JOHANNESBURG (miningweekly.com) – Dual-listed Gold Fields is bracing itself for another year of softened gold prices, but CEO Nick Holland believes the bullion producer is well-positioned – from a debt level and production cost perspective – to weather the anticipated pricing environment.

The local gold industry was not, however, indefinitely sustainable at the current realised prices.

“There’s a tough year ahead of us…[and] we have to assume that we are where we are [in terms of the gold price] for the short term.

“While we don't give price predictions, the current gold price is below the long-term cost of [the] replacement of an ounce of gold, so if you want to have an industry that's sustainable for the long term, the gold price has to be higher than where it is today,” he told a media roundtable on the company’s third-quarter results on Thursday.

Optimistically, industry consensus had rallied around expectations of a higher gold price from 2016, added group CFO Paul Schmidt.

But Holland cautioned that if the increased demand for gold likely to emerge from India and China was to be serviced, a viable, productive gold industry would be critical.

“Otherwise, where are they going to get the gold? The central banks haven’t sold [gold] for ten years, recycled gold is very price-sensitive and I think we’ve seen most of the blood spilled in the exchange-traded funds, for now.

“If [gold] doesn’t come from primary supply, we’re not going to be able to service demands in those countries. So, long term, we will have a market, but it will have to be at a sustainable level so that we, as an industry, can develop grassroots projects and operate them. Which won’t happen at $1 100/oz or $1 200/oz,” he commented.

DEBT FOCUS
A continued strong cash generation during the quarter ended September 30 had enabled the group to further improve the strength of its balance sheet by reducing net debt and further improving the net debt to earnings before interest, taxes, depreciation and amortisation (Ebitda) ratio, Schmidt outlined.

Over the three months, net debt was reduced by a further $137-million to $1.5-billion, bringing total net debt reduction for the year to date to $237-million.

This reduction was assisted by the $81-million proceeds from the sale of a 51% interest in the Chucapaca mine, in Peru, which was received over the quarter.

“We have [among] the cheapest debt in the gold mining industry. There are really only two options to bring down debt in the industry; through raising money and selling assets, and we’ve sold everything we want to sell,” Schmidt noted.

Gold Fields would, however, look to further “chip away” at current debt levels at a rate of some R200-million a year. 

Based on a 12-month rolling historical average, the group’s net debt to Ebitda ratio improved from 1:47 in the June 2014 quarter to 1:33 in the September 2014 quarter.

“Our medium-term objective is to reduce our net debt to Ebitda ratio to about one,” noted Schmidt.

EARNINGS
The gold miner’s revenue for the period narrowed 6% for the prior quarter to $699-million owing to lower gold sold and a lower achieved gold price.

This narrowed headline earnings from $18-million in the June quarter to $14-million in the period under review, while earnings a share were maintained at $0.2 apiece.

Operating profit decreased from $311-million in the June quarter to $285-million in the three months ended September 30.

Equivalent gold sold decreased by 6%, from 586 000 oz in the June quarter to 552 800 oz in the three months under review, as gold production at the company’s South Deep operation slumped by 18%. The South African mine’s production decreased from 51 100 oz in the prior three months to 41 700 oz in the September quarter, owing to a fatal accident, the continuation of ground support remediation and a five-day training initiative.

“Gold Fields delivered results consistent with guidance previously given. This has enabled the group to continue to generate cash and to further strengthen its balance sheet.

“Key features of the quarter included a strong performance from the international mines, all seven of which were cash generative, as well as the completion of the production-critical, safety-related ground support at South Deep,” noted Holland.

At the gold miner’s Tarkwa mine, in Ghana, the expansion of the carbon-in-leach plant from a yearly throughput of 12.3-million tons a year to 13.3-million tons a year progressed well and was scheduled to be complete by the end of December.

The expansion was expected to enable Tarkwa to increase its future production to a steady-state level of around 550 000 oz/y.

Gold production from the nearby Damang mine increased by 6% to 42 800 oz and was on track to exceed its 2014 guidance of 165 000 oz of gold.

“The main focus at Damang remains the identification of additional ore sources along the 27 km of strike between Damang and Tarkwa, where historical openpits were last drilled and mined when the gold price was between $300/oz and $400/oz,” Holland explained.

In South America, Gold Fields’ Cerro Corona copper and gold operation, in Peru, had another “outstanding” quarter with gold equivalent production up 10% to 84 700 oz.

With year-to-date production of 242 000 oz, the mine remained on track to exceed its production guidance for the full year of 290 000 oz.

The group’s Australian operations, meanwhile, continued to perform, exceeding guidance both in terms of costs and ounces produced.

The four mines in the portfolio reported gold production of 268 800 oz for the quarter, bringing total production for the year to date to 770 900 oz.

“Over the past 12 months, since acquiring the Yilgarn South assets from Barrick Gold in October, Gold Fields’ Australian operations have produced more than one-million ounces of gold,” Holland added.

FREE CASH FLOW
Despite the recent volatility in the gold price, the Gold Fields CEO remained committed to the objective of generating a sustainable free cash flow margin of at least 15% at a $1 300/oz gold price.

Holland believed this could be achieved without compromising the long-term sustainability of the orebodies through a lack of investment in ore-reserve development and stripping, or through “high-grading”.

“This policy remains unchanged, even at current spot prices. By structuring the group to generate a 15% free cash flow margin at a $1 300/oz gold price, Gold Fields has, in fact, built in a safety cushion to withstand lower gold prices.

“On this basis, the group’s expected breakeven gold price is around $1 050/oz, assuming existing operations are sustained,” he pointed out.

The group remained on track to achieve its production guidance for the full year of about 2.2-million ounces of gold equivalent production.