Gold Fields punished as miner forced back to the drawing board on South Deep

After years of losses and failed turnarounds, Gold Fields [JSE:GFI] is having to come up with another plan to save its massive South Deep mine. Its shares plunged.

The Johannesburg-based company may cut about 1 560 employees and contractors at the operation, its only one left in South Africa, and refocus the mine plan to reduce activity and lower costs. South Deep is the world’s second-biggest known body of gold-bearing ore and has the potential to produce for 70 years, yet more than a decade of poor performance has weighed on the company.

The company will announce a new plan in February for South Deep, which is losing about R100m a month at the moment, Chief Executive Officer Nick Holland said on a conference call.

“This has not been an easy decision and comes after many other initiatives have been attempted where we haven’t seen results,” he said. “We believe this is the best short-term initiative to resize the operation and look at what a more realistic operation would be.”

The announcement suggests Gold Fields may be running out of options at South Deep, said Leon Esterhuizen, an analyst at Nedbank Group.

“South Deep needs much higher volumes to be an efficient operation, but Gold Fields seems to have now run out of financial rope,”’ Esterhuizen said. “The constant failure to make this mine work is very bad for Gold Fields and its long suffering shareholders.” Gold Fields shares tumbled as much as 14% in Johannesburg, the most since March 2016.

Gold Fields has ploughed R32bn into South Deep since 2006, including the purchase cost. The mine, which stretches 3 kilometers underground, has lost R4bn over the past five years as it repeatedly missed targets and the company struggled to mechanise the operation in a country dominated by conventional, labour-intensive mining methods.

In addition to eliminating jobs, the restructuring involves reducing the equipment fleet, scaling back mining in some sections and cutting capital expenditure, Gold Fields said. The company said it can’t provide new output forecasts until it’s finished revising the mine plan.

Holland said as recently as last month that increasing volumes was key to turning around South Deep because of the industry’s high fixed costs.

South Deep's tale of woe

  • 2010: Company estimates production at as much as 800 000 ounces by end-2014.
  • 2014: Gold Fields says it will produce 650 000 - 700 000 ounces a year of gold by the end of 2017.
  • 2015: Company says its plans won’t be achieved and is revising targets.
  • February 2017: Company says it will need five years to get to 500 000 ounces a year.
  • First quarter 2018: Mine produces just 48 000 ounces, 41% lower than the prior quarter, as costs rose.

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