New South Deep plan helps turn first profit
Gold Fields’s plan for higher growth entails a completely mechanised mine
Gold Fields believes it has a plan and the people to start paying back the R31bn investment in the South Deep mine, which has been an underperforming asset since it was bought in 2007.
In the nine-odd years since the mine was bought from Western Areas and Canada’s Placer Dome, Gold Fields has struggled to find the right mining plan for a massive underground ore body that ranges in width from 2m to 120m thick, lying more than 2.5km underground.
In the first strategy, Gold Fields developed in 2009, the intention was to extract 750,000oz-800,000oz of gold a year, but a number of snags delayed the plan. This led investors to wonder whether Gold Fields could bring the asset to account, having sunk R29bn into buying it and investing in infrastructure.
A second plan was drawn up, which entailed a completely mechanised mine extracting ore from vast underground voids.
"This is probably the best plan we’ve seen at South Deep in a number of years and growth rates of 10% per annum are very achievable," HSBC analyst Derryn Maade said on Thursday.
The revised plan, which will cost R2.28bn over the next six years, will increase production steadily from last year’s 290,000oz to 497,000oz in 2022. South Deep, Gold Fields’ last remaining mine in SA, produced its first profit last year, generating a slender net cash flow of $12m, but management regarded this as a turning point.
Gold Fields has pegged its all-in cost of steady-state production at $900/oz. Assuming a gold price of $1,200/oz, the profit margin would mean the mine would generate $150m a year, allowing the company to start paying back its investment, said CEO Nick Holland.
Adriaan de Beer, the mine GM and acting executive vice-president of the South African business, said the mine was capable of greater production than that for which the plan provided, with just two-thirds of the ore capacity of 330,000 tonnes a month in the twin shafts and plant being used.
It would take years to settle the mine, he said, and management would only be able to give investors a revised production profile in five or six years.
A big change in the plan was the R400m construction of a vast workshop 2.7km underground, capable of rebuilding machines in the mining fleet and doubling their lives. The cost of a major rebuild was 39% of the replacement cost of trucks and loaders. Up until December 2016, the logistics of hauling worn-out machines to the surface was too difficult and they were just parked, De Beer said.