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Edited Transcript of GFI.J earnings conference call or presentation 15-Aug-19 1:00pm GMT

Q2 2019 Gold Fields Ltd Earnings Call

Johannesburg Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Gold Fields Ltd earnings conference call or presentation Thursday, August 15, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Nicholas John Holland

Gold Fields Limited - CEO & Executive Director

* Paul A. Schmidt

Gold Fields Limited - Financial Director, CFO & Executive Director

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Conference Call Participants

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* Johann Steyn

Citigroup Inc, Research Division - MD and Head of South African Equity Research

* Tanya M. Jakusconek

Scotiabank Global Banking and Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to Gold Fields Limited's First Half of 2019 Results Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I'd like to hand the conference over to Mr. Nick Holland. Please go ahead, sir.

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Nicholas John Holland, Gold Fields Limited - CEO & Executive Director [2]

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Thank you very much. Good afternoon or good morning, ladies and gents, depending on where you are in the world today. I'm joined by Paul Schmidt, as always, our CFO. I've also got Avishkar Nagaser with me today. Thank you for joining us on the call to discuss Gold Fields' half year results for 2019. I'd like to make a few brief comments, and then we'll open it up for questions.

I'm pleased to report that after a 2-year reinvestment period, Gold Fields turned net cash positive in the first half of 2019, which is earlier than when we thought we would, generating $49 million for the 6 months. We actually expected this would be negative for this first half. So it's a nice surprise for us.

We expect the group's cash-generating ability to increase in the second half and into next year as the project capital reduces further and the contribution from the new projects increases. Attributable gold equivalent production for the 6 months ended June '19 increased by 9% to 1.083 million ounces, mainly due to the inclusion of the contribution from Asanko in the first half of this year for the first time. Remember, we bought early interest in July of last year, so it wouldn't have been in the first half of last year.

All-in costs for the first half of this year were 5% lower at $1,106 as project capital started to decrease. Normalized earnings for the 6 months were $126 million or USD 0.15 per share, an almost threefold increase from the first half of 2018, in line with our dividend policy of paying out between 25% and 35% of normalized earnings. We have declared an interim dividend of ZAR 0.60 per share.

The net debt balance at the end of June '19 was $1.5 billion, which is an improvement on that reported at the end of December '18 of $1.61 billion. The net debt to EBITDA also improved over the 6 months period to 1.36x.

During the period, a lot of good work was done to improve the balance sheet, including the new bond issues and refinancing the bank debt. That's improved the liquidity profile of our maturities going forward. In addition, the sale of non-core investments raised almost $100 million.

Turning to the growth projects. Gruyere commenced production, I'm pleased to say, at the end of June, and achieved practical completion on 10 August, which means we ran the plant to the full value chain uninterrupted for up to 96 hours. The ramp-up to full production is progressing well.

Damang continued to perform ahead of plan and generated positive cash flow after all capital for the period.

The focus at Salares Norte during the first half of 2019 was largely responding to queries related to the Environmental Impact Assessment as well as progressing detailed engineering, and we made good progress on that. We expect the EIA to be granted within the next 12 months, which will be a trigger point for the approval and commencement of the project.

And with that, we'll now open up to questions, which myself and Paul will deal with. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Johann Steyn of Citigroup.

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Johann Steyn, Citigroup Inc, Research Division - MD and Head of South African Equity Research [2]

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This morning, on the South African presentation, you mentioned that you're very committed towards South Deep. You don't see it at this point in time as an asset that you would like to dispose of. Now I just wonder about this because you guys have been very successful over the past 6 years or so with bolt-on acquisitions and disposals, and you've struggled with South Deep. There is an opportunity now with the Randgold part being at near-record highs and some of your peers in South Africa being keen to buy the assets. There is an opportunity to dispose of this asset. I just wanted to better understand why the insistence on keeping this asset.

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Nicholas John Holland, Gold Fields Limited - CEO & Executive Director [3]

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Yes. So Johann, I think the way I'd like to respond to this, and it's something we debated earlier with various journalists, is to say whatever we do on the South Deep must be from a position of strength and not from a position of weakness. And clearly, the asset is still in a very fragile position. We've got to remember that. Now we've come through restructuring that really took the wind out of the sales. And I think it's fair to say that most of quarter 1 was dedicated to recalibrating people and taking 1/3 of the equipment out, relooking at the cost base. And we're really only starting to get our tails up in the last quarter, and even the production levels we're at now saw some distance off where we'd like to be in the future.

So I don't think we're saying that we're necessarily weighted to this forever. But whatever we do must be from a strong platform and let's see where we go. We did say at the beginning of the year when asked about the future of South Deep that we would get through this year and see if we can achieve the goals we've set for ourselves. We'd reassess then at the end of the next -- at the end of this year and turn on the next step forward. But I think, certainly, until we've gone through that phase, we've got a better understanding as to what we think we can do against a very different backdrop than where we were a year ago, it would be premature for us to conclude that this is something that must definitely be out of Gold Fields. By the same token, it's not to say that strategically, we shouldn't consider something else. But until we can get, I think, some runs on the board over a period of quarters and probably over a period of time beyond the 2 quarters, I don't think we'd want to decide on the next steps. Clearly, we need to take this into safer waters, see if we can sustain our improvements and make sure that we can build on this. That thing gives us a whole range of different things to think about, whereas right now, we'd be very limited in the range of things that we could possibly do. So it's not to say that there isn't other options for it in time, but it's not the right time for us to consider that now.

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Operator [4]

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(Operator Instructions) Your next question comes from Tanya Jakusconek of Scotiabank.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [5]

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I have a couple of questions. Maybe I'll start with the financial one first and then move to the technical. Just wanted to ask, Nick, on your hedging philosophy right now at this point. I saw that additional hedges were put on in the quarter. I'm wondering how you see hedging in this full price environment. And particularly, with Salares Norte, at some point, you will be making a production decision on that, is that something you would also hedge?

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Paul A. Schmidt, Gold Fields Limited - Financial Director, CFO & Executive Director [6]

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Tanya, it's Paul here. Let me take you through the full process as to why we hedged. We've embarked on a process of debt reduction over 2019, 2020, 2021. I mean the one thing we've been good at is controlling our production, controlling our costs. We obviously can't control the gold price. When we did our first draft of our ops plan for 2020, we came up with x cash flow.

Just so you understand what our planning assumptions for next year. There's USD 1,200 gold price, AUD 1,600 gold price and ZAR 550,000 per kilogram. Understand this process started was probably in February, March when we looked at it and came up with x cash flow. And it didn't necessarily meet the cash flow we needed to achieve our debt reduction. Remember, Nick and I commented that we wanted to get net debt to EBITDA down below 1 by the end of next year. At that stage, I mean, prices were some $1,300 when we started in our hedging program. And we got some -- we got permission from the Board to add some CapEx, but fairly steep pricing that they said if we can get those prices, we can go ahead and hedge. And that's what we have done. We have basically hedged 50% of Australia's production for next year, 50% of Ghana's production and 75% of South Deep. South Deep, we could only hedge 75% by [SAR] rules, and I think South Deep is a little bit more different in logic.

Martin needs to continue delivering on South Deep next year. And I don't mean to worry about the gold price because if gold actually dropped to ZAR 550,000 or something, we may have to carry the constant capital literature. I managed to get hedges in place for 75% of its production for next year around ZAR 680,000 a kilo, which now doesn't look great with the price being ZAR 700,000 plus. But ZAR 680,000 is a great price for him to be able to deliver everything that he needs to. Offsetting these costs must be made. These costs must be obviously a lot lower, but we also want South Deep to make money next year.

All above that, it's not about long-term -- we will never go longer than a year in terms of performance here. So we won't build up a book of 3, 4 years. We will only look at the year ahead of us. And obviously, we locked this in March, and at that stage, we saw the price is a bit great. But remember, it's only 50% of the production in Ghana and Peru. The other 50% is still exposed to the gold price, and probably gold will be -- Nick and I believe that gold's been on a very good run at the moment, maybe as we shop this off a bit. But it was basically locking our cash flow for next year or our proportion.

When we did the (inaudible) prices. [Post-tax] with all hedging exercise added an additional $150 million to our cash flow for next year. So it was quite substantial, and that allowed Nick and I to achieving almost a change of plan. We will achieve our goals of getting to 1x net debt to EBITDA by the end of next year. I hope that explains your question.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [7]

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Well, maybe you can just add to -- would you expect to add further at these prices? I mean you have 50% at Peru, and Ghana's still outstanding. Is this enough for now?

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Paul A. Schmidt, Gold Fields Limited - Financial Director, CFO & Executive Director [8]

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No. There need to be more. We also got 50% of Australia. No, we've just gained 50% because that was enough to cover us and to get to our targets for next year. The rest we will ride to the market.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [9]

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Okay. So at this point -- and what about Salares Norte? Is that something that you would look to hedge the capital there?

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Paul A. Schmidt, Gold Fields Limited - Financial Director, CFO & Executive Director [10]

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Well, it's a simple thing, we don't have an approved project. So I wouldn't call hedging something that's not approved. It's not saying you won't when you approve it, but at the moment, there's nothing approved. So I can't hedge.

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Nicholas John Holland, Gold Fields Limited - CEO & Executive Director [11]

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We'll need a new EIA as well, Tanya.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [12]

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Okay. Yes. No, I understand, it was more just a philosophical question on your hedging philosophy.

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Nicholas John Holland, Gold Fields Limited - CEO & Executive Director [13]

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Yes. I think you got to look at the hedging at Salares in the context of how we fund it, and we're working on a funding strategy. So part of the answer would be how we fund the project and whether a project debt or asset-related debt would be a big component so then -- clearly, hedging has a role to play sometimes and also the price over the critical period of getting the buyback of what that might be.

So that would fall fairly and squarely within our existing ops [schedule] in the market. But it's really we're not long-term systematic hedges. We've done everything we've done in terms of our policy, which is stated in our integrated annual report.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [14]

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Okay. And then maybe just if we can come back on just the CapEx for this year. Can you just review what the -- your sustaining annual development capital is this year? Just because we've had some movements with Gruyere, we've had some movements with Damang. Maybe we could just get a clean number from you.

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Paul A. Schmidt, Gold Fields Limited - Financial Director, CFO & Executive Director [15]

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Yes. I think at around $650 million we guided -- $650 million all. $490 million of sustaining and $140 million of growth capital.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [16]

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Okay. And that's still the number? No change to that?

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Paul A. Schmidt, Gold Fields Limited - Financial Director, CFO & Executive Director [17]

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Yes. That's still the number.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [18]

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Okay. Perfect. And just I wanted to come to Asanko, which, I guess, you released an update on the life-of-mine plans and appreciate some more is coming in Q1 of 2020. Can you talk a little bit about that project on 2 aspects? It looks like much smaller operation from a mine rank perspective. And then number two, just on the capital side, you mentioned significant capital limited to movement of village. What exactly are you seeing on the capital side?

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Nicholas John Holland, Gold Fields Limited - CEO & Executive Director [19]

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Okay. So I think what the joint venture is keen to do here is to get Asanko to a space where it's cash positive on a sustainable basis and to bring its costs down. We both -- both partners think the cost base needs to be looked at, and we're working across the piece on that. And at the same time, given the fact that Esaase, which is going to be probably a big part of the base load, is still in its infancy, having only commenced mining at the beginning of the year, we're going to proceed more cautiously and build it up over time. Our objective to come up with an 8- to 10-year mine life is the starting point, not the end point. So we shouldn't see that as being a capital on what this asset can do.

And let me remind you, Tanya, why we bought Agnew. We bought Agnew because we've seen significant prospectivity on a large piece of ground that has not been explored. And we see multiple potential analogues of Nkran and Esaase, that's why we bought Agnew. Now at the same time, the operation is running at very high costs, and we need to bring that down. One of the ways of doing that is to focus on the near-term deliverables to improve short-term performance. I think big capital projects like conveyors have been talked about. Those are off the table. Projects around growing the size of a plant from the current 5.4 million tonnes are off the table. We think we can actually make some good money on the back of 5.4 million tonne plant with the right kind of mix of feed from both Nkran, Esaase and the various satellites around us.

That's the first and most important step. We'll also be putting together an exploration strategy that looks to bring forward the most promising of the prospects, particularly, prospects that are closer to the process plant. Tontokrom is one potential such ore source, which sits within [20k] of the process plant. In fact, it's nearer than where Esaase is. And obviously, there's work to do to continue drilling out. We need some other targets into the future.

So it's a first step to get something that makes sense. Both partners need to come up with a new reserve and resource. We've not declared any reserve or resource, even though we've been owners of the asset for a year. We want to come up with something that we agree with Asanko and put that out in quarter 1. That will be something that we can both be very confident of, particularly, given some of the history here. And then we just [have] as a process to grow it up from here. But we see -- we think Esaase can be a tremendous mine. We think there's lots of potential there and there's lots of potential around it.

So the business thesis, if you will, Tanya, for buying Agnew hasn't changed. It's about getting near-term focus on running this like any other mine that we are in. We are very focused on margin, we're very focused on cash flow, at robust prices, and I think you've seen that, that surfaced reasonably well on our portfolio. And I think there's really good alignment now with the team at Asanko in this particular project (inaudible).

The relocation capital is a village called Tetrem, which is going to be in the mining radius of Esaase being last Esaase, which we'll get to over time. And so there's around about $29 million that will be funded this year and next year on that relocation, and the (inaudible) approve that capital to enable us to secure the long-term prospects of Esaase.

So that's the only, at this stage, material capital I'm aware of. We are finishing the Nkran Cut 2 West at the moment, around about September. That will get us into good ore in that [pullback] in Nkran, and we'll finalize our business plan for next year. But as I sit here today, that's the one remaining significant piece of capital (inaudible). I hope that's clear.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [20]

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And just so that I understand, the $29 million on a 100% basis to be spent this year and next. And then it would just be sustaining capital to keep you at that 225,000 to 250,000 ounce rate over an 8- to 10-year mine life.

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Nicholas John Holland, Gold Fields Limited - CEO & Executive Director [21]

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Pretty much. I mean there will be -- there's probably going to be some capital on upgrading the road that we're looking at, but we haven't yet firmed up on what and when and how much. But again, if we want to increase the feed from Esaase, you know that's something that we'll be talking about with our partners and factoring that into the plan. There will be some capital on that, but we're not talking huge amounts of money here. And again, I would see that as probably part of the sustaining capital anyway to basically keep the asset at the sort of 225,000 to 250,000 ounces because remember, certain ore sources come up, other ore sources have to increase. Esaase will probably increase over time. So upgrading the road will be an important component of that. But I don't know how much that might be at this stage, we will work it out.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [22]

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Okay. That's helpful. So we'll look forward to that starting Q1 in next year.

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Nicholas John Holland, Gold Fields Limited - CEO & Executive Director [23]

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Perfect.

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Operator [24]

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(Operator Instructions) Gentlemen, we have no further questions on the line. Do you have any closing comments?

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Nicholas John Holland, Gold Fields Limited - CEO & Executive Director [25]

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Yes, I'd just like to thank everyone for dialing in. And we'll be on a roadshow, so possibly we'll see some of you on our roadshow. If not, we look forward to talking to you next time. Thank you. Bye-bye.

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Operator [26]

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Thank you, sir. Ladies and gentlemen, we thank you for joining us for the Gold Fields Limited results call. That concludes today's conference call. You may now disconnect your lines.