Gold Fields Ltd (GFI) 2008 Q1 法說會逐字稿

Good afternoon, and welcome to the Gold Fields quarterly results conference. All participants are in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation.

(OPERATOR INSTRUCTIONS)

Please also note that this conference is being recorded. I would now like to turn the conference over to Nerina Bodasing. Please go ahead.

Good afternoon, everyone, and welcome to this Gold Fields Quarter 1 2008 results teleconference call. In the room today, I have Ian Cockerill, our Chief Executive Officer; Nick Holland, the Chief Financial Officer; Terence Goodlace, the Head Officer of African Operations; and Glenn Baldwin, the Head of International Operations.

Ian is going to start the conference call with an overview of the results, and then we will follow on with questions and answers. I hand over to Ian.

Nerina, thank you very much. Good morning or good afternoon, everybody, and thank you for joining me and the team here today so that we can discuss the first quarter's results for the fiscal year 2008.

As I mentioned in some of the previous results presentations, Gold Fields is certainly in a period of consolidation at the moment, and certainly our activities over the past quarter clearly demonstrate that fact. However, I am pleased to report that in this quarter, Gold Fields has delivered a consistent operational performance by maintaining its attributable gold production above the 1 million ounce mark while continuing to focus on cost control in the face of significant wage increases and ongoing cost pressures, particularly in our international operations.

Production at our South African operations increased from 685,000 ounces to 689,000 ounces, while attributable production at the international operations dropped from 330,000 ounces to 312,000 ounces, giving us an aggregate total of more than 1 million ounces of production.

If one looks at some of the key figures, facts for the quarter, our operating profit was $244 million with normalized earnings of $56 million. Total cash costs were up by 7% to $435 an ounce, and that was due to increased labor costs at South Africa as well as the impact of low production coming through from St. Ives and Tarkwa. Now, performance from those two assets certainly isn't anticipated to improve over the next few quarters, which I believe will have a positive impact on unit costs.

Also during this last quarter, agreements were reached for the sale of our stakes in Essakane and Choco 10 for $200 million and an indicative $532 million, respectively. And the Cerro Corona is certainly on track, the project in Northern Peru is on track for production of concentrate during the March 2008 quarter.

Looking more specifically at production -- overall attributable production was 1,100,000 ounces, as I said, at $435 an ounce, with all of our South African operations, with the exception of Beatrix, delivering a very creditable performance.

South African production rose by 1% on the back of an unchanged production at Driefontein of 260,400 ounces. Production at Kloof increased by 3% to 235,300 ounces, and that was on the back of an increase in underground tonnage, which was partially offset by a slightly lower yield.

Production at Beatrix did drop to 119,200 ounces, and that was due to lower yields. Principally this, we did some work during the quarter. We certainly found that fragmentation, excessive fragmentation of ore was leading to a loss of gold in the working places. We have changed explosives. We are looking at far greater -- larger chunks in fragmentation, and this does seem to be already having a positive impact on hedge yields.

Production itself did pleasingly increase by 7% to 74,300 ounces, and that was the result of an increase in underground yield.

At the international operations, the attributable production dropped by 5% to 312,000 ounces. Now as we guided the market in previous quarters, production at St. Ives was going to drop and, in fact, came in online with our guidance. And that was due to the depletion of the high-grade pits and awaiting the buildup from the underground, Cave Rocks as well as Belleisle. I must say it is pleasing to report that progress to return to normal levels is very much on track, and certainly in the upcoming quarter, we should see a much improved performance coming through from St. Ives.

Production at Agnew was down slightly by 5%, and that was really due to lower yields at Songvang.

Disappointingly, production at Tarkwa was down by 10%. That was really due to lower processing volumes, which was really a result of excessive rains during the quarter, which reduced the availability of competent material to run our mill effectively. Certainly Tarkwa has experienced rainfall levels which are more than 50% higher than the 50-year rainfall averages, and that is a 50-year storm.

In fact, if you look at normal rainfall, rainfall in Tarkwa is now something like double what the normal annual average is. And in fact, we have had just under three meters of rain. This excessive rain, which has come in a very, very short period of time, has meant that our ability to get our trucks into the pits such as Teberebie has been a little bit difficult. So we've had to mill more surface low-grade material. However, once again, although it is still raining in Ghana, we are seeing a return to more normal production levels, and you will see that coming through in the December quarter.

Pleasingly, Damang improved production by 21%, and that was due to higher yield from an increase in high grade ore, which came from the Damang pits cutback. And production in Choco 10 saw a reversion to more normal operating conditions with the advent of decent rainfall there, and we doubled production at Choco to 15,700 ounces.

Overall cash expenditure for the quarter rose by 3% to $478 million, of which $298 million was spent in South Africa, which represents a 4% increase, which is really all due to the labor cost increases which came through from the recent wage negotiations. On the international side, costs were at $179 million, largely influenced by GIP movements at several of the operations.

As I said previously, the operating profit was $244 million. Our operating margin for the group dropped slightly to 34%. We dropped 1% in South Africa to a 36% margin, and the margin at our international operations is now running at 29%.

Moving onto a topic which I think is relevant, and that is safety. Certainly we regret to report that whilst the group fatality rate dropped to one of its lowest levels, it is still at an unacceptably high level, and we clearly have much work to do if we are to achieve our goals of zero harm.

The fatal injury frequency rate for the September quarter was 0.17 million man hours, which is a big improvement from the previous quarter's of 0.26. However, in light of recent incidents related to safety within the local mining industry, the management of Gold Fields certainly wants to reiterate its commitment to its policy of zero harm, to improving the training of its employees by behavioral-based interventions in order to reduce the unacceptable level of safety-related incidents and, importantly, to meet our self-imposed benchmark standard of meeting or improving upon the Ontario mines safety records, as well as matching the Mine Health and Safety Council milestones down here in South Africa for all of our mines.

We have also indicated to the Minister of Mines here our willingness to participate in the upcoming mine safety audit as we welcome this kind of initiative that has the potential to lead to a positive improvement in safety on our mines. And I think it is fair to say that we are certainly looking at a cooperative approach to safety. We see this as one area where cooperation is going to be far more constructive than any form of confrontation.

Moving on and looking at on the international side, during the quarter we announced that we had reached agreement to sell our assets in Burkina Faso as well as Venezuela, and these disposals form part of Gold Fields' ongoing strategic evaluation of its portfolio of assets. The sale price of the Essakane interest was $200 million, and that is made up of $150 million worth of cash and $50 million worth of Orezone stock. And we believe that that represents very good value when our price going into this in terms of the exploration expenditure and the cost of the feasibility study was $47 million. So a very good return to shareholders there.

The consideration for the Venezuelan asset sale was an indicative $532 million. That is made up of $150 million of cash, $30 million of convertible debt as well as $140 million -- sorry, 140 million Rusoro shares, which, if you value them at the prevailing 10-day VWAP at the time of the announcement, will give you the indicative total of $532 million.

Now I must emphasize that these sales do not in any way detract us from our often stated commitment to international growth. Now having said that, while Gold Fields continues to look for value-accretive international ounces, we are in the consolidation phase now, and our focus clearly has to be on delivery of the South Deep mine, or showing buildup at South Deep as well as delivering the Cerro Corona mine in the March quarter into production.

Consequently, we are not going to slavishly follow -- and I use this as a quote -- a growth at any cost philosophy. It must be ounce growth that can demonstrably show value, or we won't do it. So whilst we still have an aspiration of moving towards 1.5 million additional international ounces, if we can't do it in a way that actually shows value, then we are not going to do it. We would rather stick with what we have and improve our returns.

So, in conclusion, a short word on the Cerro Corona project, which is progressing very well. All our major mechanical components are on site and in position. Grouting at the major buildings is underway as well as the construction of the cable [racking] around the plant. And certainly the grouting of the major buildings will facilitate working under cover during the upcoming rainy season.

And finally, the construction of the tailing [stone] wall continues apace, and this remains a critical part item for the project. However, at this stage we are still on schedule for delivery of concentrate in the March quarter next year.

Finally, looking for the outlook for the next quarter, gold production should be marginally higher in December when compared with September, and we will be looking at cash costs which are similar, hopefully slightly lower than they are this quarter. So I think with that overview of the first quarter's results, let me open the floor to any questions that you may have. Thank you very much indeed, Dylan.

Thank you very much, Ian.

(OPERATOR INSTRUCTIONS) Our first question comes from Sam Robbins of Robbins Planning Company. Please go ahead.

I have several questions, but the first question I wanted to ask you about was South Deep. I am really delighted that you were able to obtain all of those reserves as a long-term protection for the gold reserve position of the Company. But I worry that as you go deeper and deeper, your costs are going to increase disproportionately. And I am wondering if you can give us a feeling for what kind of cost you will encounter as you go deeper? I understand four to five miles deep before you have gotten all the gold out of there.

Sam, trust me, I wouldn't be happy mining at four to five miles deep. What I think the bottom of the existing Phase 1 is at around about 3,000 meters below surface. And then if you go into Phase 2, Phase 2 will take you to around about 3,700 meters. So that is like 50 years out. You will be no deeper.

And that is actually the same depth that we are currently mining at at our other operation. So it is not as if this is going to be a much deeper operation than where we are currently mining already.

I see.

So I think your concerns about excessive depth are probably somewhat off the track there. But perhaps, Terence, you would like to comment on how you see this looking at the costs of mechanized operations as opposed to a conventional operation?

Yes, good afternoon, Sam. If you look at South Deep and where it is right now, I think bear in mind that this is still a developing asset, and any sort of unit cost that you see right now you can't extrapolate into the future. So we have got a long way to go in terms of economies of scale building up to what we call the 330,000 tons per month case.

I think the other important thing to realize is that as we build up, we are going to be doing more and more from a mechanized perspective. So, ultimately, you are not going to be doing the narrow reef mining. All of it will be the mechanized destress, and it will be mechanized mining per se.

In the original feasibility in terms of unit costs, the detailed costs came up at something like ZAR376 per ton over the life of mine. That was the life of mine average. But time has moved on a bit, and we are estimating in our current model that it is still at around about ZAR400 per ton, and that takes into account some 18 months of escalation and bring it into today's terms.

Okay, thank you. Can I ask my second question?

Please do, Sam.

With reference to Venezuela, I am wondering how much of the decision was made because of the political risks there and how much was made because of problems I believe you may have had in bringing the mine to its full fruition? DO you want to discuss that a little bit?

I think, Sam, it is actually much more fundamental than that. I mean, we were made an offer for the asset or the assets that we felt represented very fair value to Gold Fields shareholders. And we had to make a conscious decision, do we take the value that was offered today or do we take value over the next 10 to 12 years?

And clearly, when you are weighing up that decision, you look at a variety of factors -- your ability to operate in the country, the conditions there, skills availability, the whole bang shoot. So it wasn't any one particular factor that influenced us to decide to go for the sale.

Bear in mind, we will still retain a very significant interest in Rusoro. I mean, 140 million shares represents about a 38% ownership in the company. So we will still retain an interest, and hopefully, we will get some value from the upside from this asset. But I guess one of the other issues is that we felt that with Rusoro's local operating experience, perhaps they were better suited to operating in that environment than we were. So it was a variety of factors that led us to saying good value today, let's take that money off the table risk free.

Yes, okay. Thank you for the explanation.

Our next question comes from Shane Hunter of BJM. Please go ahead.

Hi, good afternoon, gentlemen. Just a question around the costs, and first of all, we just paint the picture that we know that we are working in the environment with variable costs increasing and general inflation. So with your projects that you have got, putting up the Project 100 and also projects beyond. So would it be correct to say that these projects would probably help you to maintain your costs, or are you really expecting to see some costs coming down as a result of these projects?

Hi, Shane. It is Nick Holland speaking here. I think if we look at cost control and what we're trying to do on costs, it comes from a variety of sources. First of all, we want to upgrade the portfolio, and you have heard us talk previously about bringing in extra ounces at lower cost.

Cerro Corona is a good example of that. Cerro Corona is slated to come in at around about $300 per ounce. And as you can see, the costs in the last financial year were $376 per ounce. So that just gives you an idea of the comparison between last year's costs and what the likely costs of Cerro Corona are going to be.

Also, we are also looking to get South Deep ramped up, which will also (inaudible) costs. So that is actually improving (inaudible).

The other side, though, is to multiply [data]. You have mentioned Project 100 and project beyond initiative and really what we have tried to do with these projects is make them a way of life, incorporate them into the operating (inaudible) of the various operations.

And I expect that we will continue to obtain benefits from these projects. I think the labor optimization side in particular has great potential on the Project 100 plus on the supply chain side. Interesting to note that (inaudible) that we analyzed the project is around about $900 million a year, which represents a total spend on services and materials, whether that be contractors or bought-in services (inaudible). That is about 50% of our total (inaudible), and we are looking at ways that we can optimize on the (inaudible).

We have given guidance as the cost (inaudible) be around 10% (inaudible). And as you can recall, that was $376 per ounce. So that is the guidance. But obviously, we will try and see if we can get better on that and see if we can open this margin at (inaudible).

Can I just recap one thing there? The phone call was cutting out partway through your conversation. Were you saying that the guidance for FY '08 is in the region of 10% to 15% higher overall on costs. Was that correct?

10% to 15% higher on the $376 achieved in 2007. That is correct, Shane.

Okay. Thank you, good.

Our next question comes from Victor Flores of the HSBC. Please go ahead.

Yes, thank you. Hi, Ian.

Hi, Victor.

Can I ask you to just go through a bit of detail on the issues that you faced at Beatrix and how this changing the blasting pattern is going to correct it?

Yes, if you can imagine that gold is contained within the conglomerate, a certain percentage of that gold is free gold. But when you fragment the rock, it releases very easily. In fact, the percentage of gold in the [onding] fashion was probably somewhere in the order of about 70%. It is exceptionally high.

Now when you over fragment the rock, clearly you are creating more surface for gold to be lost. And that loss takes place in the stope. You wash the stope out to get the -- rock out, and by doing that, you have a very efficient concentrating process where the gold collects in the little cracks and gaps in the footwalls where it tends to get lost.

With multiple rehandling through the system out of the stope, through the [tranning], up the beltways, along the conveyor belt from surface and into the plant, the rock tends to fragment each time you handle it even further. So eventually, you land up with so-called rock going into the mill, which is, to all intents and purposes, almost like sand. And at each point, you have the possibility of losing more and more.

This was picked up, and the recommendation is made to go for larger fragmentation in the stope. So start with a larger rock in the rock face. This is a little bit more difficult to clean and to move but reduces the amount of gold which gets lost.

And we moved away from [ANFO] powder onto power gel explosives, which are slightly less energy intensive. We have opened up the drill burden facing, and the net result is that we have now been able to produce chunkier bits of rock in the face. And you can see it going into the plant.

And I think just to give you an idea of what that has meant, if you look at the steel consumption in our plant, the steel consumption has dropped by about 25% as well, and that is also indicative that the larger rocks are acting to break up the other rock in the mill, which is exactly what you want. And that has led to slightly higher yields, mid-grade yields. So we think that has certainly been a contributory factor to the reduced [line core] factor, and we don't think it's instructive without trying to reverse that trend. And the initial results seem to be quite promising.

Yes, I mean, that makes sense. I would have thought that just the sweeping and cleaning out the stopes would have recovered a good deal of that gold. But you are saying it was a very high percentage of free gold at that particular area that you were mining.

We always clean out the stopes anyway. The trouble is, when you wash the stopes out, as you do, with a high percentage of free gold, water and gold together is a wonderful sort of collecting agent. And it just looks for the low point, and you get concentration of gold into the footwalls.

But what you are telling me is that you are now seeing an improvement in your mill head grades as you've change the blast pattern?

Terence, perhaps you'd like to comment?

Yes, hi there, Victor. It's Terence. We certainly have a -- most of the problem really comes out of Three Shaft. And if we look at the grades going into the plant, the hip grades, we have seen an uptick in the last couple of weeks. We've basically moved 80% of Three Shaft onto the new power gel of explosives that Ian has mentioned. And we are trusting that we are starting to solve the problem.

I think the other thing around Beatrix is it is not exclusively the fragmentation. There is a couple of other factors that obviously drive the grade. One is that we are probably mining at about 60-centimeter [gram] per ton lower than planned. So a natural effect of broken grade is a little bit too low, and that just comes from -- it's a measure of flexibility that's required.

And then the other item which also affects the grade is our width, and we basically are around about 10 centimeters more than we should be in terms of our actual mining width. And that is the other aspect that we are looking at.

Okay, great. Thank you. I just wanted to ask a couple other quick questions. One is, could you give us the terms of that convertible debt on the Rusoro transaction?

Victor, it is likely to be around three years with a market-related coupon, and indicative terms at this stage is probably around about a [7%] coupon I suspect is what it will end up. So we will give you the final terms once the deal is close to closing. Those are the indicative terms at this stage.

Great, thank you. Just one final question. There was a comment I saw cross which, Ian, I think they were quoting you, regarding some changes to the deal with [Invela Ponda], and there wasn't any commentary that I saw in the press release. So this must have been in response to some other question. Can you comment on that?

I can't comment on something I don't know what the comment is about, Victor. So what was the thing that is allegedly attributed to me?

Oh, goodness. Well, let me just find -- I hate to waste people's time on a conference call. It said something about issuing shares to Invela.

Victor, I think it was just a headline that Bloomberg put out. But it was actually just in reference to the mark-to-market on the shares that we put out in the commentary in our notebook.

Oh, I can probably explain that, Victor. Victor, you are familiar with the floor and cap arrangement, the 45 million minimum shares and the 55 million maximum shares that will be issued to Invela. That constitutes the derivative instrument in terms of IAS-32, and accordingly, it has to be mark to market through a Black-Scholes model.

We have done the Monte Carlo simulation on that. And as you know, it's like a black box, and you put in all these parameters, and it spits out a number. We will only know whether we are going to issue 45 million shares, 55 million shares or something in between during May of 2009. So it is purely an accounting thing. It has no bearing at all on the commercial arrangements, which remain as is.

Great. Thank you. Sorry for wasting your time with that one.

Our next question comes from Muneer Ismail of Deutsche Bank. Please go ahead.

Good afternoon. Afternoon, guys. Two questions. Nick, for you on the balance sheet, I remember last quarter you spoke of a convertible or the potential for a convertible instrument to try and match the CapEx profile at South Deep. Now you have done the two deals or the two deals are in progress at the moment. That's the (inaudible) together with the Venezuelan assets. I am just trying to understand if that gives you enough cash, let's say in the short term, or enough funding that you don't see a need for the convertible instrument anymore?

First of all, the instrument we were considering was not convertible. We were considering a straight bond issue, not a convertible bond. A straight bond, a straight debt instrument. And if you look at the debt profile at the end of the quarter, around about $860 million of net debt. And I think it is important to understand that these deals are not driven by a need to recapitalize the balance sheet. We are very, very comfortable with the level of debt of $860 million. We are very comfortable we can fund the capital (inaudible). These deals were driven by strategic merits rather than financial merits.

We haven't decided yet how to deploy the cash. I think because you saw in the quarterly book, we have indicated there is a number of potential uses of proceeds, one of which could be debt reduction, but the other one could be to fund sort of the capital program itself, given that we do have $1 billion this year. Our EBITDA is about $1 billion, but we also have to pay taxes and dividends and what have you. So that would help towards that funding. But even if we take on a bit more debt, I would still be very comfortable.

At this stage of the game, we are still considering the bonds. But that is going to drift into 2008 at this stage and we will give you more detail down the road. But it is really a case of saying if we do the bonds, it is not incremental debt. It is actually replacing shorter term debt that we currently have with longer term debt that more correctly matches the profile of the assets.

So I don't want you to get the impression that we are going to load up the balance sheet with a whole bunch of debt because we have to or we want to. We certainly don't want to do that. And remember the parameters I've previously quoted to you. We wouldn't see ourselves going too far outside of those grounds. It may be $1 billion, but I wouldn't be too comfortable to go beyond that. And in any event, I think we are well positioned not to.

You are expecting both deals to close before the end of the year? Am I correct?

Yes, both deals should close, hopefully, around the end of November. At this stage, we have no reason to believe that there is any material issues that will prevent closing around that time.

Thanks, Nick. Ian, if I may, just a second question for you. It's a little bit more difficult, just playing on your words on the consolidation period that we find ourselves in with regards to Gold Fields, how long will this consolidation period last?

The issue that I have is we keep on getting -- with all, I think your IR team is brilliant in the way they guide us in production, but in my estimates normalized production for this company should be just around 32.5 tons or I think that is about 1 million and 45 ounces. I am just wondering, Ian, when does the consolidation period end and what determines the consolidation period? Is that just getting South Deep on its feet, or is this a development issue at each of the ESA ops and then issues with regards to St. Ives getting the grades back up?

Yes, look, I think that is a good question. I mean, if you look at where Driefontein is at the moment as well as Kloof, I think they are operating at reasonably optimal levels. Clearly Beatrix is sub-optimal. We have recognized that. They should be 300 to 400 kilos more than they are currently doing. And I think you heard Terence talk about some of the initiatives that are being put in place there to actually take us back over the four tons.

Obviously St. Ives, 120,000 ounces a quarter is a more realistic number. We said that in the September quarter, this one now, we would be down at about 102. But over the next two quarters, we will be building back up again so that by quarter three, we saw ourselves back at 120,000 ounces a quarter as we get the impact of Cave Rocks and Belleisle underground coming up to speed.

Obviously this last quarter, sadly, not even Gold Fields is good enough to control the weather, and that really did have a significant impact at Tarkwa. But if you look at what is coming through already in this quarter, we certainly are back up more in line with the numbers that you've seen previously.

So if you look at that, all of the sudden you are going to start seeing yourself much closer to the numbers that you are talking about. And we were very pleased with the way that South Deep is starting to pick up in the mix. And over the next two quarters, we should see positive impact coming through there from the two additional long [hole] drilling projects, one that will come to light in this quarter and one that will come to light in the next quarter.

So when we talk about consolidation, it is very much a low point, starting to see improvement, organic improvement from existing operations. And then, obviously, into the June quarter of next year, you are going to start seeing the first impact coming through from Cerro Corona. And I do think that many people really haven't fully appreciated the very positive impact that Cerro Corona is going to have on this group. So you will see us breaking through your numbers very quickly, Muneer.

All right, brilliant. Ian, sorry, one last question. Just on Tarkwa, you guys are guiding 7% higher for the quarter. I'm just a little bit nervous about the sort of chemistry on the (inaudible) given all the rain. Anything there, or am I just being a bit paranoid for no reason?

No, look, I mean obviously when you get a lot of rain, you do get some dilution. But the solution to that is to just add more cyanide. So you get your solution level, your cyanide levels in the circulating solution where you want them to be.

You do get some short-term impact. Ironically enough, sometimes when you get heavy rains, it tend to saturate the pile a little bit more effectively, and sometimes you do get better dissolution because it tends to move fluids around away from the channels that tend to develop. So you do -- almost counter intuitively, you sometimes get a bit of a kick directly after a fairly heavy rainstorm.

Now obviously that doesn't happen all the time. But you sometimes get better irrigation after rain. It simply is a question of maintaining the cyanide levels that get diluted by the rain, and that will actually help you.

Thank you very much. Thanks for your time.

(OPERATOR INSTRUCTIONS)

Mr. Cockerill, we have no further questions. Would you like to make a closing comment?

Dylan, thank you very much indeed. Thank you, everybody, for listening. Certainly we look forward to seeing you again or talking to you again in January. And for those of you who I don't see before Christmas, I hope you have a very safe, healthy and profitable Christmas. We look forward to talking to you in January. Thank you very much, and good-bye.

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