After production delays and fatal accidents, the plunging price of bullion is making Africa’s richest gold deposit the biggest burden for owner Gold Fields. And the bond market’s taking note.
The 81 million-ounce resource at South Deep near Johannesburg is still burning cash after Gold Fields bought it for $3 billion in 2006. The mine has helped lift the company’s break-even price to $1,105 an ounce, according to Moody’s Investors Service. Yields on the company’s bonds climbed to a six-month high during July as gold fell 6.7% to $1,093 an ounce.
“You’ve got a perfect storm now, with a low gold price environment and the potential for South Deep to continue to consume cash,” Douglas Rowlings, a Dubai-based analyst at Moody’s, said by phone. “The question on everybody’s mind is how much more cost can sustainably be taken out of SouthDeep and other mines?”
The failure to exploit South Deep profitably is hastening the decline of South Africa’s gold-mining industry, which has produced a third of all the world’s bullion over 120 years. The country is today ranked sixth in the world among gold producers, down from first just eight years ago.
South Deep, with the potential to produce 700,000 ounces a year costing as little as $900 an ounce for the next 70 years, may change that. Yet its complex ore body has so far proved too difficult for Gold Fields to extract profitably, even after $1 billion of investment over nine years.
The mine was closed temporarily last year after two workers died in accidents in the space of a fortnight. Nine employees died when a cage lift cable snapped in 2008.
Yields on Gold Fields’ $1 billion of bonds due July 2020 jumped 23 basis points by 2:15 p.m. in London on Tuesday to 8.23%, the highest since January. The yield’s 113-point rise in the past month compares with a 59-point increase for emerging-market mining companies, JPMorgan Chase Indexes show. Gold fell to $1,091 July 23, the lowest since 2010.
The company in February abandoned its target of producing 700,000 ounces by the end of 2017, which was already two years behind schedule. As the only large-scale mechanised gold mine in South Africa, Gold Fields struggled to find the right skills and mining techniques, Chief Executive Officer Nick Holland said in May.
With a new manager and mining method, it wants to bring South Deep to break-even by the end of 2016. The mine produced 36,300 ounces at $1,640 each in the first quarter. The company agreed on a three-year wage deal with unions at South Deep in April, providing certainty for investors, said Sven Lunsche,a spokesman for the company, based in Johannesburg.
“We’re comfortable with our debt levels, maturities and can operate at these gold price levels for a sustained period of time,” Lunsche said by phone. “Without South Deep our costs would be $1,000 to $1,050 an ounce.”
Even with the challenges, Rowlings sees Gold Fields holding onto its credit rating because it has a proven track record of cutting costs. The company, which also has mines in Peru, Ghana and Australia, has a Ba1 credit rating, one level below investment-grade, with a negative outlook. It reduced all-in costs 7% in 2013 even after inflation and agreeing to wage rises in South Africa.
“Even at $1,100 gold we are still comfortable that Gold Fields will take the necessary measures that they need to in order to keep their credit profile in line with the ratings guidance we set,” Rowlings said. Those measures include re-planning their mines, cutting capital spending and, if necessary, reducing its dividend, he said.