Negative rating as Gold Fields misses targets

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Dineo Faku

Moody’s Investors Service has kept its negative assessment for Gold Fields over concerns about its ability to meet the revised production targets at the South Deep mechanised mine near Carletonville.

South Deep was started by Brett Kebble, the late mining magnate, and has not reached its full capacity after missing deadlines. It was awarded a mining licence in 2010 through a consortium comprising politically connected individuals.

Gold Fields bought the 3km deep mine in 2006, and it has cost the company R40 billion, including the purchase price.

The mine’s production target has been moved to 700 000 ounces a year by 2017 from 800 000 ounces by this year, to the irritation of investors.

The execution on Gold Fields’s revised ramp-up plan for South Deep would remain critical, Moody’s local market analyst Douglas Rowlings said in a note last week.

“In the past, Gold Fields has had challenges in meeting its production and cost targets for production ramp-up of the mine,” he cautioned.

The investigation by the Directorate for Priority Crime Investigation (the Hawks) and the US Securities and Exchange Commission and into South Deep’s R2.1bn black economic empowerment (BEE) deal are concerning.

Moody’s said the investigations presented uncertainty for Gold Fields.

Rowlings wrote: “Actual or alleged breach or breaches of relevant laws (including South African anti-bribery and corruption legislation or the US Foreign Corrupt Practices Act of 1977) under any circumstances, may lead to regulatory and civil fines, litigation, public and private censure, loss of operating licenses and could negatively affect BEE status.”

South Deep is a key mine for Gold Fields’s future production profile, accounting for 73 percent of mineral reserves.

South Deep has 49 million ounces of attributable reserves, 80 million ounces of resources, and a life of about 70 years.

Management was committed to positioning the mine to achieve break-even cash flow by the end of this year or early next year, Rowlings said.

Gold Fields spun off its aging mines to establish Sibanye Gold last February after labour unrest in the mining industry that resulted in the killing of 44 people in August 2012.

Its share price has been hammered and declined 29 percent in the year to date.

Nick Holland, Gold Fields’s chief executive, remains confident despite the ongoing challenges. He told the Bank of America Merrill Lynch’s Global Metals, Mining and Steel Conference in Miami last week that he was positive about meeting the new target at South Deep.

“We are not happy in terms of progress we’ve made relative to our commitment… We had hoped that we would have this mine to full production by the end of 2014.

“And regrettably we are going to be three years late from where we started. Our new estimate is at the end of 2017”.

Holland said a review conducted between August and February, which was externally reviewed by a team from Australia and Canada, found that a skills shortage was to blame for missing the targets.

Holland noted that 15 Australians from the group’s operations in that country were brought to South Deep in January. Over the next two years they would instil a “world class mechanised mining culture at the operation”.

So far, morale and industrial relations had improved.

“What it comes down to is that it’s not about the ore body, it’s not about the infrastructure; it’s actually about the soft issues. We are driving those issues, which I believe can develop a fundamental change in this particular ore body,” Holland said.

Gold Fields’s permanent staff was reduced to 10 000 employees from 45 000 with the unbundling of its Kloof, Driefontein and Beatrix mines.

In the March quarter, Gold Fields produced 557 000 ounces, a 17 percent increase year on year. The company was downgraded to a sell by Citigroup, Goldman Sachs and JP Morgan Chase last week.


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