Gold Fields loses US$129M in Q2 as production costs surpass gold price

VANCOUVER — Gold Fields (NYSE: GFI; JSE: GFI) is preparing for a future of US$1,300 per oz. gold by restructuring all of its operations — and potentially closing some — to bring its production costs back below the gold price, a now-negative disparity that drove the company to a US$129-million loss in the second quarter.

And the company is betting on Australia to help it achieve its goals: just as it announced the quarterly loss and warned of the potential for further writedowns, Gold Fields announced a deal to buy three gold mines in Western Australia from Barrick Gold (TSX: ABX; NYSE: ABX) for US$300 million. 

Gold Fields faced a major enemy in its battle to make money last quarter: a lower gold price. In the second quarter the yellow metal fetched an average price of US$1,372 per oz. Using the new World Gold Council all-in metric, Gold Fields pegged its gold production cost at US$1,572 per oz. 

That disparity created two new realities that resulted in a $270-million impairment charge. First, Gold Fields had to re-evaluate the ore stockpiles at its Damang mine in Ghana, where less of the stockpile is now economic. Second, Gold Fields is producing less gold following reductions to what the company calls “marginal mining.” 

That refers to mining where the returns are not worth the cost, and Gold Fields was faced with quite a few such situations. The company closed the marginal heap-leach operation at its St Ives mine in Australia. Then it stopped mining the low-grade Main and Rajah orebodies at its Agnew mine, also in Australia. Finally, it closed the heap-leach portion of its Tarkwa mine in Ghana, where the company is now only using the more effective carbon-in-leach circuit to recover gold. 

“The main theme in Gold Fields today is to restructure and position this company to survive at a US$1,300 gold price, and to a large degree that is what this quarter has been about,” said CEO Nick Holland in a conference call. “It could be that further mining is curtailed. We’re not afraid to cut production to make money.”

Even with those changes, Gold Fields still has two money-losing mines: the highly mechanized Deep South gold mine in South Africa and the Damang mine in Ghana. Deep South is an underground mine with two shaft systems, one old and the other new, that is still ramping up to planned throughput of 330,000 tonnes per month. That would enable the mine to churn out 700,000 oz. gold annually for more than 40 years. 

“The key short-term deliverable at Deep South is to get the operation to break-even — that’s what we want to achieve as soon as possible,” Holland says. “At the same time we want to reassess the long-term trajectory. It might be that we’ll look at a different production profile so that we can turn this wonderful orebody into a long-term, profitable mine.”

As for Damang, Holland says questions remain.

“Can we come up with a longer-term plan that works for the operation? Or do we have to accept that it has to be put on care and maintenance?”

Following news of the quarterly loss, Gold Fields shares posted their biggest one-day fall in five years, losing 9.1% on the Johannesburg Stock Exchange to close at R59.89.

But it’s not all cutbacks at Gold Fields. The company’s new deal with Barrick will see it spend US$300 million, of which half could be paid in shares, to acquire Barrick’s Yilgarn South assets. The package comprises the Granny Smith, Lawlers and Darlot gold mines, which are all in Western Australia. 

The mines produced 452,000 oz. gold last year, at an all-in sustaining cost of US$1,137 per oz. Assuming that production level is maintained, the deal would make Australia Gold Fields’ most important region, responsible for 42% of the company’s gold production. Ghana would drop down to second place with 34% of Gold Fields’ output. Peru and South Africa would remain largely unchanged at 13% and 11%. 

The mines offer 2.6 million reserve oz. gold and 1.9 million resource oz., though Holland expects considerable resource growth over the long-term. Gold mineralization in the Yilgarn belt is predominantly orogenic, and Gold Fields has demonstrated an ability to delineate new reserves at its current Yilgarn mines, having added 7.8 million oz. to the St. Ives and Agnew reserve count over the last 12 years. 

The synergies extend well beyond geology. Gold Fields’ Lawlers mine is adjacent to Agnew, and Holland says the company plans to immediately consolidate the two operations. Agnew is already one of the lowest-cost producers in Australia, and Holland says consolidating the mines should push costs even lower.

“We might even be able to shut down the Lawlers mill completely and process everything at Agnew,” he says. The orebodies might also merge at depth, which means the mines could become an integrated underground complex.

Despite the production curtailments, Gold Fields is still on track to achieve its 2013 production guidance of between 1.83 and 1.9 million oz. 

Holland says further assets impairments would be assessed at year-end, once the company has completed life-of-mine operating plans for all of its mines based on US$1,300 per oz. gold. The company is also in talks to sell two exploration-stage assets: the Woodjam copper-gold project in B.C., and the Talas gold project in Kyrgyzstan. 

Gold Fields has been cutting back on general and administrative expenses. The company cut staff at its corporate office from 110 to 56, reduced its Australian employee count by 23% and shed three board seats to leave nine. 

These restructurings are coming just 10 months after Gold Fields made another big move, spinning its KDC and Beatrix gold mines in South Africa out into a new company called Sibanye Gold (NYSE: SBGL). The move reduced the company’s exposure to operating risks in South Africa, where labour strife and insufficient power are common plagues. But Gold Fields has kept South Deep, so the company has not cut its ties completely.