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South Deep pain barely disturbs Gold Fields' investment case as share ambles on - MiningMX

Tuesday, 13 November 2018

SHARES in Gold Fields were untroubled on Friday following the firm’s third quarter production update in which it detailed deteriorating labour relations at its South Deep mine, and – more importantly for investors – demonstrated the strength of its international portfolio in Australia, Ghana and Peru.

“The South Deep situation seems to be going from bad to worse,” said Nedbank Securities analysts, Leon Esterhuizen and Arnold van Graan in a note on November 9. “From our perspective, the bad news seems to be in the price. As a result, we don’t not expect a material reaction from these results,” they added.

There wasn’t.

Shares in Gold Fields were down marginally by the end of the week, but this morning they had recovered just over 2%. The big hit was in August when Gold Fields shares lost about 28% after announcing that around 1,500 jobs would be cut at South Deep. The group also said South Deep was destined for another restructuring exercise, the results of which will be presented in February. The likelihood of the mine ever reaching its 500,000 ounces/year production target by 2022 appear remote.

The latest setback is a strike – now into its second week – which is being staged by 150 National Union of Mineworkers (NUM) members who work at the mine. RBC Capital Markets described a decision by Gold Fields’s not to assume any more production from the mine this year as “sensible”. It added: “Whilst undoubtedly disappointing it is not surprising to us or, we expect, the street”.

Both banks’ comments suggest exhaustion with South Deep. In fact, since Gold Fields announced the latest restructuring, there have been calls by analysts for the group to take its medicine with South Deep and shut or sell the operation once and for all.

Gold Fields CEO, Nick Holland, acknowledged in an interview with Miningmx on November 9 that the mine absorbed an inordinate amount of management time. But he wanted to give the mine one last chance. “We’ve never done a major restructuring at the mine so let’s see what we get out of this. Let’s see if we are better off and can prevail,” he said.

As for the strike, Holland said it was pointless. “I really don’t think the branch is serving its members well, nor of the national head office. We have instituted a no work, no pay rule so it’ll be sad that employees go home with no salaries over Christmas,” he said.

“Open voids at depth”, which are a part of South Deep’s geology, mean that an interruption to production for more than a month could seriously imperil the mine’s future. “It really doesn’t help if you leave the mine for a number of months,” he said. “Pillars collapse. It’s not good to leave faces standing and there are greater risks than jobs,” he added referring to the safety risks of an extended strike.

BALANCE SHEET

Gold Fields may refinance $1bn in syndicated loans during the course of next year, according to the group’s third quarter results commentary. Holland said a decision on some balance sheet reorganisation depending on “… if there is a market”.

“We could refinance potentially once we’ve got the year-end out of the way,” he said. “Since our credit was upgraded we may look at increase flexibility. Banks like our credit and the rest of the [asset] portfolio is doing well. We are looking to pay debt off over the next few years so let’s see if there markets are there. If not, we’ll bite the bullet,” he said.


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