Three weeks before Gold Fields released its third quarter results, a senior executive warned BEE shareholders that the South Deep mine was on the “last roll of the dice”.
Gold Fields released its third-quarter results on Thursday – costs are down 9% and production is up 4%, resulting in $18m net earnings attributable to Gold Fields’ shareholders.
In response to the positive results, Gold Fields shares climbed more than 25%, eventually ending the day 17% higher.
But behind closed doors, during an annual general meeting of BEE partner Invictus Gold, Gold Fields’ executive vice-president for South Africa, Nico Muller, offered a frank assessment of the company’s only remaining South African mine – South Deep – describing it as a “broken” business burning through R1bn a year.
“Quite frankly, I think we are on the last roll of the dice; we have to turn this business around,” he told black shareholders gathered at the Hilton Hotel in Sandton on October 30.
“My observation is that the business is broken – many parts of it … I think we are in a tight spot, I have to be honest.”
South Deep, a 3km deep mine on the outskirts of Johannesburg’s West Rand, boasts the world’s second-largest ore body – its estimated 38 million ounces in gold reserves make it a behemoth from a bygone era of South African gold mining.
Over the years, South Deep’s promise of vast riches has also drawn in many famous names – Brett Kebble once owned the mine, and its current BEE partners include former Springbok Ashwin Willemse, Speaker of Parliament Baleka Mbete and advocate Jerome Brauns, who represented President Jacob Zuma during his rape trial.
But Gold Fields’ track record of over promising and under delivering on South Deep has led to accusations in
some quarters that the company has been “mining the market and not the ore”.
In 2009, Gold Fields predicted it would produce 800 000 ounces by the end of 2014 – currently, it predicts it will produce 193 000oz by the end of the 2015 financial year.
Controversial businessman and original Invictus Gold deal maker Gayton McKenzie said three weeks ago: “Since Brett Kebble sold this mine … not one of those targets has been reached. Every year we were told: ‘Next year we’re going to produce this and we’re going to be profitable.’ Now we’re at the stage where next year this mine can close down.”
At the annual general meeting, Muller said: “I don’t think [CEO Nick Holland] has gone out and said: ‘I have no business, let me see how many people I can con into buying shares and sell them this dream.’ I think he’s a very worried man.
“He’s desperately keen for this to work, and he’s given me a totally open mandate.”
Muller, who arrived at South Deep in October last year, has been put in charge of turning the mine around.
One of his biggest challenges is the rate at which the mine is burning through cash – Muller said it was currently about R1.2bn a year.
“It will be unlikely that Gold Fields will be able to finance or subsidise another year,” said Muller. “We have to increase our productivity. If we don’t do that, we are under major financial threat.”
He did, however, make it clear that he believed the project’s potential remained and that significant progress had been made in improving safety, processing higher volumes of ore and improving skill levels, parts availability and the running of an underground machinery-repair facility.
This quarter has been a good one for South Deep – production increased by 42% to 54 900oz – and Holland said on Thursday that he expected the fourth quarter to be even better.
The cash burn rate for the quarter was R266m – an improvement on the second quarter’s R330m. On Thursday, Holland told investors that their goal was to break even with South Deep by the end of next year.