Gold Fields raises curtain on ‘evolution’ with R11.3bn capex
This programme, described by CEO, Nick Holland, as the “next cycle in our evolution”, would begin with an outlay in growth and stay-in-business (SIB) capital of $869m (R11.3bn) this year representing a 35% year-on-year increase.
The projects include South Deep, the extension of Damang in Ghana, the start of the ground-up development of the Gruyere gold project in Western Australia, and the Salares Norte project in Chile which Gold Fields has been exploring for several years.
The composition of the capital expenditure is that about $252m has been set aside for growth capital with the balance allocated to SIB.
The $252m in growth capital comprises $120m for Damang, A$153m ($112m) for Gruyere, as well as R287m ($20m) at South Deep. Holland acknowledged that the company may spend more than it earned this year.
From a production perspective, the outcome of these efforts was that Gold Fields would “safely” maintain output at above two million ounces a year for five to seven years.
Asked by Citi analyst Johann Steyn if Gold Fields could corroborate his 2.5 million to 2.6 million oz gold forecast by 2019, Holland responded: “I don’t want to commit to that I’m more interested in growing cash”.
He added that there was an element of production growth in the projects, but the likelihood was that Gold Fields would seek to replace higher cost with lower cost gold production. “It may be that there are some incremental ounces [growth], but I’m more interested in incremental cash,” he said.
Despite the outlay, Gold Fields said that it would remain focused on paying a dividend.
For the 2016 financial year, it announced a final dividend of 60 South African cents per share taking the total dividend to 110c/share. This was after posting normalised earnings of $191m for the year (2015: normalised loss of $45m).
“While we may spend more cash than we may generate in 2017 … we are taking a longer term view to growing our cash flow in the future,” Gold Fields said in notes to its fourth quarter and year-end results announcement.
“Our business is a long-term game, which has to be sustainable through price cycles. Importantly, we are ensuring that we only embark on investments and capital expenditure with excellent potential for paybacks and returns and which will continue to drive down our costs,” it said.
“It is also important to remember that we need to keep managing our existing orebodies with regard to grade management and ongoing sustainable capital expenditure, so as to provide a platform for repetitive strong cashflow,” it added.
The company guided to gold production of between 2.1 to 2.15 million oz for the 2017 financial year having produced 2.15 million oz in the year under review. “This is the fourth year that we have matched or beaten our production targets,” said Holland.
Net cash inflow for the 2016 financial year was $294m which helped Gold Fields to cut net debt to $1.17bn as of December 31 from $1.38bn at December 31 in 2015.
The net cash included “a modest inflow” at South Deep from a $80m cash leakage previously, although Holland added: “Let’s be frank about it, the rand gold price helped us to break even”.
‘WE HAVE A FULL DECK’
Commenting in the full-year presentation, Holland said the group had “a full deck” of projects. “The chances of doing something additional on the M&A front is unlikely,” he said.
“It would have to be something exceptional. We will now have an inward approach because if we deliver the projects we’ve got, we will have good sustainable cash flow,” he added.
He also said the group was likely to dispose of its Darlot mine in Western Australia which it acquired with Yilgarn South from Barrick Gold for about $300m in 2013. “You are likely to hear more about this in the coming year,” said Holland.
Goldman Sachs was concerned about the capital expenditure ramp-up, however. “While production and financials were slightly ahead of consensus and the South Deep plan was not a big surprise, the biggest concern … is the significant increase in capex spend,” the bank said in a note.
“With the Salares Norte pre-feasibility on track for the second quarter of 2017, capex in the near term could remain elevated, implying lower free cash flow/returns,” it added.
In question time at the mid-morning presentation today, analysts expressed concern regarding the scale of the investment undertaken by Gold Fields.
Holland acknowledged the technical risk and said the group was flexible on the timing of projects. “We have deleveraged the balance sheet by $700m so we have got the headroom,” he said of potential balance sheet risk.
“We also have the time to look at the pace with which we develop our projects. I wouldn’t rule out slowing up, especially if gold went to $1,000/oz,” he said.