Gold Fields Ltd (GFI) 2008 Q2 法說會逐字稿

Good afternoon and welcome to the Gold Fields second-quarter results conference. All participants are now in listen-only mode. There will be an opportunity for you to ask your questions at the end of today's presentation. (OPERATOR INSTRUCTIONS) Please also note that the conference is being recorded.

I would now like to conference over to Willie Jacobsz.

Thank you, Dillon. Good afternoon, ladies and gentlemen, and welcome to this quarter two conference call for Gold Fields. We're going to follow the normal process with Ian Cockrell, our Chief Executive Officer, doing an introduction. Then Nick Holland will briefly talk about the financial results, and then we will hand it over to Terence Goodlace to give you an overview of the situation in South Africa, whereafter Glenn Baldwin will give you an overview of the international operations. And the, John Munro will give a brief introduction to the development projects, in particular the Cerro Corona project. After that, we will take questions.

I'll now handover to Ian Cockerill.

Willie, thank you very much. Good afternoon or good morning, everybody, and welcome to our results presentation.

Now, I know that the first thing on all your minds will be what is the situation with power here in South Africa, but we'll address that later in the call. Terence will give you a full description on that, but initially, let me just give you a brief overview of the December quarter results.

It was a quarter I would say characterized by a sharply-rising gold price, several safety-related stoppages in our South African operations, which did impact output there, particularly at Dreifontein. But the key stats for the quarter are as follows -- our attributable production was down to 960,000 ounces, that is down about 3%, but somewhat higher than the guidance we did give late last year. Cash costs rose by 3% in rand terms, but on the back of the strengthening rand, we are actually up 80% in dollar terms to $467 per ounce. The stronger gold price certainly helped on the operating line, with profits rising to $300 million from the $242 million in the previous quarter. We also sold our interest in Essakane project in Burkina Faso to our joint venture partner for $201 million, as well as control of the Choco 10 mind in Venezuela to Rusoro, and that was a $532 million at the time of sale.

Net earnings, excluding gains and losses on ForEx, financial instruments, and exceptional items, rose from $57 million in the September quarter to $88 million in this quarter. But perhaps most pleasing about this result is that despite a small drop in production, we are certainly seeing a translation of the higher received price into our bottomline earnings.

Finally, the slippage trend which was observed in the Cerro Corona project that occurred towards the end of 2007 certainly appears to have been reversed and we have made good progress over the Christmas period, giving us confidence that the revised commissioning data at midyear will be achieved. John will be giving us a very comprehensive update on the project as it stands now.

Now, clearly, the South African power situation has caused a pull over the whole of the South African economy, but particularly on the mining sector. During his part of presentation, Terence will give you a sense of what our response is going to the to this debacle.

Now, whilst we would normally pay a dividend this quarter, after much debate and bearing in mind the continual flux around the power supply to our South African operations, the Board has decided to act prudently and not to pay dividends, but this decision is based solely on the power situation. As you are aware, we were told by Eskom that our power levels will be increased to 80% last Tuesday and we were given an undertaking that a further increase is going to be allowed this season to 90% and that is on the assumption that load sharing elsewhere in the country was achieved.

Sadly, I have to tell you that after lunch today and after we gave our results presentation this morning, we were informed by Eskom that this is no longer possible and we remain restricted to 80% of our normal average demand. I think that this reinforces or this fact helps reinforce the prudent stance that we have made on the dividend declaration for this quarter.

So with that very brief introduction, let me hand you over to Nick, who will give you a summary of the group financials.

Thank you, Ian, and good afternoon. Looking through our income statement for the quarter, we can see that our revenue is up appreciably this quarter and that is mainly because of the increase in the gold price. We've seen our revenue go up to $800 million for the quarter. That is on the back of $100-per-ounce increase in the gold price. That has more than offset the 3% drop in production that you heard Ian refer to.

We have also seen our operating costs go up around about $25 million and most of that is due to the strengthening of the Rand. We've seen the Rand strengthened to ZAR6.76 during the quarter, which causes that impact. In Rand terms, however, our costs have been well-controlled and only went up by 1.5% quarter-on-quarter.

Our operating profit, pleasingly, with the increased gold price we have received, as I mentioned, has gone up by 24% to $300 million for the quarter.

Looking further down through the income statement, the other highlights to indicate is that we have generated what we call exceptional gains of $204 million during the quarter. That is due to the sale of Essakane. Essakane was sold during the quarter for $201 million. You can recall that was an exploration project in Burkina Faso and because all of the expenditure we have incurred on that being principally expiration expenditure was written off, all of those proceeds effectively report into earnings.

The other thing I'd mentioned is that because we sold the Venezuela operations during the quarter and we also sold those for proceeds of -- for total proceeds of $414 million, generating profit $11 million, because we have sold those during the quarter, what we have done in terms of international financial reporting standards is restate all of the previous quarters that we had Venezuela in our results and have also excluded it from our results in the current quarter and mainly aggregated all of the earnings, revenue, costs, etc. and put it onto one line together with the profit on disposal and call that profit from (technical difficulty) operations. You'll see in the income statement that comes to around about $16 million for the two. And as I mentioned, $11 million of that is due to the profit on the sale of Venezuela.

So those of you trying to reconcile our ounces produced to the previous quarter and not getting the right numbers, last quarter we showed one million ounces attributable and because we've taken the Venezuela operations out and restated the previous quarter, the comparative now drops to 986,000 ounces and of course the 960,000 ounces we he report this quarter also excludes around about 17,000 ounces from Choco 10.

So I think pleasing that we are able to make those sales and generated cash flow. I'll talk about the impact of that in a moment.

So after all of those items, net earnings of $281 million were generated for the quarter, compared to $60 million in the previous quarter. But of course net earnings have been distorted by things like the exceptional gains, the discontinued operations, as well as various derivative valuations that you'll see in the accounts. If you strip all of those out, in fact, our earnings were $88 million, compared to $57 million in the previous quarter, still a substantial increase. If we look at cash flow from operations, you'll see the cash flow we're showing is $175 million for the quarter. Cash flow from Ops, and given our strong operating profit of $300 million, you might well say, well, why isn't that higher? We've had working capital buildups during the quarter of about $80 million. That is principally just the timing of when we receive our gold sales and we pay our Accounts Payables. And that is in the process of already reverting in this quarter. So the lot of that will come back in this quarter.

Capital for the quarter, very, very substantial at $363 million and that is pretty close to the all-time highs. That is because we are endeavoring to complete a major project in Peru, which took up $93 million during the quarter and we also finalized the purchase of the Uncle Harry's ground, which is ground that we bought to the east of South Deep. That cost us $57 million. And then Tarkwa, which is the CIL expansion, should be finished around about September/October. There's a high spend there of about $28 million at the moment. So that's the reason for that high spend and I would expect that in the second half of the year, we're going to see a reduction of that.

The only other thing I'd like to mention is the fact that we are having these production impacts, which Terence is going to mention to you. It is having an impact on the business. And one of the things we're doing is reassessing our capital burn rates throughout the business. As I mentioned, our capital burn rate will reduce in the second half of the year once we bring Corona into production and we get the Tarkwa expansion completed. I think the good news about Corona is that it will actually turn from a cash burn, which, as I mentioned earlier, was that $93 million this quarter, into a cash generator as that operation gets up to full production. That will have a very material impact on the overall cash flow, because it's taking an investment at the moment and turning that into a return, which will certainly help us. And the higher rand gold prices, also, that we are experiencing at the moment could help to soften some of the impact of these production problems caused by the power, which Terence will talk to.

Lastly, there was a royalty rate imposed in South Africa, rather a new draft that is likely to be imposed in 2009 that has been placed before Parliament for ratification at the end of February. We do have possibilities to comment on that. Effectively, it is a profit-based royalty that replaces what we thought was going to be a fixed royalty on the gross revenue of 1.5% just onto that from operations. The new formula now means that we probably pay about 4% of gross revenue versus the 1.5%, a very substantial increase. We're going to be making representations and submissions to the national treasury here to reconsider the level of this and hopefully we will get some kind of positive outcome on that in the months to come.

So with that, I'm going to hand you over to Terence Goodlace.

Thank you, Nick. Good afternoon, everybody.

First up, in terms of the South African operations, I'd just like to talk health and safety and to say that it remains a key imperative for us if we look at our overall long-term trends as measured by fatality injury frequency rate, the serious injury frequency rate, and the last day injury frequency rate, we do note that we are improving over time. However, we were very disappointed with what happened at Kloof this last quarter with the fatalities. Importantly, we have over the last six months completely rewritten health and safety plans and these are at various stages of implementation, but remain a very core part -- cornerstone of our business.

If look at the fatalities per site, our fatality injury frequency rate was 0.28 per million man hours worked. As I said a little earlier, Kloof was a disappointment, where he had five accidents which resulted in eight deaths and ultimately ended up in the mine-wide stoppage by the Department of Minerals and Energy, which obviously affected production, but also affected safety in a positive way. We are being subject to the presidential audits and so far, we have had two presidential audits by both -- one at Dreif and one at Kloof mine.

If we move onto production, at the South African operations it decreased from 689,000 ounces to 657,000. Basically the effect on production was affected by the one-day national strike by the National Union of Mine Workers, mine closures at both Dreifontein and Kloof related to the fatal accidents, as well as a two-day interruption that affected us at Beatrix, where there was labor unrest.

At Dreifontein, production decreased by 8% due to a combination of the mine closures and lower underground yield. The lower underground yields were as a result of increased dilution from the western part of the mine. Gold production at Kloof decreased by 2% as a result of lower underground tonnes due to the impact of the lost shifts. In total, we lost some six days at Kloof to production through safety-related issues. This was also affected by two underground fires which affected us. At Beatrix, gold production was similar quarter-on-quarter, with lower volumes mined and processed, offset by a slight increase in yield.

At South Deep, gold production decreased 9%. This was mainly as a result of a decrease in underground volumes and yield because of a previously-reported reduction in mining activity on the conventional Ventersdorp Contact Reef horizon, where a major fault on the western side of the ore body was intersected in the September 2007 quarter. This horizon is now largely depleted and has, in effect, stopped. In addition, trackless volumes were lower as a result of surface vein failure, which affected underground temperatures and curtailed entry and mining activities for some 35 days. This did affect our newly-established long haul open stoking area.

On the cost side, operating costs increased from $298 million to $321 million, an increase of 3%, and this increase was mainly due to increased contractor costs, increase sweepings and secondary support costs, as well as repair and maintenance. Included in the costs were also additional voluntary shifts and an increase in training. Total cash costs at the South African operations increased from $413 per ounce to $465 per ounce. The margin at the South African operation increased from 36 to 37% as a result of the higher gold price.

In terms of capital expense, the South African operations increased from 104 to $124 million in the December quarter. Most of this was in and about expenditure at Dreifontein and at South Deep, as well as increased expenditure on all reserve development.

With that, I would like to talk through the current power situation. As Ian had mentioned earlier, our power was interrupted last Thursday night and since then, we haven't produced anywhere near what our throughput is. We had an announcement on Thursday night, which resulted in a sharp reduction in demand, power demand, and we dropped from our normal 600 megawatts to 300 megawatts as a result of an instruction from the Eskom power utility.

Since then, we have gradually increased. We have had many emergency meetings with Eskom, the power utility, and at present, we are still at 80% of our normal power usage. So the current situation is such that we are not able to fully operate all of our mines and we are only operating some selected sections of the various mines and that is also with limited success, because we are -- we're juggling power around to suit.

If we look at the effect of these power cuts, the power cuts, per se, can be very material, and I think one of the things that really concerns us is just what level of power we are ultimately going to get to produce at all of the mines in this country, not just Gold Fields. The letter that we received this afternoon, which said that we can no longer go to 90%, has, in effect, stopped us in our build-up and has raised serious questions about what the long-term power availability is going to be at our mines.

You may ask what we're doing about it. I think the first that we have done is we have analyzed which are the higher margin and which are the lower-margin shafts within the Gold Fields group and based upon that, we know which operations we should maintain and which operations would be affected since should there be a continual or a permanent reduction in power. Suffice it to say, there would be a material impact on our production as well as our employment should the current situation persist.

If we are to look at what other thing we can do about power, we can obviously pursue aggressive energy savings, but at this stage, that is not going to assist the South African mines in terms of the overall quantums that are required to be effective. The other key component -- question that can be asked is what we are going to achieve in this current quarter. This has become even more difficult with the announcement today. We had said at the quarterlies earlier today that would be some 20% down on the current performance as reported in the December quarter, but who knows what the actual numbers are going to be with the current situation as far as power is concerned.

We are moving to have additional emergency meetings with Eskom as soon as we can and relay the seriousness of the situation not only to Gold Fields, but also to the rest of the mining industry, who, in my opinion, are the sacrificial lamb in terms of power cuts for this country.

But with that, I would like to hand you over to Glenn.

Good afternoon. The international operations have provided a consistent overall performance for the quarter, with managed gold production up to 362,000 ounces. The cash costs were kept steady on a quarter-by-quarter basis at around $470 an ounce, but the operating margin increased from 30 to 38%.

During the quarter, Tarkwa had three fatal accidents, which were obviously very disappointing. However, Damang, St Ives, and Agnew all remained fatal-injury-free since acquisition by Gold Fields. We remained committed to the principles of zero harm and continue to drive behavior on each site to eliminate all accidents.

At Tarkwa, the increase in production was reflected nicely in a reduction in cash costs. The rain abated during the second half of the quarter and, therefore, we have a higher outlook for production in this quarter coming. This CIL expansion project, which will deliver more gold in F2009 at Tarkwa, is progressing well. However, the total project cost is expected to increase from 126 to about $161 million. The main reasons for this change are foreign exchange variances, cost escalation, and minor scope changes. We still expect the project to be completed in the September quarter, but it may be pushed out by a month or two just depending on what happens with supplies from South Africa.

At Damang, the production was lower mainly due to the lower-than-expected grades from the stockpiles. The costs were up because of this lower grade material being treated, coupled with a stepped change upwards in the mining contractor cost. The outlook for Damang for the next quarter will only remain steady due to the root failure of the in-pit ramp into the main pit cutback. Fortunately, we have had -- put remedial actions in place a couple of months ago, so, therefore, this failure has been minimized, which means that we also expect similar total costs this quarter.

At St Ives, the quarter's production was in line with the forecast as we continued to develop the new projects, which include Cave Rocks and Belleisle underground and the Leviathan open pit. These projects will provide the backbone of the St Ives production from middle of the year, when we expect to be back at more acceptable production levels and deliver more consistently. In the next quarter, we also expect cash costs to remain similar.

At Agnew, production was slightly lower due to processing Songvang pit high-grade stockpiles, which reduces throughput. The cash costs were maintained in the quarter, however. We do expect them to increase significantly in the next quarter due to the treatment of low-grade stockpiles and higher tonnages from underground. Overall we expect the total cost in this next quarter to remain similar, thereby protecting the margin. The low-grade stockpiles will be fully depleted in this financial year at Agnew, which will then see a reduction in quarterly production from around 50,000 ounces to 35,000 ounces, because the production will come from underground sources only. We will maintain the accelerated exploration program at Agnew and we aim to prove up open pit opportunities to increase the baseload of the mine. We are still confident with the exploration programs we have place at both St Ives and Agnew.

In closing, we expect production to continue improving in quarter three and we will continue to drive the total cost equation to maximize the margin.

I will hand you over to John to talk about Cerro Corona.

In terms of the Cerro Corona, I think important introduction comment is that our sense is that, as Ian said, we're starting to feel like we're getting ahead on this project. We've got a long way to go to get into production in the middle of year, but the remedial measures taken, both the extension of time and the increasing budget spoken about late last year, are starting to gains some traction.

Looking at the various elements of the project, the community side of things remained stable in the Cerro Corona site and as you are aware, Peru remains fairly tricky from an overall community and mining point of view. In terms of operations, the only significant activity carrying on is the mining operations, with some 7.9 million tons removed in the quarter and about half of these was mined from the quarries being used for construction of the tailing dam embankment, or tailings management facility embankment, and the bulk of the balance was waste coming out of the surface mine. So mining operations continuing at a similar rates to previous quarters.

Moving on, then, to the construction of the project and focusing on the plant area, you'll recall that the part of the schedule and the cost overrun announced at the end of last year was attributed to some poor performance of some of the major contracting in the plant area. In December of last year, revised arrangements and a revised plan was agreed with some of the contractors and we've seen very good performance against that plan in January of this year. So, so far during this month, we've made some of the deadlines that we agreed with this contract and are starting to release some of the areas from the mechanical construction to allow electrical and instrumentation completion and then allow these areas to move into commissioning.

At this stage, the most critical area in terms of plant construction remains the flotation building, clearly the most complicated from a piping and instrumentation point of view and a lot of effort is being focused on making sure this is completed on time. In terms of procurement, there are no major outstanding items. We are tracking very carefully a capacitor bank that is required for one of the substations on the national grid. This is a late requirement imposed on us by the regulator and, at this stage, is not expect to affect startup, but it's the only area of procurement that is at this stage regarded as semi-critical.

Staying on the power front, with the growth of power consumption in the north of Peru, the Peruvian regulators took some action at the end of last year, which not only necessitated the implementation -- the installation of the capacity I referred to, but also the limiting of power to us and to one of the other projects in the region until the end of the March. So until that period, we will be limited to some three megawatts maximum draw on the Cerro Corona side. That is due to the upgrading of the coastal powerline that feeds this region. At this stage, that limitation on power will not affect the construction and the precommissioning activities. It would only become critical if that day slipped by about six weeks, which, at the state, we do not expect, but clearly something we are watching very carefully.

The other area of construction that was entered into the changes announced at the end of the last year was the construction of the very large tailings management facility embankment. This is the [valley four] tailings dam and this is the embankment that will contain those tailings. The critical part of this stage is not just the TMF will affect the startup of the plant. Yes, you need very little water to start the plant. The more critical thing is to ensure that we have about 0.5 million cubes of water contained in this dam by the time the rain stops in May of this year, because you have a dry season from then through to October/November. And so we need this 500,000 cubes to bridge that period. Obviously the dam will have to be at a certain height by then to impound this volume of water. So that is a critical step in terms the -- or the critical nature of the TMF construction.

In terms of the actual construction itself, we previously spoke about the production of engineered materials that are required for the filter zones in the TMF embankment being critical. A lot of progress has been made since December of last year in improving the mining and crushing and screening of these materials to the point that this step is no longer critical and we are actually producing stockpiles of these that are then waiting for the subsequent zone in the tailings dam, which is the impermeable clay zones. So the construction is now really focused on the placement of these clay zones. That is complicated the moment by continued weak weather. It is a particularly rainy season in Peru at the moment. The rain obviously affects the QA/QC on the implacement of these clays.

At the stage, we are laying about 4000 cubic meters per week on the critical clay zone. That will take 15 weeks to get to the right heights to impound 0.5 million cubic meters of water and we'd like to raise that rate to at least 6000 cubic meters per week, which would then drop that to about six -- 10 weeks. We have a number of measures in place to workaround the wet conditions and we need to see those coming to fruition in the next two to three weeks to ensure that the TMF water collection stays off the critical path for this project and doesn't affect us in the dry season.

So then, pulling this together, in terms of schedule, we remain on track for the commissioning of this plant in the middle of the fourth quarter of this fiscal year, i.e. around May of 2008. The critical part on that at this stage is running through the completion of the construction of the flotation plant. That is the most critical part from a construction point of view overall. The TMF, as I said, does not affect the startup, but it is critical to have the right height by the time the rain ends in May. And we are obviously watching the power situation very carefully to make sure that does not become critical.

Then onto capital construction cost. We have said the end of last year this has increased to some $420 million, including a $20 million contingency. We have utilized some of those contingencies since the last reported on this project, but the bulk -- and that is some $13 million of the $20 million contingency -- has been used, but more than half of that usage has been to make sure that we stay on schedule, for instance in restructuring and we resourcing some of the construction activities, particularly in the plant, but also in the TMF embankment. So it this stage, we continue to forecast capital construction costs for this project of US$421 million.

I won't go into detail, but we obviously have a lot of activities underway and Cerro Corona at the moment. Turning our attention, now, to making sure that when this plant is complete, that the commissioning and then ramp up to full operations occurs snowflake. At this stage with the commissioning on ore due in the month of May, we expect that it will be at least three, more likely four months before this plant reaches full capacity, so that takes as into the beginning of Q2 F2009. It is very hard to forecast how rapidly the plant will be commissioned, but we think that is a middle-of-the road estimate.

So in summary, I think that the projects have made good progress since the disappointing news last year. There are still risks, particularly I think in the placement of the clays in the tailings dam and also maintaining a schedule on the construction, but at this stage, those look like they are in good shape.

I think in conclusion, it is worth emphasizing again how important is project is to Gold Fields. In the slides that are on the website and the talk that we gave this morning, we refer to the significance of the EBITDA contribution that this project could make at current prices. And that is calculated at around US$200 million per annum on a simple EBITDA basis. And against a background of our commonly-spoken-about EBITDA for the rest of Gold Fields of about $1 billion, that is obviously a very significant contribution and getting this project into production in the middle of this year is critical for this Company. Thank you.

Thanks very much, John. I think as you have heard from some of my colleagues, certainly the power situation here in South Africa is frankly dire and it would appear that we're going to be restricted for at least the foreseeable future to somewhere between the current 80% and hopefully we can move back at least to 90% of our normal average power consumption. Whilst there is always going to be some scope for energy thrifting, but as a Company, we have engaged in that exercise for some time, so I think really is going to be unreasonable to expect much benefit from this avenue going forward and certainly over the short-term. However, longer-term, there will obviously be scope for a change in approach to energy usage and we have to seek those opportunities as and where they arise.

But basically, we have determined that in a power-rationed environment, our production priorities have to be directed towards the higher-margin material. Now this may well result in some production being sacrificed, so that, overall, the group maximizes earnings potential against the available power.

As things stand, we will be concentrating our efforts at Dreifontein at the four, five, two, and one shafts, which is basically what was referred to as the old East Dreifontein. At Kloof, it is our intention to concentrate production at main, three, four, and seven shafts. At Beatrix, it seems as if a 90% power limits probably wouldn't even allow us to mine Beatrix's four shaft as well as the rest of Beatrix. So four shaft may well have to be put on a temporary hold.

At South Deep, it was our intention anyway to close down the VCR section, as the ore above 95 level was depleted, but even with this power situation, we find ourselves -- sorry, the power situation that we find ourselves in, we will certainly continue to prioritize critical ore reserve, destress mining, and infrastructural development. South Deep is a critical component of Gold Fields future and certainly needs to be prioritized as such.

In the meantime, our international operations will continue at pace. Certainly our forecast for the next quarter is for an overall improvement of approximately 3% with slightly higher costs when compared to this quarter. For our local ops, I would love to, but I really can't give you an accurate forecast, other than to say as things currently stand, we're likely to see South African production in the third quarter down by between 20 to 25%, because we simply have not reached a stable situation with regard to power as yet. Although as you heard from Terence, we are back into our operations and we're slowly trying to rebuild the productive base.

Finally, whilst behind the original schedule, it is pleasing to see, as John said, that Cerro Corona has made good progress not only in tailings dam wall, but we're still looking good for a midyear startup, which is definitely going to benefit Gold Fields as it will demonstrate our commitment to further global diversification and is going to add welcome, low-cost, high-margin answers to our portfolio, followed a quarter or so later by the expansion at Tarkwa, which will be completed.

So whilst we may be down in South Africa overall, in the March quarter, we will be receiving a much higher price for that lower production as well as better prices for our international ounces. However, we will naturally keep shareholders and analysts up-to-date with developments as they occur, because clearly this is going to be an exceptional quarter and I think it would be appropriate for us to give more regular updates as to how things are going.

With that, let me open the floor to any questions you may have.

(OPERATOR INSTRUCTIONS) Shane Hunter, BJM.

First of all, apologies if I'm asking this question. I only came in actually part way through the call, but was this with regard to some information you put out this morning your release where you are saying that the KEA project here from Kloof has actually been put on hold. I just wondered if you could explain -- so what's happening here?

Its Terence. We have completed the drilling of the KEA 4 and KEA 5 hole and surface-to-exploration holes. Based upon that information, we have decided not to continue with the decline that -- the decline as was originally envisaged. As you'll recall, I think it was in June, we had actually stopped the decline pending the results of the KEA 4 and KEA 5 holes.

Okay, does that mean that now, say, the whole project has now been canceled? Is that what you're saying?

It will be morphed into something else. We still have a large portion of the KEA ground below 45 level at the four shaft and we're looking at an alternative access via the [force of] vertical shaft system.

Okay, thank you.

Victor Flores, HSBC.

I have a question with respect to South Deep and I quote from the press release, "the strategic review has come to the conclusion that the current scope of mining activity at South Deep will have to be changed." I'm not sure the word changed is, but reading on the press release, what I assume you're saying is that you'll have to essentially close down the current production at South Deep in order to do the ongoing development that you need for the long-term. Is that a correct interpretation and if not, could you point me in the right direction?

Hello Victor, Terence. The word changed is important. The first thing is that the VCR horizon has been depleted above 95 levels, so that is the first change, is we're no longer going to be depleting the narrow reef horizon above 95 level. The other aspect is that we really do need to concentrate upon finishing the shaft system. It is a five-year project. We're sitting with a twin shaft system, which is not fully equipped and will always be a constraint and that is the reason why we used the word changed.

I think also, Victor, the destressed mining that was originally undertaken, the destressed for the even masses, it was also a labor-intensive process. We have now made the conscious decision to move that over to at mechanized process, so effectively South Deep as you know it today will become an exclusively mechanized operation, not partially mechanized and partially labor-intensive.

Okay, but I'm sort of chasing after what specifically this means in terms of production and costs for the operation, and what I'm hearing is that because of the need to work on the development, we should not anticipate production to be what it has been in the past few quarters going forward.

That is correct that this site will continue with the trackless mining as we know, be continuing with the destressed mining as we know it in a conventional way. We still need to equip ourselves to move over to mechanized destressed mining. The VCR, which contributed something like 200 kilograms per months -- I don't know what that is in ounces offhand -- that has come out of the equation.

Okay, great. Thank you. Then unfortunately I'm going to have to ask about the power. One of the comments in the press release is that obviously power is an issue, but also the impact of the Christmas holidays and what not. If production were to be down 20% for the quarter, how much of that would be power and how much of it would be other extraneous items?

It's about three-quarters of that would be due to the power and the other 25% would be normal Christmas. In fact, in the presentation, Victor, we said that this current quarter we were looking at 20 to 25%. Assuming we got back to 90% in the steady-state, we will be looking at somewhere of, say, between 15 to 20% reductions. So it's about a quarter of the loss would be due to Christmas, the normal seasonal fluctuations, but the vast majority of the production loss is still attributable to the power situation.

Okay, and then just to follow up on this whole power thing. It's sort of hard to translate I guess mentally what 80% of normal power means. One would automatically assume that 80% of power means you lose 20% of your production, but it sounds like it's actually much more disruptive than that. Can you give us a sense of what a 20% cut in power actually means in terms of its impact on the operations?

Victor, I think that the first thing we need to understand is that a typical deep level South African mine has a very high baseload and that is just to keep the basic machinery going in terms of ventilation, keeping your mine cool, as well as pumping of water to surface. That baseload, as I say, is between 50 and 55% of our usage. So if you use the numbers that we currently have at our disposal, we use, as an example, 600 megawatts of average power between the four mines everyday. 300 of that would be our baseload with doing nothing, so it's only the increments above the 50, 55% that we can start utilizing in the actual mining operations.

The other important component is if we look at the total distribution of power on a mine, only 10% is actually used in the mining process. All of the other is effectively overhead. So on an incremental basis, when you start talking about 70, 80, 90, or 100%, we assume the baseload and then we add the incremental power requirement to operate specific shafts. That is how we come to the equations and what we have actually put out in the press.

I think the bottom line, Victor, is that a 10% reduction in overall power actually equates to 20% of the power available for mining activity over and above the baseload to keep the mine operational, so it is not a direct linear relationship. It is probably magnified two times.

Ian, thank you. That I was after, there is a bit of a magnifying effect, if you will, so maybe two to one or something like that. I'm sure it's not linear, but that is what I was after, a 10% cut in power has an inordinate impact on your ability to produce or the industry's ability to produce.

I mean, at 90% of normal power, we would probably have about six to seven shafts that will be at risk and that would be equivalent to about 20 percent of our production.

Okay, great. Thank you so much. I will let somebody else jump on with questions. Thank you.

Murray Pollitt, Pollitt & Co.

The power thing, if South African economy continues to grow, will the mining industry continue to be, as somebody put it, the sacrificial lamb? What would be the longer-term expectations for South African power generation? One-half of the question, because this is clearly and ominous sort of thing. Secondly, I think a couple of years ago Gold Fields announced plans to spend an awful lot of money to develop Dreifontein at depth for mining 20 years forward but very, very deep, very, very expensive, lots of ventilation, refrigeration, and so on. Will this affect -- if the problems can only get worse, will this effect those sort of capital expenditure plans? Should we be cutting back on those?

I think the answer to your second question, Murray, is that all of our capital projects need to be reviewed against the backdrop of what is likely to be a much more expensive power environment going forward. I think that is the first question. Also our existing operations, we need to look at, you know, can they afford to be operated at prices that maybe significantly higher for power? Probably aroundabout somewhere between 11 and 12% of South African costs is power-related. So if there's going to be a significant increase in power costs in South Africa, clearly marginal material is going to be impacted.

I think as far as the growth in South Africa is concerned -- I am not an economist -- if I look at the facts, there is a build program underway in South Africa for the construction of increased baseload power generation, but like all these things, it is going to take a long time to get that up. It clearly has been delayed longer than it should have been. We will get there eventually and I think over time the power installation will catch up with the demand which exists there.

What is going to happen in the interim, where we have this constrained power supply, to be perfectly honest with you, Murray, I'm just a mining engineer. I don't understand what the shortfall really will be, what the impact is going to be on the economy. I would say my instincts tell me it has to have some impact on the economy. It has to pull back on growth to a certain extent. It has to have an influence on people's investment models. How much or how little that is, I will leave that to the experts to decide.

Thank you.

Barry Cooper, CIBC World Markets.

Nick, I was wondering if you could just tell me what is the after-tax effect of the two unusual items with respect to the selling of Venezuelan and Burkina Faso assets.

Well I think the good news, Barry, is that there is no tax effect on those particular sales. We have been able to structure those sales so that the proceeds flow straight through to us.

Okay, so then the $61 million of taxes in the quarter I think was the figure. Then how does that relate to the profit switch? When you back that out, that's a 50% tax rate almost?

Barry, I'll have to get back to you on that particular point. Can I phone you off-line?

Sure, that'll be fine. Second question, I don't know whether you'll want to answer this one or not, would you hazard a guess that if the production is down 10% that same multiplier of two times might be applicable to the cost, given your fixed costs nature of the business?

Certainly if the production comes off, Barry, in the short-term, the costs aren't going to change much, because in the short-term, the costs are quite fixed in this business. Clearly they will be some impact on stores, possibly there will be impact on bonuses and overtime, stuff like that, but I would not factor in a significant drop in costs in the short-term. Clearly in the medium to longer-term, that is going to result in a whole repositioning of the business and that is the exercise that we are currently engaged in.

Right, okay. Thanks a lot, then.

(OPERATOR INSTRUCTIONS) Farooq Hamed, National Bank Financial.

I just had a question -- actually just a follow-up on that cost question. If going forward you're going to be strategically mining out of key areas of the South African mines, do you think that will actually help your cost structure and that maybe it will provide higher grades or anything like that?

I think the honest answer to that is like as Nick said, clearly in a power-constrained environment, we will be focusing in on the higher-margin material or the material which is easier to mine and gives us the profitability, because clearly we've got to optimize and maximize earnings with the power that we've got available to us. What the net impact of that is going to be, because, as Nick says, there is a very high fixed cost element in that business. Obviously that is -- we have to factor that in and calculate what it is going to mean.

I would say, though, that if you look at the last quarter, we were at just over ZAR170,000 a kilogram. As we speak now, we are at ZAR226,000 a kilogram. It is well over 30% higher Rand received price for gold. So with the sort of drop in production that we are getting, I think it's fair to suggest that we can sustain a fairly sharp drop in production from South Africa and obviously the higher prices will help us overcome some of that drop in production, plus with this group having a fairly substantial portion of production coming from international operations, which are not impacted by the power, you would see that higher price accrue to those ounces as well. So you need to do your own calculations and see what the impact is on that.

Okay, thanks.

Alex Rackwitz, Nevsky Capital.

Sorry, I've had some connection problems today. If this a repetition, I apologize. Could you give a full year capital expenditure guidance?

Look, certainly the next quarter would be similar to the quarter we have just gone through. So I don't think you're going to see much change out of the same figure we've given you, which was about $363 million. That is for March -- sorry, $363 million. That is the March quarter. For the June quarter, you're probably going to see something similar again, not far off that, because the Corona project is going to continue to lend and that is about another $120 million that will still have to spent on that. The Tarkwa project still continues, so I think for the next two quarters, the best thing to do is use the same sort of numbers as we have incurred this quarter.

Okay, thanks.

Ladies and gentlemen, we have unfortunately run out of time for questions. Gentlemen, if you would like to make your closing comments.

Dillon, thank you very much indeed. Obviously it is never nice to have to report upon the situation that we currently find ourselves in, but I can assure people listening in that the guys at the South African operation are beavering away feverishly trying to make the best of this situation. I'm very confident that they've come up some good plans of dealing with the various levels of power that we may or may not be allocated. And we will be acting decisively as and when the situation gets resolved. Hopefully by the next quarter, we will be in a position to give you a much clearer picture of a stable South African environment moving forward.

With that, thank you all very much, indeed, and we look forward to chatting to you again in three months time. Thank you very much.

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