Gold Fields' mine tragedies pale group results

Tag: Wet Grinding

JOHANNESBURG Gold Fields Limited (NYSE & JSE: GFI) today announced headline earnings for the March 2008 quarter of R1,246 million, compared with headline earnings of R456 million and R228 million for the December 2007 and the March 2007 quarters respectively. In US dollar terms headline earnings for the March 2008 quarter were US$176 million, compared with earnings of US$67 million and US$32 million for the December 2007 and the March 2007 quarters respectively.

March 2008 quarter salient features:

• Attributable gold production decreased 14 per cent to 827,000 ounces largely due to power disruptions in South Africa;

• Total cash costs increased 21 per cent from R101,532 per kilogram (US$467 per ounce) to R122,920 per kilogram (US$513 per ounce) mainly due to the loss of production at the South African operations;

• Agreement was reached with Mvela whereby the number of GFL shares to be exchanged for 15 per cent of GFIMSA will be fixed at 50 million shares;

• Cerro Corona on track for production of concentrate during the September 2008 quarter;

• Nick Holland takes over as the new Chief Executive Officer from Ian Cockerill and Terence Goodlace appointed Chief Operating Officer, effective from 1 May 2008.

An interim dividend declared of 65 SA cents per share payable on 2 June 2008.

Statement by Nick Holland, Chief Executive Officer of Gold Fields:

"It is with deep regret that subsequent to quarter end three separate accidents resulted in the death of 14 of our colleagues. On 28 April a seismic event at Driefontein's 10 shaft resulted in the death of four colleagues and at South Deep one colleague lost his life in a fall of ground accident on 29 April. On 1 May at South Deep nine colleagues died when a winder rope apparently broke and a conveyance fell 59 metres to the bottom of the 215 metre long ancillary ventilation raise hole between 100 and 110A levels. In all instances full investigations are currently underway. Gold Fields also intends to commission an external, full safety review at all its operations.

From an operational perspective the March quarter was characterised by two important developments.

The first was the power disruptions in South Africa which had a significantly negative impact on Group production and costs.

The second was the 29 per cent increase in the average rand/gold price received from R170,488 to R220,612 per kilogram as a result of a 17 per cent increase in the US dollar price of gold, combined with a 10 per cent weakening of the South African rand quarter on quarter.

Despite the negative impact of the power disruptions in South Africa, the Group margin increased from 38 per cent in the December 2007 quarter to 42 per cent in the March 2008 quarter. This demonstrates the benefits of a higher gold price combined with the shielding effect of the weakening currency on Gold Fields' earnings which, combined with cost leadership in a very challenging inflationary environment globally, should enable Gold Fields to capture some of the higher price received for the benefit of shareholders going forward.

The Group should benefit over the next three quarters as production in South Africa normalises at stable power supply levels and, in particular, as production increases from the international operations with the commissioning of the Cerro Corona mine in the September 2008 quarter and the completion of the Tarkwa CIL plant expansion during the December 2008 quarter. This, combined with the reduction in capital expenditure as these projects are completed, is expected to bolster free cash flow and earnings."

Health and safety

We deeply regret to report that five fatal accidents occurred in the quarter at the South African operations. Kloof and Beatrix had two accidents each and Driefontein had one. Three of the fatal accidents related to fall-of-rock related accidents, while the other two included a heat stroke incident and a ventilation door accident. The fatal injury frequency rate for the March quarter improved to 0.13 per million hours worked, compared with the previous quarter's 0.32. The lost time injury frequency rate improved from 6.9 to 6.4, the serious injury frequency rate improved from 4.0 to 3.1, and the days lost injury frequency rate improved from 248 to 241. In addition, Beatrix and Driefontein achieved 1,000,000 fatality free shifts in the month of January 2008. A full explanation of the safety terms used in this report is available on our web site.

Following the March quarter, it is with regret that we report on three separate incidents in which 14 colleagues lost their lives. A seismic event at Driefontein resulted in the death of four colleagues and at South Deep one colleague lost his life in a fall of ground accident. The tragedy at South Deep cost the lives of nine of our colleagues. As a result of the recent spate of accidents Gold Fields is to commission an external, full safety review at all of its operations.

The Presidential Audit initiative continued during this quarter. Beatrix, Kloof and Driefontein have been audited. South Deep will be audited at the beginning of the June quarter.

Gold Fields remains committed to pursuing the Mine Health and Safety Council milestones in South Africa. These milestones are based on rate improvements for fatalities, noise induced hearing losses and silicosis with the objective of aligning with international norms.

Discontinued operations

The Venezuelan assets (including Choco 10) which were sold during the December quarter are classed as discontinued operations for accounting purposes, and as such all prior periods have been restated to exclude results from this operation.

Revenue

Attributable gold production for the March 2008 quarter amounted to 827,000 ounces, compared with 960,000 ounces in the December quarter, a decrease of 14 per cent. Production at the South African operations decreased from 657,000 ounces to 520,000 ounces largely due to power disruptions. Attributable production at the international operations increased from 303,000 ounces to 307,000 ounces.

At the South African operations gold production was adversely affected by reduced power supply from Eskom which resulted in almost a week's lost production at the end of January and reduced production over the remaining period - more detail is provided under the South African operations section below. As a result of the loss of production, a press release on 25 February 2008 gave an updated guidance which forecast a decrease in production at the South African operations of between 20 and 25 per cent for the March quarter and between 15 and 20 per cent for the June quarter, when compared with the December quarter. The actual decrease for the March quarter was 21 per cent. Kloof, Beatrix and South Deep's gold production was more or less in line with the guidance given on 25 February, while Driefontein achieved 10 per cent above guidance, mainly due to increased surface production and higher underground grades fed to the mill.

At the international operations, gold production at Tarkwa increased 4 per cent due to higher processed volumes. At Damang, gold production increased by 19 per cent due to increased processed volumes at a higher grade. Gold production at St Ives decreased by 6 per cent due to a decrease in underground volumes at a lower grade. At Agnew, gold production was similar to the December quarter, with the increase in high grade underground ore mined and delivered to the mill offset by lower average grades from the Songvang stockpile. At Songvang the high grade stockpile was depleted mid-quarter and the low grade stockpile is now being processed.

The average quarterly US dollar gold price achieved increased from US$784 per ounce in the December quarter to US$921 per ounce in the March quarter, a 17 per cent increase. The average rand/US dollar exchange rate averaged R7.45, compared with the R6.76 achieved in the December quarter. As a result of the above factors, the rand gold price improved from R170,488 per kilogram to R220,612 per kilogram, a 29 per cent increase. The Australian dollar gold price increased quarter on quarter from A$886 per ounce to A$1,008 per ounce.

The increase in the rand gold price achieved more than offset the decrease in production. Revenue in rand terms amounted to R6,109 million (US$820 million), compared with the previous quarter's R5,430 million (US$801 million), an increase of 13 per cent.

Operating costs

Operating costs increased by 5 per cent from R3,341 million (US$494 million) in the December quarter to R3,503 million (US$470 million) in the March quarter. Total cash costs increased by 21 per cent from R101,532 per kilogram (US$467 per ounce) in the December quarter to R122,920 per kilogram (US$513 per ounce) in the March quarter. This increase was mostly due to the loss of production as a result of the power disruptions in South Africa.

At the South African operations, operating costs decreased from R2,174 million (US$321 million) to R2,126 million (US$285 million), a decrease of 2 per cent. This decrease was mainly due to the lower volumes mined and processed because of the one week closure and constrained production flowing from the power disruptions during the quarter. In the short term mining costs are mostly of a fixed nature, resulting in an increase in unit costs as a consequence of the lost production. As a result total cash costs at the South African operations increased from R101,170 per kilogram (US$465 per ounce) to R125,181 per kilogram (US$523 per ounce).

Operating costs at the international operations, including gold-inprocess movements, amounted to R1,417 million (US$190 million), compared with R1,219 million (US$180 million) in the December quarter, an increase of 16 per cent, of which 10 per cent is due to the weaker rand. Approximately half of the total dollar increase at the international operations occurred at Tarkwa, which reflected an increase in costs of US$5 million or 7 per cent due to the increase in production, together with fuel and power tariff increases. At Damang, costs increased by US$2 million or 9 per cent as a consequence of increased volumes mined from the Damang pit cutback and an increase in on-mine exploration. At St Ives, operating costs in Australian dollar terms, including gold-in-process movements, increased by A$5 million or 8 per cent, mainly as a result of increased maintenance costs associated with a planned mill shutdown and an increase in royalty charges due to the higher gold price. At Agnew, operating costs decreased by A$2 million or 8 per cent mainly due to the decrease in processed ore from Songvang. Total cash costs at the international operations increased from US$470 per ounce to US$500 per ounce quarter on quarter.

Operating margin

The net effect of the changes in revenue and costs, after taking into account gold-in-process movements, was an operating profit of R2,566 million (US$344 million). This represented a 26 per cent increase when compared with the R2,037 million (US$300 million) achieved in the December quarter. The Group operating margin increased from 38 per cent to 42 per cent. The margin at the South African operations increased from 37 per cent to 41 per cent, and the margin at the international operations increased from 38 per cent to 44 per cent.

Amortisation

Amortisation decreased from R763 million (US$113 million) in the December quarter to R714 million (US$95 million) in the March quarter. This decrease was mainly due to the lower amortisation charge at the South African operations which reduced from R463 million (US$68 million) to R376 million (US$50 million) because of the loss of production. This was partially offset by an increase at the international operations in line with the increased production.