Gold Fields Ltd (GFI) 2006 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Gold Fields First Quarter Fiscal 2006 results conference call. My name is Coby and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [OPERATOR INSTRUCTIONS].

I would now like to turn the call over to your host for today's presentation, Mr. Willie Jacobsz. Please proceed, sir.

Thank you, Coby. Ladies and gentlemen, good day and thank you very much for joining us for this call. We will follow the normal procedure with Ian Cockerill, our Chief Executive Officer making some introductory remarks. We have Nick Holland, the Chief Financial Officer, who will talk about the finances; Mike Prinsloo, Head of the South African Operations will follow with the remarks on the South African mines; and John Munro, Head of International Operations on the international mines.

Now, I'll hand over to Ian Cockerill.

Thanks very much indeed, and good day everybody and thank you for joining us. When we last spoke of the June quarter, we mentioned then that there was several operational issues that were likely to negatively impact on this quarter's production and that was even without the potential impact over the rates here in the South Africa. And despite our best efforts of reducing the impact of these issues, they have played a role in the results laid out before you today each strike in South Africa. This is -- it means that there has a total reduction in gold output from 1,780,000 ounces in the previous quarter, dropped by 8% to 993,000 ounces in this quarter. While roughly half of the stock was used at the strike and the balance was used to the previously mentioned operational issues. Fortunately, we received gold plants that's higher in both rands kilo and dollar per ounce term, up 4% in rands kiloton through 91,669 and up 2% in dollar terms to 437 dollars per ounce. We seek out some ways towards (indiscernible) and the impacts to lower production. Stocks will gain more control and despite the 6.5% wage increase in July, we managed to reduce total expenditure by 1% to 2.4 or $377 million as in previous $386 million in June quarter. Overall, cost in South Africa (indiscernible) by 12 million rand, which despite the reduction in volume is do the creditable performance where now considered approximately 75% of that cost a fit irrespective the output level.

Now the combination goods cost control and lower production level improved with the prices. You can result in bottom line net earnings of $7 million compared with the previous quarter's $35 million. However, the previous quarter did include a one of tax credit from the Australian operations. So, if one excludes that deferred tax credit as in previous quarter, then we will be comparing this quarter's $7 million net earnings against $8 million in the previous quarter. So, in brief summary, not a brilliant quarter to Gold Fields, as we highlighted that the market we would like it to be. There is (indiscernible) report that operations have shown some improvement in the September month, as well as in the October operation month, which certainly does bode well with a strong December quarter. With these introductions, let me you over to Nick, as he will give you some more of the details on the financial.

Thank you Ian. I'm not going to say anything more on the accounts. I think, Ian has covered that in sufficient detail and obviously, the book has been released, as you've seen it's on the website. But, I just want to spend a few minutes talking about cost control generally because it is a topical issue within South Africa at the moment and we put out on the web this morning, six or seven slides, but I will briefly again summarize for you in a couple of minutes. Would pick up some of the things we doing in South Africa. Now, these figures are all in rand, million terms. So, if you could bear with me, callers from the US, because I'm going to talk about the rand figures on this.

Some time ago, we announced that we had a supply chain initiative core project deal on that we had launched some two-and-half years ago. And last year, we said, but we were going to analyze around 800 million rand of spend for $150 million and work out what sort of sellings we could realize in terms of standardization of products, rationalization of suppliers doing more competitive price benchmarking, moving spot purchases, six contracts and improving our specifications for months. That's the number of things we are doing. And we had set up our target of savings 100 million rand a year, in contracts with savings, we could achieve that. The cash flow impact of that obviously, flowed through as you tow down on the new contract. And last year, we achieved around about 30 million rand at savings. And this year we forecast at round about 60 million rand at savings. And in this current quarter around about 15 million rand of that in fact has been realized, which doesn't sound like a lot but bear in your mind that the savings in this project is going to ramp over a period of time and this is only a quarter. It's in line with our expectations. Though over the next year then we well realize 60 million rand, if you look at our track performance compared to the market and there is a slide that you will see in the handout that you will get on the website that shows that over the last five years, we've significantly outperformed the general mining market in terms of our price decreases. And in fact, what we have achieved in South Africa over the last 18 months is, we've made savings that have in effect eroded the impact of general inflation increases which for the purpose of calculation you can work on between 4 and 5%, we have essentially kept our prices flat and that is a benefit you've seen coming through in our cost. A lot of those benefits you saw last year were in fact -- we reduced our overall cost while we increased our outputs. And this quarter has been somewhat complicated by the impact of the strike, which has caused interruptions causing terms of ramp down, the strike itself, and also getting back to normal levels. So it's not an easy quarter to actually measure some of the benefits we are trying to get out of this activity. Nonetheless, the project is on track, the next step is to look at the next wave of expenditure, which is around about another

800 million Rands. We are going to analyze that for further aggregation opportunities, time of our best opportunities looking at the total cost of ownership on those items and in particular, looking at performance based contracts, where we actually get our suppliers in the Company aligned in terms of the overall objective.

We think we could save another 70 to 100 million Rands. That's what we are targeting this year with a cash flow benefit of that coming through over the next 18 to 24 months. In summary, Project Beyond is delivering what we wanted it to deliver, and I think that we are on track to deliver the 200 million Rands per annum of saving that we have targeted. If we look at Project 100 plus, which was a derivative of Project 100, which was a very successful project focused on reducing our consumption on materials, we have set up a separate target of 200 million Rand a year savings and we are going to achieve that in a number of areas, principally, labor managements, rationalizing medical facilities, probably with some of our favorites, looking at high density accommodation and seeing how we can streamline that. We are also rolling out much cheaper, more effective commercial systems, which are going to reduce the cost of maintaining those systems, get us off all legacy systems and expensive platforms, and also looking at improved maintenance.

So, we will see the benefits of that also coming through over the next 12 to 24 months. And the international sourcing is also a part of our supply chain project and the exciting thing here is the possibility of looking at sourcing systems commodities on a group basis. But if that's not possible, certainly rolling out the experiences we have had in South Africa to the international operations and making sure that we can get some of the same benefits on that. And I think the target we have set, in particular for the local operations, of 70,000 Rand a kilogram, it is certainly a target that can be achieved if we look at the combined effects of these cost initiatives together with maximizing the revenue. We all know that the property equals revenue minus cost, and that in particular unit cost can be reduced in two ways, by reducing the absolute spend that we incur and also by producing more given the fixed cost. And we have productivity initiatives underway, on that which Mike possibly will refer to briefly. But if we are successful on both of those fronts, then we see no reason why we should move away from what is a stretched target, but we think an achievable target of 70,000 Rand a kilogram for the local operations.

With that I will hand it over to Mike Prinsloo.

Thanks Nick, good afternoon everybody. As Ian mentioned, the South African ops were impacted on by the strike and the strike affected the different operations by five and/or six days. The we took a day before the strike where we supported all the prices -- at these prices our debts would have collapsed, if we left them unsupported and we weren't sure how long this strike was going to be. And then obviously, after the strike the slow build up back to full production also impacted on the results. With the results was down 3% on gold production, down to 289,800 ounces, but fortunately they were still able to achieve over 9 tons for the quarter. This was in line with our forecast given in June quarter and as I said was all due to the strike. The lower gold production obviously impacted on other measures and our total cash costs were, say that $333. I have had the highest assisted to offset some of the production loss and this resulted in an operating profit of 25.8 million US dollars at different time. Capital expenditure for the quarter, we reduced that in line with the level coal production and that was 7.2 million for the quarter.

Looking forward to the December quarter, we can expect very similar performance above 9 tons or 290,000 ounces coming out of Bloemfontein, this is mainly due to -- as we are holding up not the full production at number one and five shafts in terms of Carbon Leader build up and BCR's ton introduction at the other shafts does come in at a slightly lowered rate and this also in that we try to build underground volumes to replace the surface tonnage that we are trying to win different time of.

Dead repairs on the previous quarters at Guateng Beatrix has been wrinkle surface called which the previous sites intervals was creating problems. Turning to Kloof, Kloof's gold production was also down 3%, although the previous quarter was a low base and they had these problems where we went from terracing to slope. I am pleased to say, that during the October month we have restored a lot of the terrace mining, and all of Kloof are back on terrace at different shafts and we are seeing a much better mining mix come up which bodes well for the December quarter.

Kloof is slightly longer than Driefontein storage volumes price track, but as I said October has showed a good result. We can look forward to Kloof producing roughly 25,000 ounces more than it produces quarter in the December quarter and this with the higher gold price will obviously impact, and might be in margins and costs, at a lot more acceptable level than the past quarter.

Beatrix's gold production decreased further by 15%, and that was mainly impacted by the strike, but also the smectite problems, which we reported last quarter. And I am also pleased to announce that over the past three months, we've been able to come up with short-term solutions to the smectite problem at number 4 shaft and we've put in place long-term solutions to currently eliminate this problem. And in October month, the four shaft has got back up to 90% of its previous volumes in the new round five areas, which bodes well for the December quarter. So I am looking forward for Beatrix we can expect the 150,000 ounces plus for the December quarter, which will reflect positively by the margin.

So overall for the South African ops it was a tough quarter. but it's behind us and the strike is behind us, we have restored all the relationships at all the different shafts and mines and we can expect a good December quarter from the South African ops and with the gold price currently at about 100,000 rand a kilogram that will get the system to create a lot more flexibility in the mining areas. With that I will hand over to John.

Good afternoon. And good morning everyone. In terms of the introductions International Operations, it was a much lower quarter in the international groups, But they must be seen against a background of the record numbers produced in June and we had warned that it would be difficult to repeat that performance in the near future. And if you have a look on the mine-by-mine basis the reason for the drop in gold production on each of the operations that we set out previously, I think it is clear that the unearthed serious operations which is on each of them and some of them like Tarkwa are the normal ebb and flows of the production operations there.

In terms of the gold production for the quarter, it declined to 346,000 ounces on a attributable basis, that's a decline of some 12% and that is large due to talk of Tarkwa and St Ives and I'll briefly touch on those issues at each of those mines to further on.

Total cash cost increased 3.5% for the international group to a $294 an ounce and that maintained by the 33% operating margin and for the international group. If as you actually look at the dollar spend on or (indiscernible) million and you will see that remains well under control and that the increase in total cash cost that will reflect the lower gold production levels.

Operating cost is some $59 million for the international group that represented some 69% of the total company's operating profit. Briefly on the individual operations in South Africa and Ghana first it did have much compressive result than the June quarter, but the actual operations mining and that performance to our expectations. In fact mining achieved the 10% increase and that has moved up to some 24 million tons for the quarter. Additionally moved against the previous quarter as always, and we continue to push this waste stripping as hard as we can, until it increases flexibility and it also remains an operational imperative even if draws up the current operating costs.

Gold production was down 274,000 ounces for the quarter against 199 in the previous period. We did indicate that 199 was an exceptional number and would not be repeated. Of the reduction, about 6000 ounces were attributable to a reduction in release of gold and precious i.e. in the June quarter. We have -- we had gold being released from the leach pads of some 6000 ounces and in the September quarter it was getting neutral. This was expected and we had moved to high levels both in the north and south leach plants and although into the December quarter, we've now moved on to new list in the south, but remain on the high list on the north leach plant. And the new mill, that was a little bit from the September quarter, we've actually to get the right mix of hard and soft golds in high and low grade ores as a result to a flat drop in both throughput in grade, that is set out in some detail in the quarterly book if you would care to look at that. And by the end of the quarter, this was largely resolved and in fact in the third weekend in October, we have seen that more getting back to original levels of production and expected head grade.

Total cash cost at book to us at $277 an ounce and that really reflects two factors, the first being the increase in stripping ratio from 3.17 in the previous quarter to 3.46 in the September quarter and I have talked about that previously. Obviously, then the lower gold production level and obviously then contributed to the increase in total cash costs. So, beyond that, no areas of concern on the operating costs.

In terms of outlook, we are looking for a slight increase into the December quarter, but do not expect it to be significant and we have always learned in the past that the actual flows of gold from the East remains unpredictable, particularly of the size we used to be operating at Tarkwa, but we do expect to obviously see an improvement in this coming quarter and going forward. Moving on to Damang field in Ghana, we had a good production result there, gold production just about flat to 67,000 ounces. We are seeing a continued good performance from the new earthen pits that we opened up earlier this year and that operation remains steady. The increase in total cash cost to $375 an ounce really reflects the inclusion of a non-cash charge that's set off in the book and that is due to the consumption of some high value stuff. There's a main cut back put underway during the course and we are making good progress year-to-date.

In terms of outlook, we expect demand to continue at these posted levels, although we will see the inclusion at times all these sorts of non-cash charges as we consume the rest.

Moving across to Australia to the St. Ives operations, low gold production there was disappointing. We were heartened by continued improvement in the operating margin there. Gold production declined to 120,000 ounces for the quarter and that reflects three things on a comparison against June quarter. First will be the inclusion of some clean up in the old plants in the June quarter. We had warned in the previous quarterly briefing that we had seen a poor stock on the underground mine in the September quarter and most notably the Easter Falls underground mine, which was an unfortunate development in an excellent quarter in June and that difficulty was associated with the West and the high grade surface was affected forcing the ore from the high grade cuts through the September quarter. And into the October month, we saw an improvement in volumes from the underground mine at St. Ives.

The September quarter also included a mill shut down on the Plymouth and that contributed to the additional reduction in gold production. Just, currently on the mill, despite the shut down, the mill is performing a lot better now, we previously commented on some of the difficulties we have had there. Recoveries are now, I think to the mid-90s and most of the mechanical issues that we have discussed previously seems to be behind us and we are very pleased with the performance there. Total cash cost for St. Ives improved to Australian $414 an ounce from Australian $450 an ounce in the previous quarter and that reflects better cost from the Lefroy mills and was an improvement from the underground cost at St. Ives. Some of the cost initiatives we have had for quite some time and shows some real benefits. The total cash cost improved despite the lower gold production. There is reference in the book to some credit, but even if you were strip those off, you would still improvements in the cost position. The property increase at St. Ives to $14 million from 10 million and that reflects our cost performance.

In terms of outlook for the next quarter, we do expect gold production to improve at St. Ives and concomitant effect on unit cost as well. Briefly on to Agnew in Australia, we had another exceptional quarter. We did well, though the 65,000 ounces achieved in June could not be repeated thereafter and we achieved 62,000 ounces in the September quarter. And that reduction really is due to the volumes in slightly lower grade (indiscernible) under ground mine, but really according to normal levels. The Fong dang (ph) underground mine continues to ramp up slowly and it has seen some good progress there, and then the Fong dang open pit is performing well and as well has got good grade reconciliations there, which is important. Total cash cost at Agnew is stable at 303 Australian dollars and that maintains a margin of around 50% -- sorry a 100% for Agnew. So, very popular mines and continue to perform very well. In terms of outlook we expect this mine to be stable in the December quarter. On the development project and specifically the Cerro Corona project in Peru, during the September quarter we continued to make good progress in all the activities required to reach an investment decision by the calendar year end, which has been our previous commitment. For me the most significant development was the single official public hearing associated with the environmental impact study approval and that was attended by some 2,500 people, it was a very peaceful meeting and demonstrated very strong support and demand for the project from the local community and I think that message has made a big impact on the permitting authorities. By the end of the September month, which is when all the questions had to be ended with respect to the environmental impact assessment, those we closed off in September and we are now in the final stages of announcing those. The feasibility engineering was completed in the September quarter, as we indicated it would be and we are now in the process of the final review on the numbers coming out of that. Also during the quarter, we have made a final -- a good progress in the smelter markets, the Cerro Corona concentrate is very sort after by smelters around the world because of its high quality and gold -- and high gold content as well. We have also embarked on the first phase of the financing of the Cerro Corona project and again are seeing a good reception from the bank markets for the Cerro Corona project. In terms of outlook for this project and all the aspects that are under our control will be completed in time for a decision by year end and at this stage we still do expect permitting to be achieved but it is beyond our control, and I think you might recognize that there are lot of dynamics around money in Peru that has the potential to delay this process. And at this stage we haven't seen any signs of that, but remain cautiously optimistic for an investment decision before the end of the calendar year. Thank you and back to Ian.

John thanks very much. Now before we conclude this feedback I think there are one or two areas that I would like to highlight and just bring you up to speed certain key issues around the group. Firstly, I know many of you are always keen to understand what is the status of the mining license conversion. We submitted to the DME a license conversion for Driefontein mine. This submission has been well received by the department, but importantly in the new format that they have asked that all submissions should now be made in. The submission has moved on from the local adjudication to the final adjudication and we have been informed that granting of this license for Driefontein should follow in due course. Certainly there have been no issues that have been highlighted, no aspect that has indicated any cause for concern. It is now simply a question of allowing the formal adjudication process to take it strong. In addition because we are now happy and the department is happy with the style of the submission we are finalizing the submission for the closed mine in Beatrix and those conversion applications will be submitted before the end of this year. So, well in line with our original anticipation of when we will be ready and certainly well within the five-year guideline as laid out by the government. Secondly, you may have seen a recent announcement on the APP project in Finland, whereby we have agreed to work with North American Palladium to see whether or not there is an alternative development strategy for this prospect. And certainly, we are pleased to be associated with a Company that has previous experience, not only in this commodity, but importantly also in Arctic mining conditions. It is also our belief and this is what strongly motivates us to get this proposal up and running, is that we believe that a fresh pair of eyes and perhaps a different approach mainly to the unlucky environment within -- that we believe is inherent within this project. Now, for this reason we have developed a model that allows North American Palladium to have a direct participation in the project should it be developed. But, also allows Gold Fields Limited exposure to the PGM expertise of North American Palladium and equity within that Company. I think basically this shows that this is a potential win-win solution for all parties concerned. Thirdly, just a heads up on the status of the pre-feasibility study at (indiscernible). This study continues to make progress until many of the questions that needed to be asked in the field of imaging study such as, will there be sufficient availability of water, so that is mining, that certainly resulted in positive outcomes. There has been additional install drilling and this has identified further potential sources of ore, which will require the calculation of an updated interim resource calculation, which Gold Field will be completing. Now, this calculation of course is not going to be ready before the first quarter of 2006. And that is pending the completion of oriented core conformation of the geological model and resolution about the quality assurance and quality policy. And these are issues, which are normally associated with the coast gold deposit. This is a characteristic of the deposit and it is important that we get our heads around this and we understand it fully. So, in other words, we are still in the evaluation stage and certainly I believe it's appropriate for us to spend more time on testing the best options for moving forward to the next stage of feasibility. There may be a month or two delay, but certainly we are moving forward with that project.

Fourthly, our relationship with Norilsk, you may be aware that Norilsk has been asked to nominate a third Director to the Gold Fields Board, and they have accepted this invitation and have put forward the nomination for consideration. Already, we have had several Board meetings with the existing two Norilsk nominees, who have been present and have made a very valuable contribution to the debate at those meetings. So, all in all, I feel it fit to suggest that the relationship with Norilsk has certainly normalized. There is a free flow of information and communication between the companies. We continue to investigate ways in which we believe we can advance this relationship looking at cooperating around potential ideas, (indiscernible) and drawing value for the company as a whole.

Finally, looking for the outlook for the group in the December quarter, as you heard from both John and Mike, we've had a good start to the December quarter, particularly in South Africa where operational performance is showing a steady upward trend. Certainly Driefontein is maintaining its position of holding the yellow jersey down here. Kloof is improving nicely albeit of a low base, but we are certainly seeing better volumes and grade. Importantly, Beatrix is in much better shape than it was at the beginning of the September quarter and with the return to steadier state increased volume, a basic 4 shaft, which is the high grade portion of Beatrix, we should be looking forward to improved performance coming out also from that operation. Internationally, you heard John say that both Damang and Agnew will continue to perform well and we are looking for better showing coming out from (indiscernible). And Tarkwa is certainly looking good, although the lockup that we've had in gold inventory at this stage is not showing signs of coming up consistently. But this is fairly typical behavior from this particular mine, we have seen it before, and we have seen the release before. So, we don't have any cause for alarm. So, we should be looking for December quarter, which has better quarterly output in terms of gold. Unit cost will also be reducing as well. Back that up with a better gold front (ph), we believe it should augur well for a stronger performance in December. So, overall, I think that we did highlight that the September quarter was not going to be a (indiscernible), that certainly has been the case. We've flagged after the market. We said back in June that we did believe December quarter would be stronger and it is pleasing to see that the actual result that we are seeing in the first part of the December quarter certainly underlined our belief that we will be looking forward to a stronger December quarter. With those concluding comments, let me open the floor for any questions.

[OPERATOR INSTRUCTIONS].

There are no questions from anyone. I think we did give a fairly comprehensive overview there. Perhaps then it would be appropriate to sign off to thank people for listening in, and if anybody has any questions that they can think of afterwards, then please do feel free to give us a call.

I'm sorry sir. We do have questions in the queue at this moment. Would you like to take them?

Okay.

Victor Flores, HSBC.

Could you give us a sense of what the rand per ton mill costs were at Beatrix and Reef, because I don't see them in the press release? And then I have a follow-up on that.

Victor, it's actually in our book. The total underground cost per ton for the South African operations increased from 591 rand per ton last quarter to 627 rand per ton this quarter. And if you look at the total rand per ton including surface, it went from 467 rand per ton to 503 rand per ton, and the main reason for that increase is the lower production caused mainly by the strike, and I think as Ian said earlier, the total cost in rand million was very similar to the previous quarter and you've got the fixed cost element that was between 16 and 17% which means that you don't lose all of the cost at a lower production level. These costs are broken out for both surface and underground on page 21 of the quarterly report.

I apologize, I only have the shorter version in front of me, and I will go back to that. Just my follow-up refers to the efforts to get South African costs below 70,000 rand a kilo. You are there at Drief, not quite there at Kloof and Beatrix. What does it take over the next few quarters to move you in the right direction? You've been working very hard to get the grades up to minimize the amount of tonnage you are moving which you are not supposed to be moving under these circumstances. You've got Project Beyond, which is going your way. What more does it take to actually get you in the right direction at these two operations?

Victor, it's Mike. We've put in place a lot of productivity programs and initiatives over the last 18 months in line with moving more to the sort of fixed model of mining. We've also completed a lot of ventilation and refrigeration programs, and in that over the last two and a half years over 800 million. That's all coming to fruition now. We are also at the long life shafts into a lot more flexibility with (indiscernible) and we are able then to equip (indiscernible) and give the crews more flexibility to counter the (indiscernible). So, there are a lot of valid initiatives in place. There are lot of timing initiatives and we are pretty confident having weaned off Kloof and Beatrix will surface the niche. That is a build up in underground volumes at the new long life shafts, four shafts at Kloof and three and four at Beatrix will make up for this damage (indiscernible) target of 70,000 rand a kilogram.

Great, thank you Mike. If I could just ask a follow-up on the international operations, if you are in a position of making investment decisions by Cerro Corona, will you be providing us with more details at that point in time?

Yes, Victor. Once we've actually got that review and the feasibility sorted, we'll then publish the full capital operating cost of that picture exactly how the whole thing looks. We just want to finish that review on that first. So, we expect to do that during the last quarter of the year.

Okay. Will you be in a position to give us the acquisition cost?

Yes, we will.

Okay. Well, we will stay tuned for that, and thank you very much.

Thanks for your questions, Victor.

Steve Sheppard, JP Morgan.

Good afternoon, gentlemen. I would really like to just focus on Kloof, if I may. I am a little bit perplexed about this slope reef issue, and it's the second time we've heard this in two years and I take that and I look at the development results from page 22 of the book and I see that the meters advanced on the VCR are close to down 20% on the quarter, on reef developments down 30%. I need you to try and help me to understand, Mike, how we can reconcile this flexibility issue with lower development rates, please?

Yes, Steve, look one of the issues that has affected the development obviously in this chart, but not to the extent that it affected the stropping. What we have done is we have put in projects in place, we have reprioritized all the developments to make sure at the long-life shops that we get all of our positions up to 24-months plus. We have over the last 18 months and even longer as the price has gone south in terms of rand kilogram all the way down to 78,000 rand a kilogram. We stopped a lot of development programs in the areas that had (indiscernible) 200,000 rand a kilogram today, we have in the recent months repositioned all the development projects at all the shops including the Kloof at 92,000 rand a kilogram where we budgeted at 85,000 rand a kilogram. So, we have added an additional 15% of development into our targets and we have landed the dice on the project with the aim to achieve even on those targets. And the development results you see now sure is one quarter, but a lot of these results only come into effect 18 months from now. We have got the requisite price lines in the next two years in the operational plan well positioned to maintain production and now we will pick up on the development to make sure that we have maintained that 24 months rolling orders.

Thanks, Mike. Could I just follow up there? You said you've repositioned the development to 92,000 rand a kilo from 85,000. How does that reconcile with the SAC (ph) strategy as opposed to the Wal-Mart strategy change?

We will buy some pay limits, and as we build up the underground volumes at the new long life shafts, I mean, that ruptured pay limit and therefore, we are able to develop at a higher rate, obviously at a higher gold price, we can bring in more development than what we budgeted at 85,000 rand a kilogram. So, it is mainly a flexibility issue to rate this volume mining mix over the long term.

Okay. Finally then could you just tell us what impact that's going to have on the yield at Kloof? Also, what sort of development rate should we be looking for on the VCR going forward?

Business leaders -- you just said that we were 25 and 30% off, we will restore those in this quarter, but going forward we can look at 10% on top of that to (indiscernible) between four months' orders of sophisticated...

So, we should be looking for what, 6.6 Ks of line development?

7 kilometers.

7 kilometers. And then just that last question on the grade. If you were mining to a lower pay limit, then we must obviously expect the grade to come down. Could you tell us what the grade is that we should be looking at for the future?

Steve, I think you missed on what Mike said. What we are really doing here is we are still sticking with our 85,000 rand a kilogram for the sourcing plant. So, we are assuming a higher received prices for the development. In other words, you deserve, assuming a higher gold price environment, but we are still going to be maintaining our orders of grade as available now. So, the grades, which you saw coming off from Kloof, now we see those are being maintained, but we want to get more volume coming out. That is why you need the extra development to improve the flexibility as Mike said.

Could you just update us on what those grade expectations should be? Should they be the ones that are reflected in your orders, the statements of 8 grams a ton for 2005.

If you look in the books --

I am looking at it as we speak.

Right, you are looking at -- in some way this is the high 8, that's certainly is sort of the grade level that we would be looking at. The one thing that distorts the (indiscernible) -- if you look at the life of mine hit grades, adjusted through recoveries, (indiscernible) run about 9.4 gram per ton. What that includes? It includes a fair chunk of reserves that fits in the main short tiller, which is an exceptionally high grade. So, it's just some of the total figures, so it does seem as it perhaps we are undermining. It is very much a reflection of what is currently available and it would be nice to get to 9.4. The ability to do that with currently available reserves, because clearly we can't get into the short tiller this year. It means that we have a short -term objective of trying to get us close to 9 grams a ton as possible. What you are seeing in September is 8.7, between 8.7 and 9 is a realistic grade going forward.

Peter Townshend, Barnard Jacobs.

Regarding questions for Mike on (indiscernible) in recent times. Last quarter, we saw mining equipments rusted because of seismic problems and this quarter actually. Mike, is there a particular problem or are there specific issues there or is this normal seismic event associated with (indiscernible) minus?

Peter, I missed your middle part of your question?

Mike, it is just on seismic problems last quarter, it's a curse and this quarter (indiscernible), are there particular issues there or is this the normal seismic event you would expect given (indiscernible) minus?

It is a normal seismic event. The problems we have had (indiscernible) in recent times this quarter and the previous quarter was we had (indiscernible) of some of the (indiscernible) to the South Basin. We don't have a lot of damage on this pipe itself, in the southern area, but we had access problems and thus we treated and sorted out. It depends where the seismic (indiscernible) events that really caused the abnormal damage, but it is not abnormal to anything we have experienced in the past.

I think, it is also fair to say, Peter that this quarter, the seismic activity of recent time was no nearer than it was in the June quarter.

And then one other question on Burkina Faso. The issue with Coarsegold, is that something that you currently believe will lead a negative five or a positive five. Do you think it is going to be positive for the outcome in terms of reserves in greater (indiscernible)?

Impossible to give an either or answer on that one. But the experience tells us that when you have an ore body that contains a fair amount of Coarsegold, it can lead to some quite severe swings, either positively or negatively. Certainly, the experience that we have had to date in terms of resampling, is it tends to show a more positive bias than the negative bias, but again my experience in dealing with Coarsegold depositories, you treat them with a huge degree of respect, because you can get it horribly wrong if you are not careful, and I guess what we are slicing here is -- which is a very, very interesting project. The more we look at it, the more we get pleased with what we see but rather than rush (indiscernible) to make mistakes. We feel it's appropriate to sit back, reflect some of the information that we've got and look at it very carefully and make sure that we move into the next stage of feasibility with our arms around it. It's just a question of understanding the nature of mineralization, where it is coming from or what that means in terms of evaluating this project. So, I am not unduly concerned about what I see. It's just a question of being prudent in the way that we deal with the information.

Heather Douglas, BMO. Please proceed.

I have a question about cost inflation and it is because of labor, and we saw the kind of high profile 6.5% increase in South Africa, but I was wondering if you can speak to how wages are going up or changing in Australia and Ghana?

This is a very interesting question, Heather. I mean, Ghana is probably the lowest cost increases, John might want to be more specific, but it is -- certainly we are seeing huge pressures in Australia. Wages are having to go above inflation there because the -- the mining sector is going through such a huge expansion and there are plenty insufficient people to go around. So, we are looking at wage increases on average at about 5% in that part of the world. And we are looking in Ghana at around about 3.5 to 4%, those are the sort of numbers that we are looking at.

But those don't seem to be less because of the increases in reagents and higher energy costs -- higher that concerned more important than silver and mining increases in labor?

Let's not underestimate. We remain at (indiscernible) people working on our international operation, but the actual value that labor represents of the total cost, yet can still be fairly significant. And often we find that labor get sub fused within the so-called mining contract. But if you actually strip it all out, labor can be fairly significant overall particularly in Australia, it is an issue that we are looking at very carefully. Jonathan, if you would like to add anything?

In terms of input cost, it obviously depends on the style of operation particularly on surfaces that are underground, typically in those mines we -- labor and this is fee-on-fee through basis, so, looking at the contractors and operators as well. Labor can be about 25 to 30% across the -- and 30 to be a cost driver. You know, diesel is probably in the low-teens and reagents and some of the across the numbers. So, labor is a big driver in Australia. I think it is a -- you can (indiscernible) to the major concern for most gold mining companies in that country and it is a major concern for us, which is one the reasons why we continue to look at as much mechanization as possible and move a lot of people from the operation.

George Lequime, RBC Capital Markets.

There is a couple of questions for John, just on St. Ives and in Tarkwa. Just on St. Ives and thanks for the breakout in the annual report on the reserves per deposit, I was wondering you didn't actually mention the split between underground and surface reserves at St. Ives. It seems like you are having some of the problems just building up the production rate underground, I was wondering if you can expand a little bit on that, and also give us a bit of an idea of -- and you mentioned earlier about the cost underground, where does that stand right now?

Yes, George, just to take various compounds of your question. In terms of the reserve that's (indiscernible) 50% underground. At the moment I don't have the exact price on in terms of tons and grade at the moment. In terms of the actual reserve decline year-on-year, about 500 -- I think it is 550,000 ounces and that in fact reflects the -- in fact the slightly lower than depletion because we had the rest on discovery, but really we had a very poor year of discovery. And that is why we have seen the decline in reserve year-on-year. Where we -- actually at the negative discovery, which we talked about in the releases, some of the cost inflows during and the bottom part of the Argo underground mines, in fact some of them removed from material or reclassified as actual resources. And that is why you have actually seen a decline there, and that's why we have gone back to more equal balance between surface and underground contribution to reserves. I think in terms of the build up in the undergrounds, we actually said that in June we had an excellent period there about Argo getting up to decent time as in Tarkwa as well. We had a bit of a set back in September quarter, and some of that was some poor decision making on the particular slope design and we think that's been remedied. So, the cycle slows in these underground mines, (indiscernible) which is part of the (indiscernible) complex performs very well, some very good slope there and he is trying to open up the (indiscernible) which is an extension to that. On Argo, we previously said and has been started lowering overall grade than we anticipated, but we are starting to overcome that with some regional productivity there. In terms of your -- I think your last question was where we are in underground on the mining cost. Across the board, and it's very variable because you may even have some been very narrow lease minings at times. But we are running at about 40 Australian dollars per ton for the mining operating cost and that would be all the mines and the property at a particular point in time. Does that answer your question, George?

Yes. Just looking at the next couple of years as they look like that you will have to ramp up the production pretty significantly. Are you still on track with that or is that going to be an issue or are you comfortable that that is achievable?

Look, George, I think it would be -- the ore deposition is not where we like it to be, 3 million (indiscernible), which is more comfortable number. We have never had an expectation of huge ore deposition at St Ives given the nature of mineralization. So, an area without discoveries is not good for us. But we think we have sensed some of those things around, we've got some good projects in the pipeline and things are looking like they could turn into reserve growth going forward. And in terms of the near term, we have got alternative options at the Cave Rocks underground mine; in fact recent drilling there has continued to upgrade that. So Cave Rocks is looking pretty decent. One of the other underground positions is the Belle underground mine, which is essentially a very high-grade mine. So the ultimate option, as I indicated in the very near term we are getting into Conqueror, which is an extension of the Leviathan underground mine and that's pre-developed. So we realistically come to work with positions we have in the near term.

Two quick questions on Tarkwa, stripping ratio you mentioned that in the annual report it was higher last year at 3.1 relative to the 2.8 that you are looking for. Now you are up to 3.46. What will we likely see over the next 12 to 24 months and what's the longer-term stripping ratio that we should work on?

The results that we announced in June the long-term strip ratio, I think was 3.6 or 3.8. So, we are pretty much up to that level now. So, we pretty much achieved what we had to. And George, it does depend on what the feet is delivering at any point in time, it may seem like it (indiscernible) the volume is coming out and the feet can vary (indiscernible). So, to the extent that we have additional capacity, we will focus it on moving away, because the (indiscernible) can move now, it's a smart thing to do against the better or the highest commodities or higher gold price and create some flexibility for ourselves. The requirements for actual stripping will vary on month-to-month, quarter-to-quarter depending on which way you go -- move or not. We are trying to get away from those being impacting us in the short-term. So, I think we'll be looking at pushing it hard at least for the foreseeable future.

And this is the last question. The CFT front (ph) operating cost dollar per ton?

George, at Tarkwa, I think it's running at about $5.40 per ton. So, it's very much on the targeted number.

Allan Cook (ph), Nestbitt.

Just a quick question on capitalization of development costs. I understand that Harmony may move to capitalize development cost as I (indiscernible). Just your thoughts on whether or not Gold Fields will capitalize development cost and if you were to capitalize development costs as it appears to, what kind of percentage impact would that make to total cash cost?

Allan, first of all, I think, it needs to be clear that irrespective of how you deal with development cost, you still got to spend the same money. There is no favorable impact in cash flow. So, it is just taking money you have already spent and putting it from one pot into another. And I think, this unfortunately illuminates further why this fixation with cash cost actually distorts the total picture of the business. It's a much better for you to look at total production cost, because capital had to be amortized at some point, it's not a free lunch. Having said that, I think we have to study what the peer groups can do, because the one major concern we have is that you very same analysts will forget these changes in policies very quickly and start seeing a real comparison of our cash costs against the (indiscernible) cash costs and possibly making erroneous conclusions hat our cash costs are much higher than the others. And that is a danger. So, I think we do have to strive as much as possible for standardization in the industry. And we want to look at it. We haven't made a decision here of what we are going to do, but I think comparability of information is key to understanding how gold companies are performing. So, haven't decided yet, but we'll give thought to it.

Thank you. Any idea of what kind of percentage, just a rough impact on total cash costs that would make?

Until we have got the exercise Allan, we can't tell you.

Okay, right. And then just a last one, quickly. Do you have the weighted average funds for the North American Palladium shares that you would receive in the APP deal?

Alan, I don't have the exact number, just looked at the Bloomberg this morning. I am doing from memory, I think that in US dollars, the average cost is about $4.70, which gives us about 15.4% on the current issued capital of North American.

Thanks very much.

Sam Robin, Robinson & Company.

Thank you. First, I would just like to say something before my question and that is that I think you people deserve a medal for resilience. We have been with you for five years and we have seen you navigating with all your expertise through the most tumultuous series of events one after the other, and I think you absolutely deserve a medal for portfolio insurance and for your performance. Now, first thing, I do worry about the high price of gold. After all the rapid run-up that has occurred recently, it is usually the kind of thing that happens at the end of a run-up. That' doesn't by any matter mean that gold has reached its all-time peak. But I do wonder if the Central bankers, who have not been known to always do the right thing, if the Central bankers may be unable to avoid temptation to sell gold now. After all they were copious sellers at 250. So you could see them beginning to think that maybe they ought to sell some more. And if that happens and (indiscernible) itself, then your $347 cash cost might be in trouble, and so I am wondering as I search for a rainy day fund, if we go into a prolonged decline in the price of gold, is increasing your volume through your exploratory developments going on overseas, is that going to amount to your rainy day fund to ultimately lower your cost, whether you are talking production costs or cash cost?

Sam thanks for the comment, much appreciate it. I am not as concerned as you are about Central Bankers selling gold, simply because there is an agreement in place and Central Bank is an honorable gentlemen and I do believe that they will stick to the undertakings that they have got in the Central Bank agreement. However, I think it is prudent to assume that what would happen if the scenario turns out exactly as you suggested. And really for us, the hunt for cost reduction is not simply a question of just looking overseas. We have a huge asset base here in South Africa. You heard Nick go through quite a lot of detail about how we still believe we can squeeze some cost out of the system here, but importantly on a sustainable basis without damaging the overall integrity of the operations, it is very easy to just say `right, we are going to cut by 20%, ` you don't know what you are doing, you don't know where it is coming from, and net result is, you start to impair your ability to produce, and that's why we are looking at cost reductions in South Africa on a slow if sustainable basis and I think the proof is in the pudding, and we are seeing those results coming through. So, that's one area that we are looking at, certainly increased output, quality output, reduces unit costs, helps drive margin. But then also importantly the drive to get a balance in our portfolio would be increased on the international side. It is very, very important to us. It is challenging finding value, but we have an excellent group of geos, who I believe over the last four or five years have positioned us into some very, very interesting potential areas. If we have not had the exploration team, I think it is fair to say that we wouldn't have these good prospects going forward we do now. So, I agree with you. I think the future in this business is all about margin protection. And that's why I concur with Nick that transferring expenditure from one pocket to the other to try and make a so-called headline number look good, really is defeating the objective. How much money is left over, after you have paid all the bills. And you are going to have a very low cash cost, but still maintain our earnings. And we have seen that happen before in this business and I don't think it does the integrity of this business in the eyes of the investors any good, just to undertake financial engineering as opposed to actually trying to reduce your overall costs wherever they come from, and that's what we are going to attempt to do.

Thank you all for listening here today. It has been a pleasure talking to you, and we look forward to seeing you or listening and speaking to you in the New Year when we can report on our December quarter. With that, thank you all very much indeed and cheerio.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.