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Edited Transcript of GFI.J earnings conference call or presentation 15-Aug-19 8:00am GMT

Q2 2019 Gold Fields Ltd Earnings Presentation

Sandown Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Gold Fields Ltd earnings conference call or presentation Thursday, August 15, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Avishkar Nagaser

Gold Fields Limited - EVP of IR & Corporate Affairs

* 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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* James Andrew Keith Bell

RBC Capital Markets, LLC, Research Division - Analyst

* Johann Steyn

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

* Patrick Mann

BofA Merrill Lynch, Research Division - VP & Research Analyst

* Brendan Ryan;Miningmx;Journalist

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Presentation

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Avishkar Nagaser, Gold Fields Limited - EVP of IR & Corporate Affairs [1]

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Ladies and gentlemen, welcome to Gold Field's half year results. Before we get started, in the case of an emergency, there are 2 exit points. One at the back of the room and the one of the front. And then the muster point is at the front of the building that you entered.

I would hand over to Nick Holland, CEO, to get into presentations, and we'll do Q&A afterwards. Over to Nick.

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

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Thank you very much, Avishkar, and good morning, everybody. Welcome to our first half year results for 2019.

Very simple messages for you this morning. Essentially, production is up 9% compared to the corresponding period in the previous year. All-in costs are down 5%, and we're cash flow positive from being over $70 million negative in the same period last year. This year, our core operations, $49 million positive with, obviously, all of the projects being financed. All of the interest burden having been carried in that number. In particular, Gruyere has commenced production. We're pleased to inform you that we've achieved practical completion at the Gruyere process plant. What does that mean? In essence, it's a technical construction term. In essence, it means we've achieved 96 hours uninterrupted through the entire value chain at the process plant. So the crusher, the SAG mobile mill, the elution circuit, the gravity circuit are all functioning steady state for 96 hours. That's really great news for us. That was achieved on the 10th of August. And so now, we're in the process of ramping up that plant over the balance of the year. And as we've mentioned, we're giving a range of production because, obviously, with all ramp-ups, it's a large process facility. It's over 8 million tonnes a year. That's large in the scheme of process plants. You might get hiccups along the way. So we're saying that we should be able to ramp that up over the balance of the year. Bear in mind, over the long-term Gruyere is a project as the joint venture announced in our recent joint release, that this is a 300,000 ounce a year mine with long-term costs of about AUD 1,025 an ounce. At least with 11, 12 years to start with. And then, of course, there's potential on the joint venture property, and of course, at the mine itself to look for potential to add to that over time. So really a great addition to the group in line with the strategy of adding life at lower cost. So that we can be defensive in the face of volatility in the gold price.

And now let's talk about the gold price briefly. We've seen the gold price come up, has it gone too quick -- too far too quick, who knows. It may be volatile in the future. Nice to have it for now. But we're not putting our store on a higher gold price. We'll keep discipline in the business. We are still targeting to achieve a 15% margin at USD 1,200 gold price, at AUD 1,600 gold price, and ZAR 550,000 per kilogram price. And I think as you can see, those prices on a relative basis to the spot are still some distance away from where we are today, which is good. Let's keep that flexibility, that cushion on our operations.

Damang. As we've mentioned before, and I'll show you a few pictures a bit later, that continues to track ahead of plan. So we're on track to really get to the heart of the ore body around about quarter 2 next year. That's really the big prize for us is to open up the heart of the ore body and get in there.

South Deep, after a very painful and time-consuming restructuring process that included a 45-day strike, a difficult quarter 1 as we had to recalibrate the mine post that strike, which was only concluded just before Christmas. So really, in quarter 1, we had to take around about 20 to 30 pieces of gear out of commission, drill rigs, loaders and trucks. We had to say goodbye to 1/3 of our workforce. We had to obviously recalibrate all of the logistics and consumables. We shut down, remember, 87 One West and 87 Two West. We suspended the new mine development at the bottom of the mine, and we had to turn South chart into essentially a services shop, not a fully-fledged operating shop. A lot of things we had to do, that took the bulk of quarter 1 to get going.

But in quarter 2, we've got to a better position, to the point where production is up almost 70% on the first quarter. Costs have come down to about ZAR 590,000 a kilogram. And we've made a modest cash flow contribution of ZAR 71 million for the quarter. Bottom line, that is after paying all of the bills.

One swallow doesn't make a summer, I told the staff this morning when we did this -- a bridge presentation to them. And certainly, Martin Preece and myself are very sober about this early achievement. We need to build on it, and we need to show the South team can actually achieve its goals.

That said, where we are today, having produced about 2.8 tonnes of gold. For the first 6 months, we're on track to achieve our 6 tonne gold target, bearing in mind quarter 2 was about 1.8 tonnes of gold.

So far, so good. What's particularly pleasing for me is not just to see the headline numbers improving, but seeing all of the things behind it improving, our ground support is at the highest levels where I can remember. Backfill is at a much higher level than what I've seen for a long, long time. Destress has got up there. Development is way ahead of plan. So those are the things at the front end of the sausage machine that we'll make sure that if we can sustain these improvements that those things will be the important components to make sure that we could do so.

We've talked about the balance sheet, the need to basically refinance our debt given that we have maturities coming up. We've successfully done that over the last number of months. We've issued 2 new bonds, which has spread the maturities out. We've refinanced our revolvers with a big syndicate of banks, and I think we can safely say now that our liquidity is in pretty good shape and very well received by the market. We've been able to refinance our debt at lower cost. And we've been able to put in long-term bonds, 5 and 10 years at certainly lower costs than what we thought were possible in the planning stages. In line with our strategy of paying out between 25% and 35% of our core earnings as dividends, we paid out $0.60. We're very proud of our dividend policy. The fact that it has been a company with a dividend-first philosophy. We've said that we'll pay dividends in line with the strategy, and that we'll continue to honor that policy, notwithstanding other commitments in the company. So as you've seen over the last 5 to 6 years, we've been very consistent in following that dividend policy. So that people know when they buy into the company, they can rely on consistency in terms of a dividend. So if earnings go up, we'll pay more dividends as a function of percentage of profits. Clearly, if earnings go down, dividends will reduce. Hopefully, we're going to see higher earnings for the year. And hopefully, we'll see a good dividend overall for the year.

On safety, we continue to believe we have to eradicate fatalities and serious injuries from our business. At the leadership level in the company, we continue to invest our time in showing the way and making sure we have the right systems, the right leadership, the right behavior to further drive improvements in safety. We can never relax on safety in our business, as we all know.

Right. So looking briefly at the results. At the top there, you can see, we've done just over 1 million -- just under 1.1 million ounces, all-in costs of $1,106. As I said, that's about 5% lower than what we had this time last year.

Capital on growth projects is coming down. And in fact, if you look at Gruyere, we've spent about USD 65 million in the first half of this year. That will essentially dwindle down from there to very little in the second half because the project is done. So that will improve our fortunes in the second half.

Also, demand, spent about $44 million in the first half, again, in the second half, that'll be probably about half of that. So certainly, that $49 million that we've generated from the business. If all things stay where they are today for the second half, we should do reasonably well from this base, given that, that growth capital is down.

As you can see, mine cash flow before projects, very healthy, $200 million essentially from the business. That's before projects, which gives you a sense of what the Australian, Ghanaian and Peruvian business is doing for us, a strong underpin, which has enabled us to finance a lot of our acquisitions and project spend without materially increasing our debt. But remember, over the last 2.5 years between the acquisition of Gruyere, the building of Gruyere, the push back at demand, we spent over $800 million. Superimposed on top of that, a continued investment in taking Solares Norte in Chile to feasibility level that's probably add of another $100 million to $150 million.

Our debt hasn't moved that much. I think it shows you a lot of the growth in the business has been able to be financed internally. Some debt, but the bulk of it internally.

In Ghana, very good quarter, very good half year as well, 400,000 ounces. We've got the addition of Asanko. Remember, we didn't have that in the equivalent period in the 6 months last year, we have it in this year, nice to see as well. Strong cash flow coming out of Ghana, $72 million.

$52 million coming out of Peru. Peru, of course, our lowest-cost operation. Copper-gold is a porphyry system. And of course, with the copper byproduct against a gold grade of about 1.1 grams. That helps you to keep your costs down nice and low.

South Deep, as we've mentioned, for the6 months, still up at $15.29 an ounce. But in fact, if you look at the quarter 2, that figure was down at $12.75 on the back of that increased production. So certainly, on the right side of the ledger.

In Australia, good cash flow before Gruyere for the 6 months of about $92 million. So that's just a good quick summary for you as to where the business sits.

So turning cash positive sooner. We certainly weren't planning to be cash positive in this first half. I think the gold price has certainly been the big factor there. And let's capitalize on that in the second half of the year and push on from there after that significant capital expenditure over '18, '17, and of course, the early part of '19.

The balance sheet, as I've mentioned, I'm not going to go through a lot of this detail, Paul can certainly answer your questions at the end. We know that we've got a bond of $1 billion maturing towards the back end of next year. We bought back $150 million of that previously. So there's $850 million to pay. We decided to go preemptively and essentially refinance that. We've split it into 2 tranches to avoid near-term maturities at competitive rates. So we've got $500 million going out 5 years, another $500 million going out 10 years. The weighted average costs around about 5.5%. That compares to 4.875% on the maturing bond. That was an exceptional pricing we did back in 2010.

So we parked that money in our revolvers, I mean, knocked them off. In the meantime, we've also refinanced $1.2 billion of revolvers. Again, we've split it out 3 years and 5 years with the potential to extend, and we'll use that capacity to redeem the 2020 bond, and make sure that we're covered on that one. And the balance of that, of course, will be used for general corporate purposes.

We've also sold noncore investments. And one of the strategies we've had is to take our royalty portfolio, which had no value in our company, vended into a royalty company, go for a ride on the fact that royalty companies are trading at multiples and then cashed in. Similarly, we sold Darlot to an Australian company called Red 5, went for a ride on them. Cashed in so $88 million from virtually nothing. It's a good example of making a lemonade from lemons and getting value where there was no value. We parked that in the debt. So that's a nice strategy for us to continue to bring down our debt, which is the key objective over the middle of this year through to the end of next year. We want to make a significant reduction in our debt and a good time to do it is when the gold price is playing ball.

There is some accounting changes, which complicate our debt position where leases have to be capitalized. Principally, these are gas pipelines and gas facilities in Australia and Ghana, where essentially you have to treat it as if you own it, even though it's underpinned by a long-term purchase price agreement. So there's a few odd things coming through. We've shown you the figures before and after. Debt goes up, and it also impacts assets onto the balance sheet and operating costs, interest charges that all get amended. We've given you a reconciliation on the books. I won't dwell too much on that.

So there's the balance sheet. I think, importantly, you can see now that we have this maturity over here. We bought back another $250 million of our bond. So that bond sits at $600 million. There's some other odds and sods that will mature over there. So we'll use the revolver to knock that down. We've got the capacity now. So we're not worried about that. So essentially, that's financed, that repayment. That's an Australian loan that was used to finance Gruyere around about $500 million, AUD 450 million, I think it is. And there's your 2 new bond tranches that are rolled out. So a much better maturity curve than what we've had before. As you can see, net debt, on the old basis, down to 1.36%. That's down from the figure at the beginning of the year. And we're hoping that by the end of the year, we can certainly bring that down. Remember, the long-term target was 1x. But I think over time, Paul and I are quite keen to see if we can bring it down even further.

Right. So on the projects. Here's Gruyere, a good snapshot of -- essentially, this is the process plant you're seeing over there. You can see there's a core (inaudible) stockpile with the stockpile cover on that side. And you can see it's -- it looks and feels like a mine. There's another picture of the base core stockpile. For those miners in the room, you like to see that. That's nice and full. Basically, that's all crushed. There's your stockpile cover, that's to prevent dust and everything. Because, obviously, you get some winds coming through here. And then on this side over here, here's your 2-run pads. We've got a high-grade and a low-grade run pad. Frankly, when you're dealing with a cut-off grade of about 0.3 grams a tonne, pretty much everything could go through the plant. It's just a question of sequencing the best grade you can get in the early part of the mine's life. So obviously, there's a whole material handling strategy on that.

I was in the gold room, in fact, a few weeks ago, but I wasn't there when they were doing this. I would have loved to have been, but he's pouring the first bars. And by the way, these are not just plastic covered bars, these are real bars. They wear a chunk of material that's for sure. Tom picked that up with one hand. That is something. So just over 1,100 ounces produced right at the end of June. We're ramping up, as I've mentioned. Essentially, that test of practical completion was a key one for us running 96 hours uninterrupted. And we are hopeful that we'll have this plant ticking over at that sort of level as soon as we possibly can.

Tonnes mined have been great, as I mentioned, and I was sitting at the end of June at around about 65,000 tonnes mined. Very nice position be in, to have that amount of ore sitting on the stockpile's ready to go. So the plant now that it's running, we're going to drive this pretty hard.

Importantly, capital cost of this project is still in line with what we said, $621 million and being sort of 99.5% complete, with just the final bits and pieces. We're pretty confident that we're going to stick with that sort of number.

Production for this year, a range of 75 to 100. But remember, when we get into 2020, we'll be looking to chase down that longer-term target of somewhere close to 300,000 ounces a year.

On demand, another strong performance for the half year with production up compared to the previous year, and we are on track to meet our full year guidance of 218,000 ounces. Importantly, we've made free cash flow. So with the project Capital now starting to come down with ounce production coming up, we start moving into cash positive territory, which is great to see. And looking at the cumulative project. I'm not going to dwell on these numbers, they're in the book. But you can see in all of the metrics. This project continues to be ahead of where we were.

All right. So here's some pictures. Just to show the magnitude of the scale of mining here. This is the West wall of the pit. You can see over here where they are. When we started, they were up there. These are little trucks over here, okay, the big trucks, but they look like little trucks. Okay. So you've taken this wall the way down there, okay? We've got to get this mine all the way down to the bottom here, okay? So it's a hell of a job. And a lot of material has to be moved to make this happen. So the Western wall is more advanced than the Eastern wall, there is a reason for that because the ore body dips that way. So you want to get that down first before you go to the eastern side. Then if you look at the East wall over here. So you can see where we are on that side over there. You can see that's much less down compared to that side, okay, and that's by design. So we've got to get that down there as well. And that will be the target by the middle of next year. We're pumping this water out into another dormant pit we're not using. So as the water comes down, the wall comes down. All of these things, of course, I've got to balance each other and operate in sync. But this is what mining is all about. And he's from North to South. So that's Juno, the old Juno pit there in the south. That is the east all over there. The tailings pit, the old tailings pit is over there. You can see we've got some cover over there, geotechnical requirements and the West wall on that side. So it gives you a good idea for those of you who haven't been up there for a long time. As I said before we started, all of this was up there, all of that was up there. So it's a big earthmoving operation.

All right. Turning to Australia. A good half year. Overall, you can see production, we've pretty much maintained. That's about 1% or so down. It's very, very close to where we were. Costs have gone up a sizable amount year-on-year. There's a couple of reasons for that. We took the decision to go our own way in terms of accommodation at Agnew, instead of renting accommodation in Leinster, which was around about 35 minutes drive. We decided to build our own camp, which is within walking distance from the offices and the process plant. That's cost us almost AUD 40 million once-off. There's a payback there of about 4 or 5 years in lower accommodation costs, improved morale, having our whole team together has made a big difference.

Also, in the previous year, St Ives was mining more than it could process. And there was good reason for that because there was economies of scale in mining the remaining stages of the Invincible open pit much quicker than what would otherwise have been the case, we could bring down the unit cost and we did. And mining costs dropped to around about $4 a tonne from $5 previously. The net result is, we stockpiled a lot of ore in 2018. There's also blending issues because the Neptune open pit is softer material, whereas the Invincible pit is more fresh, harder material. We need a blend of about 75/25, 75% fresh, 25% oxides. And so we had to stockpile. So this year, now we're running it all through. So all of those GRP credits last year becoming GRP charges. It doesn't really affect the cash flow. It's a function of stockpiles being built up, stockpiles released, and it comes through your costs. The other reason costs have gone up is that now with Invincible open pit almost finished, we're now transitioning to what will be principally an underground operation once stage 6 of Invincible is done. We expect that to be before the end of the year. And then Invincible will just be an underground operation. It'll be Invincible main, Invincible south and then eventually Invincible deeps. The costs are higher. And over time, we have to get the leverage in terms of grade because underground grade should be higher. Costs will be higher. But overall, on a per ounce basis, once we get to steady state, we think that we'll maintain our costs. Notwithstanding these increases, don't be alarmed. We're maintaining our guidance on costs and on production for the year, as indicated to you in February. This is just a function of where we are in the year.

Just to give you an idea of how the Invincible ore body has developed. Now this was on the lake, as you know, we have a big lake salt pan going through St Ives called Lake Lefroy. We had an old drill hole that went back to 1994. I think we had a gram at about 2 meters up, not too spectacular. But what we didn't know is underneath all of this is 2.5 million ounces. It looks like it hasn't even finished yet, this could grow further.

Just where we started. We had some initial resources, okay, then we added some -- that was the open pit, then we added some resource and reserve. You can see the reserve is in the darker color, the resource in the lighter color, that was 2013. Then we added some more in '14, '15, you got to go through this quickly. I'm told to see it properly. I'll just go back. So that's where we are. So as you can see, what's happened over here is, it's growing laterally. This is a fault, that's not a problem. We've actually already punched through that fault, center development drive-through. It's opening up deeper. And what we're finding is, when we mined this, we're getting more tonnes, in many cases, slightly lower grade, but more ounces. So if we can actually optimize our cost base, this is going to be something really special for the future. And the main stay of St Ives, certainly for the next number of years.

Right. So there's another way of looking at it, that just splits it into the different areas. I suppose if you look at the total strike length over here compared to that scale, it gives you an idea of how big this is. Now why we're saying this is 2 million ounces plus, and we're not done yet with this.

If we look at Agnew, we've come leaps and bounds on this operation over the last 12 to 18 months. In particular, we're on the North cap, it's expanding laterally, and it's going down further. And as you can see over here, it's still open. So we're going to see a lot more out of this. It's too early to say it's an analogue of Akyem, which was a fantastic ore body. That was 1 million ounces at about 10 grams a tonne. But it looks very promising at this stage. That's just on the existing operations. And then if we look at the Redeemer complex. Now this was an old mine over here, that's a surface mine that was backfilled. We did some work over here, but we didn't find too much. And then offset from that, we found 2 areas, what we call Zone 2 North, Redeemer North and something called Barren Lands. And this is looking very, very exciting. So much so that we believe we're on the cusp of declaring a maiden resource and possibly even a maiden reserve for this area and could even be mining this in 2 to 3 years' time. So this could be a very significant addition to Agnew. It's been sitting under our noses for some time. And is a function sometimes, just spending a bit more time, these orogenic ore systems are time consuming in terms of drilling, you need to do the appropriate geophysics and geochem work. A lot of it's undercover, so you don't find it easily from surface work, but there you are. So this looks like it'll be an important addition. One of the reasons, again, we decided to build a camp at Agnew and also put in renewables over a long-term period as we're pretty confident this is going to be around for 10 years and probably more. So we're down here to round about 400, 500 meters, very acceptable debt, not a problem at all. Bearing in mind, mines in Australia are getting down to 2 kilometers. By comparison, this is pretty short.

Okay. All right. Turning to the Americas. Again, Cerro Corona, steady as she goes. A great operation as you can see. Good production. Very, very low cost. Makes really good cash flow. Now for a mine making 280,000 ounces a year roughly, $52 million for a half year, very, very nice cash flow. That compares to amongst the best on a cash flow per ounce basis. We've done a feasibility for life extension. Sorry, we're in the process of finalizing, we did the prefeas. No real issues at this stage. We're quite comfortable that, that project should go. And if you can recall, that is accelerated mining in the pit, stockpiling strategy and then input dumping. One of the best way to deal with tails, input dumping. Safer, more cost effective. You don't have issues of tails dams running away from you, which I know we've seen issues recently elsewhere. So we're doing input dumping as well elsewhere in the group. We're doing it at Agnew. We're doing it at St Ives. And certainly, we've got some good experience on that.

Solares Norte in Chile, you've seen we declared a maiden reserve, about 4 million ounces, round about $500 an ounce, all-in sustaining costs once it's in production, with around about 11 years of production, but part of a major district that we believe will get bigger over time. The next process here is to get the EIA complete and signed off by the authorities. We're in the second round of questions that we've answered. I'm hoping that, by no later than the middle of the year, next year we'll have approval. We'll take the final project to the Board, and if all goes well, we'll start building this project towards the end of next year, subject obviously to Board approval and a Board supported funding plan. That's been a topical issue. It's an $800 million project. That's a lot of money. You will be spending that money over about 26, 27 months. So it's a lot of money to spend quickly. And we're looking at different options as to how we fund that, and we'll give you an update on that I'm sure over the next 3 to 6 months.

Looking at the district, we've got very encouraging results at a nearby deposit called Horizonte, which, again, I think, reinforces the camp potential in this area.

We bought a 16% interest in Chakana. I'll come back to that now. But just to give you an idea, this is the greater area or part of the greater area. There's the Solares Norte deposit and here's Horizonte over here. So that's less than 20 kilometers trucking distance from their proposed plant site. And in fact, the ground package over here is at least twice the ground package of Solares. So we've got 4 million ounces over here, who knows what might be here. We'll see in time.

We've done about 12,000 meters of diamond drilling here so far this year, and we'll continue into next year. Bear in mind, Solares took around about 170 kilometers of drilling over 10 years. So finding these greenfields deposits. Particularly, these kind of epithermal systems takes a lot of hard work, but let's see how we go. I'm hopeful, we'll add another orebody here within the next 5 years.

All right, Chakana. So given that we've been in Peru for a long time, around about 15 years, built up some experience. What better way to leverage off a great operating team platform and look for something else. So we've taken a 16% interest in the Soledad project, which is -- it's a series of Brecha pipes, which copper-gold as well, similar to Cerro Corona. It's in a great part of the country and cash easier to operate there than where we are, as you can see, we're up here, that's down here. So it's early days. A lot of the money that we've subscribed for the companies going into exploration. So again, this could be one for the future. We think Peru is one of the best destinations to be in the mining industry, and untapped the Andes region up the western Perimeter has not been properly explored. And we believe hosts many polymetallic style orebodies. Not too much gold on its own, but if you're happy to mine gold, copper, maybe a bit of silver, you're going to be in the right terrain to look for that. And certainly, we've been successful mining our copper-gold mine at Cerro Corona for the last 10 years.

Right. West Africa, as you can see, a big increase in production. That's mainly because of the addition of Asanko in this first half, which wasn't in the previous half. And you can see as well, nice increase in cash flow. That's what I like to see. As Damang's capital comes down, as the production comes up and we start seeing the cash. So Asanko, we've been in this for a year. I guess the agreement we've come up now with our partners is that, let's get to an operation that can make good money for us over at least the next 10 years. That's just the start. It's not the end. And at the same time, let's work out an exploration strategy for the greater camp. This is lodged in between Newmont's operations on the one side, Ahafo, Akyem and Obuasi, AngloGold Ashanti operations on the other side. A large piece of ground that has been sitting there waiting for someone to come in.

Share-hosted deposits, which is the 2 main deposits we have at the moment, Nkran and Esaase. And we're seeing many potential analogues of that. But we haven't invested in enough exploration. So a two-pronged approach, let's get Esaase up and running. We're just mining the top of the hill now, which is soft oxides. That's going to be the main source of ore over the next 10 years and beyond. And then let's crank up the exploration, and let's get a new camp. Again, I think this could be something really special over the next 20, 30 years in Ghana. That's why we bought it.

All right. I'll try and run through the rest quickly. Tarkwa, a (inaudible) style ore body. And if you take the (inaudible) basin here in South Africa, and you could actually superimpose that on the surface, that's what you've got at Tarkwa. A stack conglomerate package of reefs, which are very consistent. So we've been here a long time. If you look at what Tarkwa has mined to date and what it has on the books, 20 million ounces. How many? 20 million ounces deposits do you have in the world, not too many. All right. So here's the outline of the pits over here. What's interesting, if you look at these sort of mauve, shaded areas, okay? These are the possible extensions that we're drilling at now. So it proves what we believed is that these kind of ore bodies, these conglomerate packages just continue, and they're stacked packages. There's a number of them. Obviously, interposed with the waste. So you have to strip out the waste, then you expose the reef. But when you've got multiple packages, there's quite a lot of meat on the bone to go for. So we believe this is something worthwhile. Early days, but we're seeing potentially up to 20 kilometers. I was talking to our geo just the other day, there's potentially 20 kilometers of additional strike here that we could add. So pretty exciting, work to do. Tarkwa has been a great mine. It's the biggest producer in our portfolio, over 500,000 ounces a year, makes good cash. So if we can have this longer, fantastic. Let's see.

Right, South Africa. So as I've mentioned, I think I've said pretty much all of this in quarter 2. As you can see, gold up 67%, 57,000 ounces for the quarter. We've dropped our cost to ZAR 590,000 a kilogram. That $1,275 an ounce. We've made some cash. As I mentioned earlier, all of the front-end things that support production are looking reasonably good and if we can keep that going, then we'll be in good shape. And here's a good example of how decluttering the mine in terms of equipment and people has helped. We've increased our productivity from 37 meters per rig last year to 55 this year. We still think 55 is very modest, not by international comparisons, but by South African comparisons. There are operations in South Africa that are doing close to 100. So if we can get this up some more, I think this shows you stoping tonnes have doubled over the equipment period. As we mentioned, these are short-term stats, we're going to build on it and prove to you and to ourselves that actually this will be a good mine for the future.

ESG, very briefly, I've talked about safety. It's a big focus for our business. What we're doing with the ESG issues now is, we're integrating these into the business. Let's make sure that we manage these things in conjunction with the business, not on the side. And we have an eye on these things in everything we do. We want to be sustainable on all fronts. So the safety stats are here, I'm not going to dwell on them, but I can assure you this is a big focus for the business. If we cannot mine safely, we will not mine. Certainly, on ESG type things, we have an eye on this, in particular, environmental incidents. We don't want to pollute the environment. We don't want to effluent or dirty water to be discharged off the property, and that's all of those important things.

On renewables, we've done a lot of work in Australia. And I was recently down at Agnew, and I was standing in the middle of 10,000 solar panels, which will give only 4 megawatts, but it's a start. We will be building now 20,000 solar panels at Granny Smith, which will give 8 megawatts. And with the technology changing all the time. In fact, you can now attract the sun on both sides of these panels and keep moving them backwards and forwards. Battery storage is evolving as we speak. And I think within 3 to 5 years, we're going to see a lot more renewables. We will be putting up our first 5 wind turbines at Agnew, and they'll be commissioned by the middle of next year. This will bring down our costs. It'll bring down our carbon footprint. And there's a good business case all around.

Okay. So I think with that, possibly taking a bit longer, but I think we still have around about 20 minutes for questions, which I'll ask Avishkar to manage between Paul and myself and the team. Thank you.

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Questions and Answers

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Avishkar Nagaser, Gold Fields Limited - EVP of IR & Corporate Affairs [1]

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Okay. So we'll take questions from here first, and then we'll go to the conference call. Patrick?

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Patrick Mann, BofA Merrill Lynch, Research Division - VP & Research Analyst [2]

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It's Patrick Mann from Bank of America Merrill Lynch. I just wanted to ask on Australia. It's obviously a very prospective region, and you've got large tenements in place. Is there a way for you to bring forward some of your drilling or increase the life of mine by spending more? Or is it just the case of these things take time, and whether you throw more money at it, it's not going to increase the rate?

And then the second thing that caught my eye was just around the potential for a shaft haulage at Granny Smith as you guys go deeper. Just what the thinking is around that and when that would have to come in and whether the haulage costs are getting too expensive there.

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

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Maybe I'll start at the back end, if I may. And in fact, your question is opportune because I was at the bottom of the mine about 5 weeks ago when I was down in Australia, where we're actually doing development in Zone 120. And it took us in a light vehicle, it took us a little bit over an hour to get out of the mine. Bearing in mind, we've got light vehicles and we got trucks going up the spiral inclines out and that's at 120. Now imagine, we've got Zone 135. It's a package that's like a replica. We've got Zone 150, which is down to 1.9 kilometers.

It's clear to us that if we're going to capitalize on what we think is somewhere between 7 million and 10 million ounces here, we have to think differently both in terms of material handling and mining. So one of the things we'll be doing over the next year is a mining and material handling study. And material handling study is code for a shaft, right? Let's be clear. So we're going to be doing a study on a shaft and work out at the same time how we can crank up the mining because we're going to put a shaft in. We want to be able to increase the ore. The ore at the mine at the moment is about 1.7 million tonnes a year.

And you know as well, Patrick, that the process plant can do about 3.5 million tonnes. So if we can get more ore up, one is we utilize more spare capacity in the plant. There's economies of scale. And if you're going to spend money on a shaft, which is no small check to write, you want to get the volume up. Now I don't to overpromise on behalf of the Australia region. But clearly, we want to be looking at something over 2 million tonnes ore, bearing in mind what we believe sits towards the bottom of Granny Smith. Bear in mind, it's still open even beyond 150. So a study on that. It's 12 to 18 months, as you saw in the book, and we'll come back on that.

In terms of exploration, the one thing that sometimes surprises me is -- and our geologists will always want more money. And if you offer them more money, usually they'll take it. And it's interesting that the geologists say don't give us any more money because if you do, we're going to waste it. The thing with this exploration because of these orogenic greenstone style of deposits, you've got to do it sequentially. And you can spend a whole lot of money in drilling out like crazy and find you missed the ore body. They pinch and swell, they're discrete, they appear in clusters. So you've got to actually have a program that goes in a sequence. Let's find the things that matter. Let's have a second follow-up program. And when you get into diamond drilling, and I would just try and to get reserves on our balance sheet, it's fairly expensive, particularly if you're doing it from surface.

So I'm afraid to say, although we believe the potential of Salares, Agnew, Granny just got longer, and you want to see it reported in reserves, I'm afraid to say although we could probably add a bit here and there, it is what it is. But we're confident that we'll keep replacing. Last year, we replaced reserves in Australia. The year, before we did. I think this year, we're reasonably confident that we'll replace again. But $90 million, there's a lot to spend. And we're drilling out 400 kilometers. I think we're doing about 1/3 of total gold exploration in Western Australia, so it's a chunk of change. So let's get some success and see how we go.

But if we bring our Redeemer in, that could add significant ounces. And if we can bring in resource conversion at Granny's, we can add more. Let's see how we go. But it's -- I'm afraid, it's a complex geology. It's not like at that space again, where you put a few holes in and bingo, you've got a big, big reserve.

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Brendan Ryan;Miningmx;Journalist, [4]

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Nick, it's Brendan Ryan, Miningmx. You -- over the last 5 years, you've been a strong supporter of gold prospects despite what the market has been through. You've now got the gold price going in the right direction. Could I have your assessment of what's going on? Is this a flash in the pan? Or do you think there's something more fundamental that work here in the gold market?

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Nicholas John Holland, Gold Fields Limited - CEO & Executive Director [5]

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I think one thing you learn by being in the gold industry for a long time -- [Terence] is just smiling next to you because he knows what I'm going to say. I've been in Goldfields now for 22 years, and the longer I'm here in the industry, the less I know about the gold price and what it's going to do. There are so many different factors impacting the gold price, Brendan. We just don't know. And day traders will tell you today it's going up. The same day trader next week will tell you it's going down. So it's very volatile. Paul always says our fortunes lie in the dollar. I think that's still his view. It will go up; it will go down. It's going to be volatile. At the moment, it looks like it's pretty good. Let's enjoy it, but let's not get carried away. Let's be cautious. And I'll ask Paul to add because I know he has some strong views.

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

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I think a lot of this is sort of interplaying what the U.S. is doing in the dollar. Remember, there are 2 big investment vehicles, U.S. dollar and gold. And how people move to it at the moment, I think there's a perception that gold is more of a safe haven, so gold is [riding us] toward all the political instability. But you don't know. We're all guessing.

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Nicholas John Holland, Gold Fields Limited - CEO & Executive Director [7]

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Let's be cautious. And if we're wrong being cautious and we make more money, that's not a bad problem.

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Brendan Ryan;Miningmx;Journalist, [8]

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Could I throw a follow-up in on specifically South Deep. The rand, what do you think is going to happen to the rand? Because that obviously has a huge impact on South Deep?

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Nicholas John Holland, Gold Fields Limited - CEO & Executive Director [9]

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Well, I think we are as South Africans we are worried about the balance of payment issue, the national debt going up all the time. We are an emerging market. We get caught up in the trade wars. We are a victim of trade wars potentially. And added to our own sort of fragile finances, the rand could be under pressure. But the one thing Paul and I have also learned is a weakening rand in our game is like an interest-free loan. You're going to pay it back. It's a question of is it -- are you going to pay it back in 18 months or 24 months? The inflation follows behind.

The other thing about South Africa that worries us is your energy costs for us are probably going to double in 5 years. We -- just us are spending about ZAR 500 million a year on energy, okay? If that doubles in 5 years, that's another ZAR 500 million for us. What about the rest of the industry? How are they going to cope? We're fairly modest in terms of what we use compared to the big conventional gold mines and platinum mines. How are they going to survive? The structural inflation here is a major concern. And wages as well continue to go ahead of inflation and have not been matched by productivity enhancements. If anything, productivity has gone down. Wage has gone up. So we've got some serious structural issues here to deal with.

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Avishkar Nagaser, Gold Fields Limited - EVP of IR & Corporate Affairs [10]

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Can we see the questions on the conference call, please?

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Operator [11]

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Yes. We have a question from James Bell from RBC Capital Markets.

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James Andrew Keith Bell, RBC Capital Markets, LLC, Research Division - Analyst [12]

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Just 2 quick ones around South Deep. Do you think the asset can attract capital when you compare it to some of the other projects and exploration you have in the international portfolio?

And secondly, given your closest peer is potentially looking to exit South Africa both from an asset and a listing point of view, do you think it's time now for you to have a look at strategic asset -- strategic options around South Deep or a potential exit from there?

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

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Yes. Let's deal with the second part of your question first. I think we wouldn't have gone through the massive pain of restructuring allowed with a strike if we were checking out on South Deep. So I think that gives you the answer. We have restructured the operation. We've taken about ZAR 1 billion a year out of the cost base. We've improved the discipline on the mine. We've improved the quality of the management. That is not the signals of someone who's checking out.

On the first half of the question. One of the beauties of South Deep is we've actually spent a lot of the money on the fixed infrastructure. Remember, we built the plant expansion. We built the backfill plant. We put in a significant amount of additional cooling, ventilation. We deepened the vent shaft. So the real thing ahead of us now is development. We've got to develop the ore body. We've got to open up the ore body, which is not dissimilar, actually. I mean, if you look at Wallaby underground gold mine at Granny Smith, in order to access down to Level 150, we've got to open up the ore body. That is the bulk of it. Obviously, there's infrastructure maintenance that will continue. So it's not like we have a mountain of capital ahead of us. It's really development that will be the key thing. Obviously, replacement of equipment. But as you know, we've taken a lot of equipment out of surface or out of operation, rather, and are now parking it up on surface. So that will also defray a lot of the necessary replacements which would otherwise have to have been effected.

So we've done a lot of the hard work here, James. And we'll get back into new mine development towards the end of the year. And in addition, a lot of the team that we'll deploy to that we redeployed into doing ground support and backfill. So in fact, we'll leverage off just redeploying people back to restart those activities. So that will actually mean that the incremental costs won't be as high as it would otherwise have been. Hopefully, I've answered your question.

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James Andrew Keith Bell, RBC Capital Markets, LLC, Research Division - Analyst [14]

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Yes. That's very clear. And then just one more on the Salares Norte. If we see spot prices to sustain at these higher levels, do you feel like that's a project you can go alone on? Or is your strong preference still to look at a partner to help you on the CapEx during the construction there?

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

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James, I think we're still considering all our options as to how we will bring this to account and how we're going to fund the project. That's in process at the moment. Obviously, we'll need to come to a decision by the middle of next year, but we're working on it. And there's various streams of work going on as we speak.

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Operator [16]

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The next question we have is from Johann Steyn from Citibank.

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Johann Steyn, Citigroup Inc, Research Division - MD and Head of South African Equity Research [17]

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Nick, you've been very successful. If you strip out the South Deep situation in the past, you and your team have been very successful with kind of bolt-on acquisitions and disposals. And I think you created a lot of value to your shareholders through that, and that's probably something that you guys don't get enough credit for every day. In this current environment, it seems like you've opted now to go more towards greenfield development as opposed to finance further bolt-on acquisitions. Is that a correct assessment? Or is just the fact that the bolt-on acquisitions have now just become too expensive?

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Nicholas John Holland, Gold Fields Limited - CEO & Executive Director [18]

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That's a good question. And I think the one thing we must remember, in this global consolidation, which I think is going to gather speed over the next year. And one of the Canadian analysts sort of asked me the other day on our call what do I think the gold industry would look like in a year's time and who would not be here anymore. And I'm not going to mention names here, but what I did say is I think it's going to be different.

But I think consolidation is a means of trying to deal with the fact that the gold industry has been undercapitalized for years. And the strategy here is, let's keep the least undercapitalized assets and get others to pay a premium at a $1,500 gold price to buy the more undercapitalized assets with shorter life, looming closure obligations. And hopefully then, we can take the money we get from those investment sales, recapitalize our own business, smaller business, lower cost to move on. So these companies who want to do this were obviously hoping that other companies are going to give them attractive prices for the assets they don't want because they're not going to put the best assets on the block.

So we've been countercyclical. We invested in new assets 3 years ago. When everybody else was retiring debt and making their costs look better by not spending, we were still spending. And now that we finish spending, we have 8 to 10 years ahead of us. We don't have any major production gaps. We're happy with what we've got. We've got Salares coming. And as Paul has just mentioned, we're looking at funding options. But clearly, we're going to compromise our funding options if we go and buy other assets that maybe are inferior. I mean, how many assets can you buy that can give you a 2.5-year payback and $500 an ounce costs in this environment? I don't think anyone would want to sell assets like that. They'd want to keep them.

Organically, as well, Johann, all of our mines have potential -- we have potential on all of our existing mines to extend life, and particularly given the fact we have the sunk capital spent in the infrastructure. It's lower risk because we know the ore bodies. The best place to find gold is where you're mining it. I think that's low-risk, high-return options for us. So never say never. We continue to run the rule and everything that's out there. But less likely, I think, given Salares coming as well and the fact that we want to pay down our debt, show some cash, that we would be a participant in this process.

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Operator [19]

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They're all the questions on the line, sir.

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Unidentified Analyst, [20]

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Mr. Holland, you mentioned one of the risks you had was electricity supply. Looking at Eskom and their ability to underachieve targets that they've set on an ongoing basis, what is the -- how much can you actually access from alternative sources? And how much of this problem would that be? How much of a setback would it be if they continued to take even longer than expected to get that new operations going?

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

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So we've done a study on a 40 megawatt solar field at South Deep, which we think is viable. which, bear in mind, you can't use solar when it's dark and the battery storage is limited. That could probably add, on average, about 20 megs, and we are using somewhere between 60 and 80 megs. So that's quite a material change to our power composition. So we have a process. We're in a regulatory process now, and we need approvals from the likes of NERSA and so on. We believe there's quite a lineup of people in as well. But if we can get approval, we will implement that in stages because on a cost basis, we believe that makes sense from day 1.

Now bear in mind, what I've just said is that if Eskom continues getting 15% a year, that you're going to double your costs over 5 years. It will be even more in the money in 5 years' time. So we think that's an imperative, and we'd like to be in a position if all goes well to start the first stage of that early next year.

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Paul A. Schmidt, Gold Fields Limited - Financial Director, CFO & Executive Director [22]

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Sorry, (inaudible) standby generators. Martin, correct me, 10, going up to 12 at the end of the year of 12 megs that you really got on site.

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Unidentified Analyst, [23]

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May I ask another question?

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Nicholas John Holland, Gold Fields Limited - CEO & Executive Director [24]

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Yes.

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Unidentified Analyst, [25]

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When you look -- covering the South African operations, we had a number here. Gold production increases under South Deep. And we're looking at to $1,275 an ounce. Now looking at the volatility of the gold price, which has been immense recently, how far down could that go before you actually say, sorry, we've got to cease operations or slow down operations considerably?

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Nicholas John Holland, Gold Fields Limited - CEO & Executive Director [26]

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Yes. we'll look, the fact that we've already brought our cost down significantly in the second quarter, I think, is showing, in fact, that it's going the other way at the moment and off a very high cost base. Clearly, we've said that Gold Fields' franchise assets, we want to get to as close as we can to $900 and make a 15% margin at a $1,200 gold price. So that's the task for the South Deep team is to drive us down there. And if you look at an increase in volume, look what it does. You drop your costs 30% plus just by getting a modest increase in volume.

We're still only using these sort of production levels, 1/3 of the installed capacity, so we've got capacity here. So the marginal cost of extra tonnes will be lower. Quite a sizable amount lower than the all-in cost. So that's why it's a volume, it always has been or will be. And if you can get more open stoping through, which is your big volume in our development and distresses on reef, but it's low volume, get your open stopes through, that's really where you're going to see the leverage here. So let's see where we go. But we're encouraged by where we sit today. Brendan?

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Brendan Ryan;Miningmx;Journalist, [27]

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Nick, following up on your comments on South Africa. Could I ask you for your overall assessment of what's going to happen to the gold industry here? I mean given Anglogold wants out. Harmony wants to go to P&G? And even the PIC says wants to invest in South Africa. What is the future of gold mining in this country -- sorry, West Africa?

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Nicholas John Holland, Gold Fields Limited - CEO & Executive Director [28]

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Well, look, I've been saying for a long time that the gold industry is in decline in South Africa. And recently, we were eclipsed by Ghana, as you saw. Ghana now is the largest gold producer in Africa. And I think South Africa now is down to sub-130 tonnes a year. I think the die is cast because if you look at increasing depth, declining grades, increasing costs, that's a combination altogether. That is a real storm against you. So I think the rand when its weakens, it gives you some respite. But we've seen this over the years. The rand weakens a bit, you get a bit of respite, inflation comes up, then you get the combined effect of increasing depth, more capital required to access depth, more ventilation, more cooling. Grade comes down. The gold industry is in decline, and it will continue to be in decline. We're only now 1% of GDP, the gold industry. So how relevant are we in terms of the economy? That's the reality of where we are.

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Avishkar Nagaser, Gold Fields Limited - EVP of IR & Corporate Affairs [29]

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Okay. We've got one from the webcast. Please can you unpack the impact of the hedge and the potential impact going into 2020?

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Paul A. Schmidt, Gold Fields Limited - Financial Director, CFO & Executive Director [30]

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Well, it's in the book. As we said, the mark-to-market loss at the end of June was $120 million. We've basically hedged half of Australia's production for next year, half of Ghana's production. We've hedged 75% of South Deep. One of the main reasons is your concern you raised earlier. We've got hedges of around ZAR 680,000 a kilogram for South Deep for next year. That's to give Martin a bit of headroom to get the mine up to the cost level where we wanted.

Yes, the reason we have taken out hedges is not that we're trying to guess the gold price. Our planning assumptions for next year are $1,200, AUD 1,600 and ZAR 555,000 a kilogram. When we embarked on this hedging exercise, it was about 3.5 months ago. You need to remember where the prices were then. What we did is we had a draft ops plan for '20. We had a certain cash flow. And we were requested what can we do to improve it.

The value of these hedges -- let's ignore the mark-to-market, but vis-à-vis, what we saw is the planning process adds about USD 130 million of free cash flow post-tax to our proposed cash flow for next year. That's the reason we took it.

So as we said, we don't know where the gold price is going. We really don't know. We saw some very attractive prices, and we said let's take some of the money off the table. We are not strategic long-term hedges. We'll only hedge for a year in advance. And that's what we have done. It's underwater at the moment. But who knows where it will be at the end of the year? Maybe it's worse; maybe it's better. But we're not trying to guess it, at least now. No, we've not finalized my plan for next year, which we're doing in the next 3 months. I can put in some definite numbers. We're good on production, We're good on cost. We always were subject to the gold price volatility. We've locked in a lot of it now. So we can basically know what our cash flow will be for next year when we do our plans and complete in 3 months’ time.

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Avishkar Nagaser, Gold Fields Limited - EVP of IR & Corporate Affairs [31]

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Is there one last one here? No, with that, thank you very much. Media, at the round tables upstairs. Thank you.