Nick Holland, the chief executive of Gold Fields, answers questions about the increased focus on safety, resource nationalism, energy issues and the dynamics of the gold price in the company’s latest annual report. This is an edited version of his responses.
Q. You say “if we cannot mine safely, we will not mine”. How realistic is this?
A. We have made it our objective to achieve ‘Zero Harm’ and mitigate the risks associated with deep underground mining at our South African operations.
We believe that with the right leadership, safety culture, procedures and engineering controls, deep underground mining can be carried out in a way that does not put our employees at risk.
That is not to say the task is not challenging – or that we have it right yet. As the 20 fatalities experienced by Gold Fields in 2011 show, this is a fight that requires constant diligence. A total of 17 of these fatalities took place in the first seven months of 2011, prompting us to accelerate a widespread programme to engineer-out risks, including installing in-stope bolting in stope panels, as well as initiatives around behaviour-change, safety compliance and leadership. This had a real effect, with a marked decline in fatalities in the second half of the year.
Our promise that “if we cannot mine safely, we will not mine” is integral to our safety culture and is acted upon on a daily basis. If there is no safe alternative, we will leave the ounces in the ground rather than put our teams at risk. Over the last three years, we have written-off about 2 million ounces of high-grade reserves on this basis, though they still sit within our resource inventory. Despite the economic cost of this approach, as well as our considerable expenditure on engineering-out risks, we believe this is the right thing to do, and also the realistic thing to do.
In 2011, we had a total of 75, mostly shaft-specific, safety stoppages in South Africa – some of them self-imposed. This resulted in the loss of 52 500 ounces of production, demonstrating the economic impact of potentially avoidable safety incidents. We have proactively engaged with government and the trade unions, meeting them in tri-lateral forums on a regular basis to find common solutions to safety issues. This approach has been more productive than the adversarial approach many in the industry have taken in response to the government’s “no-nonsense” attitude towards safety in the mining sector.
what extent is Gold Fields being affected by resource nationalism?
A. We face resource nationalism to a varying degree at all our operating locations. This seems to be largely due to the significant income gaps that exist in many resource-rich countries, as well as high commodity prices and the (often misguided) belief that these are generating “excessive” profits for mining companies.
In Ghana, where we are the largest single tax contributor, we have faced a rise in royalty rates from 3 percent to 5 percent as well as the continuation of the National Stabilisation Levy for 2011. In addition, Ghana’s new tax regime will see the mining sector subject to a 10 percent increase in corporate income tax, a 10 percent windfall profit tax and a significant hardening of the capital allowance regime.
We remain concerned about the impact of these taxes on the commercial viability of our proposed Damang Super Pit project – which would otherwise secure the future of a mine previously marked for closure, as well as create jobs and boost our public revenue contributions.
In Peru, the new government has raised royalties to between 1 percent and 12 percent of operating profits (previously 1 percent to 3 percent of sales) and imposed a special mining levy of between 2 percent and 8.4 percent on net profits. Although this is relatively modest compared with some previous projections – and will help pay for poverty reduction and infrastructure development – we would be wary of any further increases.
The South African government has essentially taken nationalisation off the table, but is looking at other tax-based measures to extract more funds from the sector. Any further government taxes – for example, in the form of a resource rent tax – would do much to undermine the South African mining industry and its ability to generate employment.
Furthermore, there is also no guarantee that higher taxes in nominal terms will lead to a greater income from the mining industry for the state as they tend to act as a deterrent to investment, particularly from the foreign investor community.
The ability of any mining company to make sustained contributions to its local communities and host countries is almost completely dependent on its ongoing profitability.
prices, carbon management and climate change are increasingly cited as key business priorities for the mining sector. How is Gold Fields addressing these issues?
A. Higher energy costs are already having a direct impact on our operations, so this is far from an abstract issue for us. It is a particularly pressing issue in South Africa, due to challenges around national power infrastructure and sharp increases in electricity costs.
This is one of the reasons why I set a clear target to continue reducing our electricity consumption in South Africa. From our 2007 baseline to the end of 2011, we have already achieved a 17 percent reduction. The emphasis on reducing our electricity consumption will remain, despite the welcome decision by the energy regulator to reduce average tariff increases from 26 percent to 16 percent. We hope this reduction in tariff increases will set the tone for future price changes.
Improved energy efficiency not only reduces our costs, it also reduces our carbon emissions. This is clearly positive from an environmental point of view, but also has the potential to deliver material benefits to Gold Fields in the future. In 2011, the Australian government introduced carbon taxes and the South African government announced in the 2012 Budget that it would do so beginning in 2013.
We are not in favour of carbon taxes as they are a headline cost that is likely to increase our cut-off grade and sterilise our mineral reserves. In addition, we are already spending considerable sums on reducing our carbon footprint. We are doubtful that carbon taxes will result in the environmental benefits that governments are seeking, as we question whether revenue from carbon taxes will be ring-fenced to fund nationwide carbon adaptation and mitigation strategies.
Furthermore, we have integrated carbon pricing into financial planning at our mines and within our growth pipeline to ensure all our business decisions contribute to future sustainability.
Q. What are the key dynamics behind the gold price – and what predictions do you have for the future?
A. Between 2001 and the end of 2011, the price of gold rose by about 650 percent. It is understandable why many are predicting a period of consolidation.
We believe changes in demand are the biggest determinant of the gold price in the short to medium term. In 2011, demand continued to be driven by China and India in terms of gold as an investment and gold jewellery. Last year, these two countries accounted for 42 percent of demand for gold compared with 39 percent in 2010 and 29 percent in 2009. We believe this trend is likely to continue in the medium to long term.
Furthermore, in 2011 we saw central banks accelerate their purchases of gold, buying 440 tons – around five times more than in 2010. There is clearly appetite among the central banks to hold and accumulate gold. Currently, the vast majority of gold reserves are held in the developed world – meaning there is also significant scope for central banks in developing economies to expand their gold reserves as they grow.
Exchange-traded funds (ETFs) are another major source of demand. Having started from nothing in 2004, ETFs are now worth around $120 billion (R933bn), accounting for around 10 percent of total investment demand for gold in 2011. This still represents only around 1 percent of global funds under management – again meaning there is great scope for further expansion in the longer term.
Given the four- to five-fold increase in the price of gold over the last decade, it might be expected that supply would be booming. But, over the past 10 years, the compound annual growth in gold production has been 1 percent per year – despite a 4 percent increase in production in 2011. This is because the size of gold discoveries has fallen significantly. Analysis of the last 30 years shows that discoveries of 10 million ounce deposits, which once made up the majority of new finds, are becoming increasingly rare.
Over the same period, grade levels have also declined significantly. Gold is not only getting harder to find, it is also getting more expensive to find. Again, over the last 30 years, the cost of discovering an ounce of gold has risen from around $10 to an estimated $75. Gold Fields cost of reserve discovery through exploration has averaged around $33 an ounce over the past 10 years.
In addition, the gold mining industry is facing rising costs, led by higher energy prices, sharp wage increases for scarce skills and ever-rising prices for input materials. Despite outward appearances, the sector is not making as much money as the gold price would suggest. This means there is a fundamental dynamic – rising global demand and moribund global supply – that could help underpin future gold prices.
Furthermore, gold has regained its status as an asset class, the world monetary base is likely to continue to significantly increase (with commensurate effects in terms of future inflation) and uncertainty around a range of major global economies shows little sign of abating. In this context, we believe the fundamentals for gold remain positive.