Good afternoon, ladies and gentlemen, and welcome to Gold Fields Limited Quarter 1 Operating Update. All participants will be in listen-only mode. There will be an opportunity to ask questions at the end of today's presentation. If you should need assistance during the conference, please signal an operator by pressing star and then zero. Please note that this conference is being recorded. I'd now like to hand the conference over to Mr. Nick Holland. Please go ahead, sir.
Thank you. Good morning, ladies and gentlemen, or good afternoon, depending on where you are, and thank you for calling in to our Quarter 1 2018 update call. Gold Fields entered the second year of our reinvestment program in 2018. Following a strong year in 2017, the Damang Reinvestment Project continued to progress according to our plans in the first quarter of this year. The Gruyere Project was impacted by over 20 days of very severe weather during the first quarter of this year, which has added to the cost estimate and has also delayed the project slightly. While South Deep performed well below expectations, the international operations continued to perform well, in most cases exceeding their attributable budgets for the quarter, and that bodes well for their performance, I believe, for the rest of the year.
Attributable gold production for the group was 490,000 ounces in Quarter 1, that's 1% lower than the corresponding quarter in the previous year. Interestingly, that quarter last year included 14,000 ounces from Darlot. If you take that out, in fact, on a comparable basis, we're a little bit better than last year. That's 10% lower, however, than production in the December 2017 quarter of 490,000 ounces for the year, that is. All-in sustaining costs were 6% lower year-over-year at $955 an ounce, which is in line with the previous quarter for 2017, while all-in costs at $1,150 per ounce were 3% higher year-over-year and also 3% higher quarter-over-quarter.
Despite the high level of project capital being spent by the group, which was previously flagged, as well as the payment of the financial year 2017 final dividend during this past quarter, there was only a modest increase in our net debt balance to $1.37 billion, up from $1.3 billion at the end of 2017. As per the announcement released by the joint venture partners on Monday, that's ourselves and Gold Road, there was a joint announcement put out on Monday. Abnormal rainfall events in the first quarter of this year have impacted the schedule and cost of the project. As a result, project CapEx is likely to be around 10% higher than previously guided. In other words, 10% higher than AUD 532 million. That's a 100% basis for the project.
First production is now expected to move into the second quarter of 2019 from the previous first quarter of 2019. At Damang, the Damang Reinvestment Project continues to perform ahead of plan. At the end of the March quarter, the total material mined since the start of the reinvestment project, that's cumulative, was 22% ahead of the project schedule, whilst gold produced was 180,000 ounces. That's 35% ahead of the plan. That project's in pretty good shape. South Deep has had a tough start to 2018 with a first quarter production of 48,000 ounces, albeit that that was 4% higher than the previous year. In other words, against the March quarter of 2017, it is 41% lower quarter-on-quarter. Production for the quarter was impacted by the typical slow build-up after the seasonal holidays.
Remember that the March quarter traditionally includes the Christmas break, which is around about two weeks, then usually there's another week or so before you hit steady state. That always impacts the March quarter. We've had two labor restructuring processes that took place at the end of 2017 and during the quarter. The end of last year was on the management ranks, and during the quarter it was on the general workforce. We also had a change in the underground working shift arrangements implemented to increase productivity. In essence, we're trying to get an extra couple of hours on the face, but given that this has only been implemented over a month, it's too early to see any positive results. Obviously, in time, we hope there will be a net benefit of these arrangements in getting more time in the face for our crews.
Although these changes were necessary to create a platform for sustainable and consistent performance, these changes have inevitably created workforce uncertainty and a disruption to the operations, and that clearly has showed in the production for the first quarter and has continued into April. In addition, continued low equipment reliability, the intersection of active geological features in the high-grade corridor three, in other words, dykes and faults, as well as poor ground conditions in the high-grade composites area on the western side of the mine have also slowed production rates. Typically, these happen in the high-grade areas. Production for the month of April was further impacted by a 22-day DMR safety-related stoppage, the so-called Section 54s that we have in South Africa, stop orders, to re-support back areas in two of the critical new mine access ramps, which account for half of the total production of the mine.
Just to put into context, this was flagged as an issue and was being addressed by the management focusing first and foremost on the most critical areas. Clearly, the DMR has given us a stop order there, which we had to then stop what we were doing and accelerate the work that we were doing. The mine team is currently developing a recovery plan against all of these issues that appeared over the last quarter. First and foremost, mobilizing the workforce first to restructuring and bedding down the new underground shift cycles so that we can increase the productivity and take our places forward. Management is also implementing programs to improve and integrate critical aspects of the mining value chain.
That's something that I've flagged previously, that we need to make sure that all of our mining activities are done in sync. Obviously, we're cleaning stopes timeously, we're backfilling stopes timeously, we're backfilling them properly. Timeous ground support, timeous advance of critical destress and development ends to make stopes available. Some of these activities are not as well integrated as we would like. The team is working on this to generate improvements, we believe, over the balance of the year. Based on the above factors, we don't believe that the guidance of 321,000 ounces or 10 tons of gold provided at the start of the year can be achieved at this stage. Taking a conservative approach, we're currently forecasting 244,000 ounces for the year against that original plan of 321,000 ounces.
The reduced full-year guidance is attributable to all the factors I talked about, the ongoing impact of poor equipment availability and reliability, the slower advance rates in corridor three, given the faults and dikes that we intersected. The need for us to put safety first. We had to just advance those particular areas very carefully. Meshing the face as we go, which slows us down. Shotcreting over those meshed areas as well, both on the hanging and on the sidewalls to provide a safe environment as we navigate through these faults and dikes is going to slow you down. Hopefully, we'll get through this, we believe, in the next three to four months. Delayed extraction of the composites as well, whereby high-grade stopes had to be deferred.
Again, I think we're going to be another three to six months to finish all the rehabilitation we have to do around those areas to make those stopes available. I guess the good news in all of this bad news is that we haven't really compromised a significant amount of gold here. It will still be available for us to get. It's really deferred. On the equipment availability, which has been a perennial problem for this mine over a number of years, additional artisans have been sourced from the equipment manufacturers to urgently address equipment availabilities. This has been a tough nut to crack, and we're hopeful that this will make a difference. Poor ground conditions are mostly a symptom of the transition to more effective pillar designs, whereby we've moved to much bigger localized crush pillars, but it doesn't happen overnight.
There can be fretting of pillars as you transition the design over that period. That's following recommendations of an international independent geotechnical review board. As we implement those, it's tended to make stopes unavailable until we've continued and finished that work. Lack of timeous and effective stope cleaning and backfill is an issue. I've spoken about that and the need for us to integrate those activities along with more timeous secondary ground support. All of these constraints are receiving urgent attention. As I've said earlier, we have downgraded the forecast significantly. Obviously, the team are going to try and come up with a recovery plan that, number one, at least underpins this number, but two, tries to recover some of the situation, and ensures that additional flexibility is created for the future. Finally, South Deep has concluded a three-year wage agreement.
Bear in mind that our previous agreement expired on the 1st of March 2018. We've got a new three-year deal with organized labor, which provides for an average annual increase of 7.3% in rand terms. Local inflation is around about 5.5%. That gives you an idea of what the increase is in relation to inflation. Okay. I think we've spent quite a lot of time giving you a short analysis, or what was supposed to be a short analysis of the results. With that, we'll hand out to questions. Just to say that I've got Paul Schmidt with me, our CFO, as usual. I've also got Avishkar Nagaser, Head of Investor Relations. Between us, we'll endeavor to answer your questions. Thank you very much.
Thank you very much, sir. Ladies and gentlemen, at this time, if you'd like to ask a question, you're welcome to press star then one and it should then place you in the question queue. If at any time you decide to withdraw the question, you're welcome to press star then two and it should then remove yourself from the question queue. Just a reminder, should you wish to ask a question, you're welcome to press star and then one. The first question comes from Dominic O'Kane of JP Morgan.
Hi, Nick. I can sympathize with the frustration around South Deep in the sense that it accounts for less than 5% of group EBITDA, devotes so much of your time in terms of investor questioning and market focus. I guess my first question is quite a direct question. In light of the Q1 numbers, they were up 4% year-on-year, but Q1 2017 was also a terrible quarter. How long does the board maintain the mandate to keep investing in this mine? You've got very good high-returning projects elsewhere. How do you continue to assess the capital at risk and the returns in South Deep versus your other opportunities?
Yep. Honestly, it's the right sort of question to ask, Dominic. First of all, we're heavily invested into South Deep, and if we look at what we have here, we have an ore body that we're pretty confident is there. That's the one thing that's never changed in the 10 years or so that we've owned it, we've done a lot of drilling. We've invested a lot in infrastructure, particularly in what will be the future. If we look at where we are now, the bulk of the mining, as you see in the book, is in what we call the current mine, which should probably be called the old mine, because a lot of that is legacy infrastructure that's been around even before we were there. It's not bulk mining as we want to put in place in the North of Wrench area.
The North of Wrench area is being developed as we speak, the one bit of positive news is that that's consistently been ahead of plan, which is interesting when the rest of the mine hasn't been, as you've seen. That really represents the heart of what we'll mine over the next 20 years or so. There's almost 10 billion ounces in North of Wrench. The current mine area, which makes up the bulk of our mining at the moment, is just over 1 billion ounces. Again, it's a bunch of scattered remnants. It's not real bulk mining in the true sense of the word. If we can get in to the North of Wrench area and increase the proportion that comes from that, which will be bulk non-selective mining properly set up, that'll make a big difference.
I think first, the other thing to say after that is, remember that the rebased plan didn't see us making money anyway until 2020. It's not as if we were going to be in a situation of making cash over the first two to three years of the rebased plan. It was clear that there was going to be an element of reinvestment. Essentially, we believe our problems are not technical, Dominic. We have spent a lot of time over the last four years reassessing and redesigning a mining method that we believe works. That our four wise men from the geotechnical review board from all over the world who've been working with us for four years believe can work. The geotechnical design around it, which is a much stiffer system with increased localized pillars with a narrower mining span, they also believe can work.
What it comes down to really is integrated execution. It's really about people. It's about getting the right people in the right roles doing the right things. That's what the management team is trying to do, is to change the whole organizational design. Far too many layers of management here that we're streamlining to make it more effective and more efficient. Then really tightening up short infill controls, which is going to make sure that areas that are not backfilled timely are backfilled timely. Where ground support needs to be put in place, it is put in place. Where stopes need to be cleaned, they are cleaned. We believe that these issues, if properly dealt with, can be managed.
The equipment availability, which again has been a perennial issue as I mentioned, is really a function now of having a different approach to this and getting a grip on proper planned maintenance in action, not just talking about planned maintenance, but proper planned maintenance in action. A lot of work is going into that right now. I think the view of the company at this stage is that we should actually figure out how we're going to recover this operation and get it back on track. That's our position as of today, Dominic. Thank you.
Just one follow-up question just on the cash flow. Under the current revised guidance, could you maybe just give us a sense of what the exit rate all-in sustaining cost will be at the end of 2018?
Yeah, we've deliberately not put that in, Dominic, because arising from this material downgrade in production, we're going to go and reassess what the cost base should be and what we can do about it, whilst at the same time, obviously being cognizant of the need for us to make sure we can enable an improved production profile. Paul, I don't know if you want to add to what I said.
Once we've finished, we'll give a review of the results. We'll be able to give you the expected all-in costs for South Deep for the balance of the year.
More work on that, and we'll see what we can defer or cut out in terms of non-critical sustaining capital expenditure. We want to keep an eye on the future, of course, Dominic. If we're going to be able to get into what we believe will be the heart of this ore body with the North of Wrench, we need to keep developing that. Otherwise, we won't be able to get out of where we are and into the better areas in a couple of years' time. We'll come back to you. It's still a work in progress on the costs.
Okay, thanks.
Thank you. The next question comes from David Haughton of CIBC Capital Markets.
Good morning, Nick and team. I'll move on from South Deep, much to your relief, I presume. Having a look at the Tarkwa restructuring costs, there's quite a few going through there, and you've also had equipment sales. How are you accounting for the retrenchment costs and the equipment sales, please?
I'll hand over to Paul, who will give you a better answer than I can.
The retrenchment costs we show them on the exceptional line because they're an exceptional item, and so will the sale of the fleet. The fleet's basically going to be at breakeven. It's spread between quarter one and quarter two, the payment we're getting as we finalize that. Yeah, it's not in any of our all-in costs or anything like that.
Just to add to that.
Okay.
Over and above those costs. Sorry, Nick, I spoke over the top of you.
No problem, David. Just to add to what Paul is saying, the way this deal is structured is the all the retrenchment costs you can see are funded by the equipment sale, and we can still maintain our guidance moving to the contractor on our all-in costs for this year. I must say, the transition has gone pretty smooth. We haven't really seen any hiccups in production. In fact, we are quite pleased with where we are. Obviously, there's been opposition to it, but we believe that's now behind us and we're looking forward to moving on. All told, although it's taken us 6 months to do this when we thought it might be two or three, I think the end result will be a good one.
Okay, over to your development projects of Gruyere and Salares Norte. How much was spent in capital on each of those projects in the first quarter?
We haven't given those numbers in the book. I don't have that offhand. Paul?
I can tell you-
It is in the book?
That the name is in the book. I'll tell you now, the name on the project, we spent $33.8 million. We haven't split it out through yet. We can get back to you on through yet.
Okay. With the-
Sorry, David.
increased capital. Yes, go ahead.
Sorry, David. Sorry, I'm interjecting here. I'll probably answer your question. It's around AUD 45 million. That's our share, AUD 45. On a 100% basis, it's probably going to be a little bit more than double that because we have a few costs to be allocated that were linked to us. Total project cost is over AUD 100, but we don't normally give all that resolution in this operational update. We give that in the half year. Sorry, I hope that helps you, Dominic. Thanks.
Yes, it does. Thank you. With the capital increase, with the weather and some changes of scale at Gruyere, how should we be thinking about that increased CapEx? Should we just be bumping it up during 2018 or would there be some top-up in 2019, given that we've got a one-quarter delay on the startup? How should we be thinking about that additional CapEx?
I think some of it will happen towards the back end of 2018 and some of it will happen in the front part of 2019 because we had quite a low capital burn rate in early 2019. Heroic assumption here, when I haven't seen a resolution on this yet because we're still sort of working through the resolution, I would probably split that between the two years, roughly, if you wanted to the additional 30 months on the project.
David, it's Paul here. It was AUD 53 million on our share at the year.
Thank you. Thank you very much. You sold Arctic Platinum during the quarter. Did you receive that $40 million from the sale in the quarter?
Yes. We only got it.
Okay, one other thing. I noticed that shares on issue on your front cover here is 40 million more than the December quarter. Wondering where that went to.
Well, we haven't issued any shares.
Okay, I suspect that there might have been a bit of a misprint on your front cover because ordinarily it's 820 million, roundabout, shares on issue, but your release is 860 million.
Well, I'll have to check that. My recollection is like yours, is that it was around about 820 something. I can tell you this for sure, David, we have not had a share issue we haven't told you about.
No.
I think well spotted. I have to concede, I think this is an error.
Okay. All right. I'll just leave it there for now. Thank you, Nick and Paul.
Thanks for pointing it out. Anything else, David?
That's it from me. Thank you.
Thank you, sir.
Ladies and gentlemen, just a reminder, should you wish to ask a question, you're welcome to press star and then one. The next question comes from Tanya of Scotiabank.
Good morning, everybody.
Good morning.
Good morning. I will leave South Deep, but I just wanted to come back to Tarkwa. I just wanted to talk a little bit about the pit wall geotechnical issue that you had. Exactly what was happening next to the fault, and has everything been resolved and has there been any impact to your mining for 2018 or sterilization of any of the reserves?
No. A small issue, as we said in the report, it was resolved. Not a big issue at all for the quarter. There is no residual geotechnical risk there. We have cut that out, Tanya, so it is actually quite isolated. This is the first time that I can remember us having some kind of localized issue there. No, we are out of that now, and obviously we have looked across the mine again at all of the geotechnical designs, the pit wall angles. We have a geotechnical team internally as part of our group technical group that goes to all the mines once a quarter, and they have been out there since then. They are quite comfortable with what we are doing. We have geophones and stuff like that in the wall, so we can pick up any movements, and that gets tracked by our control room.
This was very localized and in the scheme of things, it's such a big footprint of Tarkwa, not a big issue, but it did push us back a little while.
Yeah, because I don't remember ever having issues at the mine there with any pit walls, it was a bit new. I'm just trying to just picture how much material are we talking about?
Oh, look, we're mining 100 million tons a year here.
This is tiny in the scheme of things. Over a quarter, if you lose some ore, because we're mining obviously around about 12 million tons of ore-13 million tons of ore. I don't recall the exact figures, but we would have lost a couple of hundred thousand tons of ore. We haven't lost it.
Okay. That could affect the reserve.
Obviously, if you look at that, it does have an impact on your output for the quarter, but we'll pick it up, and as I say, it's been resolved since then.
Okay. Then maybe, we didn't see you reiterate your capital or your all-in sustaining costs guidance for 2018. Has that changed at all given the change on South Deep?
Well, obviously, we need to just reassess the impact of Gruyere on that number. We'll do that at the half year, and we'll reassess what we're going to do on South Deep, because there may be the potential for us to pull back some capital there. Until we've finalized all of those numbers with good resolution, I'd rather not give updated numbers at this stage, but we'll certainly do that at the half year.
Okay. If we were to adjust, as you mentioned just recently on, I think it was David's question, in terms of moving half of the increase in capital of Gruyere this year and half next, has there been any additional capital that you'll talk about, I guess, in mid-year for South Deep that we should know about besides just the underground development?
No, there's not going to be more. There'll be less.
Okay
We might cut back on the sustaining capital. We've got to start against cutting back on project capital because that's our future, getting into the heart of the ore body. Obviously that overrun on Gruyere, the full impact of that is not on us. Obviously there's a component of that the joint venture party carries with us. We'll have to see. We have to bring it back to U.S. dollars. Usually with these things, Tanya, they're pluses or minuses, but maybe we'll be slightly higher, is what I'd say at this stage, but not materially higher, slightly.
Okay. All right. Appreciate that. Thank you.
Welcome.
Thank you. Ladies and gentlemen, just a final reminder, should you wish to ask a question, you are welcome to press star and then one. The next question comes from Brendan Ryan of Miningmx.
Hi, Nick. Brendan Ryan, Miningmx. Could you talk a bit about your decision to step up your hedging programs in Australia and Ghana, please?
Sure. As you know, we are in a year of significant capital expenditure, around about $850 million give or take. We are building two new mines in Australia, Ghana, obviously the continued investment into South Deep, the Salares feasibility study. There is a lot of activity going on. In our hedging policy in our annual report, you will see that it does provide permission for us to establish hedges at a time of high capital expenditure to shield us from potential volatility, and that is exactly what we have done. It is not a long-term program, I want to stress. I would not be brave enough to try and go out long-term on this stuff. It is really to address a particular funding need this year and to make sure that if there is volatility in the gold price, that we have put in sufficient floors.
Generally what you will find with these hedges, we put in a floor of around about $1,300 an ounce in Ghana and around about AUD 1,700 an ounce, that is Aussie, in Australia. It is to make sure that we do not have any problems if prices go south in funding our capital program. It should not be interpreted that we now have become long-term and systematic hedgers, Brendan, if that is where you were going.
Great, Nick. Thanks for clearing that up. Thank you very much.
Ladies and gentlemen, that was the final question. Nick, do you have any closing comments?
No further questions?
None, sir.
Okay. Well, thanks everybody for dialing in, and we look forward to giving you a half-year update in August. What's the date, Avishkar?
17th of August.
17th of August. We'll give you a full update on a full set of financials with all of the cash flows and capital figures, revised estimates to the extent that we need to put them in. Hopefully that will give you more granularity on some of the questions you've asked. Thanks very much, everybody. Have a good day. Look forward to talking to you soon.
Thank you. Ladies and gentlemen, that concludes today's presentation. Thank you for joining us. You may now disconnect your line.