 250,000 ounces in the quarter is indicative of a 1 million-ounce region, which is what we've talked about. Obviously, there's a few pluses and minuses in that. Gruyere have had some issues with the process plant. We had a ball mill failure that cost us a week of processing time. Difficult to really understand exactly what happened there, but we are doing a survey and investigation into that just to make sure that our management practices are up to speed. And we're starting to move more tonnes in the later stages of that pit so that we can secure the plans for '21 and beyond. So there's been a bigger focus on waste stripping there than there has been on ore as we set the mine up for the future. But as we sit today, we're not seeing anything here that would indicate that the feasibility study is impaired in any way. The grade is very close. It's what we thought it would be. The costs, I think, are just a reflection of the fact that the ounce production is a little bit less with less processing this quarter. And I think we're going to be well set up for '21 and beyond. Looking at Cerro Corona. I think I'll summarize that on what occurred, the discussion. It's a direct function of the lack of access to high-grade ore and the fact that we couldn't do the stripping in accordance with the original plan. So that would be a 24-month catch-up between '21 and '22. But pleasing to see that their costs even with all of those issues are still pretty competitive compared to the rest of the group. So I think that's pretty much all I would say at this stage. I mean the balance sheet, we've summarized. Full year looks in pretty good shape. Subsequent to quarter end, we retired the 2010 bond. So that's gone and we were able to pay that off from a combination of cash resources and other facilities. And I think as you all know, we knew that was coming and we put 2 new bonds in place, a 5-year bond and a 10-year bond last year. So essentially, our debt profile is looking very, very good. And credit must go to Paul and his team for the great work they've done there. So I think with that, that's as much as I'm going to give in terms of an introduction. And I'll turn it back to questions, which either myself, Paul or Avishkar will field. Thank you very much.

[Operator Instructions] The first question comes from Shilan Modi of UBS.

I think you did quite well post the lockdowns in various jurisdictions and good work to the team for ramping up operations. A couple of questions from my side. Firstly, according to my calculations, you've built about 20,000 ounces of inventory. Is there any reason for that and when will you release it? Recently, especially the last 2 weeks, FX -- or producer currency FX has improved quite substantially. Have you factored that into your guidance in terms of costs? And then third question for now. Some of the other Australian gold miners are talking about reducing their cutoff grades, i.e., they're going to be mining much lower-grade material in the next year or 2. What's the outlook for your operations and are you similar or different?

Okay. So I think the inventory issue is a function of a couple of things. Sometimes it's blend. For example, if you look at St Ives, we're mining some of the paleochannel material at Neptune, which can't all be put in at the same time with some of the fresh ore and we have to blend it. So often, your stockpiles are a function of where you're mining and what you can actually feed versus what you need to stockpile. So to get a process plant to operate optimally, you need the right feed of fresh and oxide materials. So it's often a function of blending. Sometimes it's also cutoffs. The Granny Smith plant, we're not running that at full capacity. So we have a campaign milling exercise where we run the process plant for 2 weeks in a month and then we actually shut it down. And so often, you will find that some of the high-grade material might come towards the end of the campaign period and you can't get it into the process plant and it gets into the next month. So that can obviously impact ounces as well. Where possible, we are running our process plants at full capacity. So it's not an issue of trying to keep material for the future other than blending. So I think you will find that these stockpiles move up and down, depending on the grade of material we're mining versus the grade we're processing in the cutoff dates. That's all I'll say on that. In terms of looking at our reserves, we've indicated across the group that for 2020 year-end, we're going to be using a USD 1,300 gold price for our reserves. And that's increased from USD 1,200, which we kept fixed, I think, for the last 2 to 3 years. And the reason we're going up $100 is because costs go up. Inflation is probably -- weighted for this group is probably somewhere between 2% and 4%. And so we've absorbed that over the last couple of years. We are certainly not going to be putting in significantly higher prices to look at lower-grade material principally because we don't need to. We're actually filling our process plants already. Granny Smith, where we do have spare plant capacity, we're actually constrained by the mine. And the mine can only get so much material out of the mine. And if you look at the waste and the ore we've taken out, we've probably taken out somewhere around about 2.5 million tonnes a year and that's maxed for that mine anyway. So there's no more material that we could get out. So we're going to continue to adopt a very conservative approach to our cutoff grades. There won't be any significant change. In fact, at $1,300, I think that's probably going to be it for next year and possibly even the year after. I think we should use this opportunity to maximize our margins. As I said, we don't have significant process plant capacity available anyway. And the risk of dropping cutoff grade, Shilan, is sometimes you can lose focus on the high grade and end up substituting higher grade for low grade and actually be in a world of pain that you never thought you'd be in. So I've lived through a couple of price cycles, having been in this company for 24 years. And the lesson I've learned is -- let's stick to conservative cutoff grades. Let's maximize the margin. And who knows? Maybe in 2 or 3 years' time, if we're sitting in a very different price scenario, it can be looked at again. In terms of guidance, yes, we're still good with the numbers for the year. Obviously, if we see significant movements from here, we'll have to think about it again. The rand has got particularly strong. But in the scheme of the overall group, we're not going to be materially out even at these rates. So I think the guidance is still good. I don't know if there's any follow-up questions you might have there.

Just on the -- it's okay. I'll actually come back. I'll rejoin the queue. I'll ask a bit later.

Good. Thanks.

[Operator Instructions] The next question comes from Patrick Mann of Bank of America.

Something that caught my eye was speaking about guidance for next year on sustaining CapEx and saying it's going to be around the $250 to $300 an ounce mark and probably near the upper end of that. Just doing a quick back of the envelope here, it looks to me like you're coming in at the low $200 an ounce now this year. So I mean it could add $100 to $150 an ounce to group all-in sustaining costs. Is that the right thing or the right way to be thinking about it?

Yes. Look, I mean I think the capital for this year is still forecasted around $600 million or so. Not that much of a jump. And we've been saying for some time that sustaining capital will be in a range of $250 to $300 per ounce. And I think, again, with the shenanigans that the gold producers are playing on cost definition, people like to push as much of the stuff into nonsustaining as they can and then have them talk about a sustaining capital number. The reality is we manage the all-in costs. So some of the additional spend is probably going to expand the process plant of Agnew over a period of a couple of years. Now right now, Agnew can do about 1.2 million tonnes a year. We're looking at a strategy that will gradually expand it to about 1.7 million tonnes over the next 3 years, starting with a crusher upgrade. We needed to replace the crusher anyway because it comes to the end of its life. And so with a little bit of extra money, we can expand the crusher and then we'll do a mill upgrade as well. And with the exploration potential that's come into the fore at Agnew, which I've talked about in previous presentations, we believe the time is right for us to reconfigure the assets in the group. So one could argue that, that capital is growth capital. But at the end of the day, I don't think it matters too much because it's all part of the same capital. At Granny Smith, we've talked about the need for us to debottleneck the mine given the fact that we're going deeper. And we have a metric that we look at called tonnes per kilometer hour, which is an important metric because the longer the trucks have to go deeper into the mine, the increase in costs and there's less loads we can get out. So we have to look at how we can actually offset that. So the second decline, I think, is a good way for us to do that. So that's capital that will come in next year as well. I'd argue, though, that is sustaining because it will keep the operation at about 260,000 ounces. And then the invincible complex continues to grow. So it's likely that we'll be spending more development capital to open that up. So again, one could argue that is growth. But to all intents and purposes, it will keep the operation at about 350,000 ounces a year for longer. So yes, $250 to $300 is a good number, including, obviously, exploration that we spend. So some of the capital this year could have been impacted by COVID. So there might be a little bit that goes into next year as well. But overall, I don't think we'll be that far off at the end of the year, Patrick, from that range.

Great. Maybe one follow-up and one comment. So you've put quite a lot of money into Agnew now with kind of new camp solar plant or the renewable energy and now upgrading the plant. So it does seem you guys must be quite confident on the ore body and the potential there. And then the other question -- follow-up question was just on Granny Smith. I recall you were considering a shaft at some point because of the constraints you were talking about. Is this -- does the second decline now -- is that the alternative? Is that now off the table? Or is that just pushed off and could come back again in the future?

No, there won't be a shaft. It was under all -- so we got the second decline. So the second decline will go down to 90 level. And from 90 level down, we've got 2 declines on either side of the ore body of those lenses. So getting the second decline down to 90 level will then enable us essentially to have twin declines all the way down. And we'll see how that goes. But for us, I mean a shaft -- I think if we could, we'd come back to it. A shaft may have been interesting. The problem is, though, you've got to have confidence in the ore body. And it's very difficult to drill down to the deeper parts of the ore body from surface. It's very expensive and you can't really do it from underground until you actually open up the lens. So -- but as you know, we've only opened up 100 level, 110, 120 and getting into 135 in a year-or-so time. That's happened really over the last 4 to 5 years. So we wouldn't have had the geological information to support that investment. The decline, I like because it's lower capital and it's not going to impact us significantly in terms of our costs and the production will just continue. So I would say the shaft is off the table, Patrick.

Great. That makes a lot of sense.

Yes. It makes a lot of sense for me, too. In terms of Agnew, yes, we are confident between the solar and wind farm and the new camp. That was already $150 million of spend. And with what we're seeing coming of the Waroonga North area, with what we're seeing coming at the Sheba extensions at New Holland with the Redeemer Complex that continues to grow barren lands, which looks like it will be anything but barren, there's a whole bunch of stuff that we think is going to convert into resource and reserve in the future. So I think Agnew -- for those critics who thought that the mine was almost at an end, we think they're going to be surprised with what they see coming down the track here.

The next question comes from [ Rahul Bhatt of 91 ].

Yes. I had 2 very high-level questions. [Technical Difficulty]

Sorry. Rahul, your line is a bit faint. Are you able to speak closer to your microphone?

Okay. Sorry, I'll try to speak louder. I had 2 quick questions. For 2021, is there -- can you give any guidance on how much of your production are you looking to hedge? And also in terms of CapEx, next year is the year when you're going to spend the most for Salares Norte and you're also saying sustaining CapEx is going to go higher. Could you give any guide on where you think CapEx is going to be?

Yes. We're going to give you guidance in February for the group for 2021. But what I can say to you is, based on what we've said before, about 60% of the total capital on Salares, which was $860 million, including contingency, is scheduled to be spent in 2021. So I think you can use that as a base. And then if you go back to what I said earlier, that sustaining capital is between $250 and $300 per ounce for the existing operations. I think you've got enough information there to calculate it out. In terms of hedging, we have put a floor price in place for Australia of somewhere between $2,200 and $2,300 for next year. We paid for all of that and the full upside exposure is open. So we've got a floor price in Australia. And principally, we've done that because of the significant capital on Salares next year. We want to give ourselves an underwrite, if you will, for that capital. There's no other hedges on gold in the group for next year and there's nothing planned to be done for next year. We'll be fully exposed to the upside in the gold price but protected on the downside for 1 million ounces of our production out of -- which is probably close to 45% of the total group's production. I hope that answers your question.

[Operator Instructions] The next question comes from Adrian Hammond of SBG Securities.

I just want to ask you if you still have a view that the group can sustain production growth of 2 million or above 2 million ounces for the next decade. And does that include Salares Norte?

Yes. So I would say even without Salares Norte, 2 million ounces certainly can be sustained over the next 8 to 10 years. And that's why we gave you a range of 2 to 2.5. With Salares Norte, I think it's quite likely we'd be at or very close to the 2.5. And if I look at the Australian assets, with what I'm seeing in terms of exploration potential at Agnew, I think certainly Agnew can look at 8 to 10 years comfortably. Granny Smith, I think with what we've got on the books already, we're very close to that in terms of reserves. And that's even before we've converted Zone 150. And there's probably a similar-size ore body down there than what we've seen in the other load. So maybe up to a couple of million ounces of resource. But we'll see there. At St Ives, the Invincible complex continues to grow. So I think that's looking good. Gruyere, I think is already at 10 years-plus and there's more upside at depth there that we'll unlock. Tarkwa, I think you know is already at about 10 years. Damang, I think it's a function of whether we do another cutback. We are doing an investigation into a mini-cutback, which could potentially add another 6 to 8 years. And we'll finish that study over the next 18 months and make the call. And then South Deep, well, I don't think there's an issue right there. So yes, overall, excluding Salares, we're looking very good for at least 2 million ounces over 10 years. And with Salares, sure, we can be challenging that upper end.

And just from an industry perspective, you've obviously decided to recapitalize your mines instead of going out there and exploring further afield. Is that a function of your -- a decision you're making or simply that there's nothing interesting out there?

Yes. One of the things we've learned, Adrian, is that the best place to find gold is where you're mining it. And so that served us very well in Australia. When we bought Salares and Agnew back in 2001, a lot of people said to us, "Why are you buying these mines? They only got 4 years of reserves." Well, guess what? 20 years later, we're still mining. And in fact, we've got -- guess what? We've got about 6 or 7 years of reserves at St Ives and building up at Agnew. So near-mine exploration has proved to be very, very lucrative for us and lower risk, lower cost. The area that we do need to look at, though, is in Peru. We know that Cerro Corona's life is becoming finite. So we are starting to think about earlier stage exploration in Peru as we look to try and replace the asset over the next 5 to 7 years, given that Cerro Corona has got about 10 years to go but only 5 years of mining remember because then we'll be storing the tailings of the pit. So that is an area that we are going to become more active. In Chile, we obviously are very active in the camp, the greater camp, which has probably 20 properties in there. And that's going to take us quite a while to work through because we do believe Salares can grow into a significant camp scale opportunity. At Tarkwa, we know that the ore bodies continue to extend. So we're doing some step-out drilling over there. And we're starting to see the ore body is replicating, if that makes good sense. But apart from that, I think the prospect of us doing early-stage greenfields in new countries, I don't think it's a strategy that we need to adopt. It's a strategy we used to adopt some years ago, Adrian. If you go back to 2001 up about 2012, we were exploring in 15 to 20 countries. And we probably spent -- if you add all numbers, we probably spent about $700 million or $800 million over 15 years and we didn't get a lot out of it. Well, luckily, we got Salares, which has proved to be a discovery but that's high risk. It's high risk. And I think there's better stuff closer to home for now and I think it would be a dilution of our attention. That's a bit of a long-winded answer. I hope that answers your question.

Yes. And briefly on M&A, Nick, I also hear that [ IMG ] is working out only 30% of Tropicana. I mean do these sorts of things interest you?

No. I don't think we'd be interested in coming in for a minority stake in any asset. I think if we were going to do anything in M&A, it would have to be synergistic deals that made a lot of sense. And to be frank, given the fact that we've got Salares to build over the next 2 years, I don't think there's too much capacity in the group for us to do a lot more. So high prices as well, I mean very difficult to find value. The vendors will be wanting to use spot for the price. We're going to be using $1,300. So I think it could be a short conversation.

The next question comes from Leroy Mnguni of HSBC.

My question is just around the sustaining CapEx guidance. So if you're saying around $250 to $300 an ounce, how should we think about that sort of medium to longer term? Do you expect it to remain at the upper end of that range for a period of time? And also, how should we think about inflation. So I mean is that more like a nominal number? Or should we be inflating at that sort of 2% to 4% over time?

Yes. It's a good question, Leroy. I think certainly -- I think for the next couple of years at least, you can use that as a nominal range, $250 to $300. And I think the thing with sustaining capital is it doesn't happen in a straight line. It can be chunky at times. So that's why we're giving a range. But I think as you get out maybe 3, 4 years, you should really be inflating that number if you want to put in your model. And based on today's, somewhere between 2% and 4% is a good number. But I think certainly for next year and probably even the year after, that's still a safe range in nominal terms.

We have a follow-up question from Shilan Modi of UBS.

Maybe just switching gears a bit from what I was talking about earlier. But Damang, you did guide that the mine would have an improving grade towards the second half of the year and you've delivered on that. Maybe just talk to the outlook for Damang in terms of life of mine impact. How we should be thinking about grade and cost for the next couple of years at the asset?