the state of the gold mining sectoroverendstudio.co.za/websites/gold-fields-corporate... · 6 but,...

The state of the gold mining sector

NICK HOLLAND28 June 2014

Society of Mining Professors’ 2014 Silver Anniversary

2

Forward looking statements

Certain statements in this document constitute “forward looking statements” within the meaning of Section 27A of the US Securities Act of

1933 and Section 21E of the US Securities Exchange Act of 1934.

In particular, the forward looking statements in this document include among others those relating to the Damang Exploration Target

Statement; the Far Southeast Exploration Target Statement; commodity prices; demand for gold and other metals and minerals; interest

rate expectations; exploration and production costs; levels of expected production; Gold Fields’ growth pipeline; levels and expected

benefits of current and planned capital expenditures; future reserve, resource and other mineralisation levels; and the extent of cost

efficiencies and savings to be achieved. Such forward looking statements involve known and unknown risks, uncertainties and other

important factors that could cause the actual results, performance or achievements of the company to be materially different from the future

results, performance or achievements expressed or implied by such forward looking statements. Such risks, uncertainties and other

important factors include among others: economic, business and political conditions in South Africa, Ghana, Australia, Peru and elsewhere;

the ability to achieve anticipated efficiencies and other cost savings in connection with past and future acquisitions, exploration and

development activities; decreases in the market price of gold and/or copper; hazards associated with underground and surface gold mining;

labour disruptions; availability terms and deployment of capital or credit; changes in government regulations, particularly taxation and

environmental regulations; and new legislation affecting mining and mineral rights; changes in exchange rates; currency devaluations; the

availability and cost of raw and finished materials; the cost of energy and water; inflation and other macro-economic factors, industrial

action, temporary stoppages of mines for safety and unplanned maintenance reasons; and the impact of the AIDS and other occupational

health risks experienced by Gold Fields’ employees.

These forward looking statements speak only as of the date of this document. Gold Fields undertakes no obligation to update publicly or

release any revisions to these forward looking statements to reflect events or circumstances after the date of this document or to reflect the

occurrence of unanticipated events.

The state of the gold mining sector - Society of Mining Professors | Nick Holland | 28 June 2014

Long-term trends affecting the mining industry

4

Economic demand from emerging market remains strong

● Emerging markets continue to be the world’s growth engine

● China is leading the way with an envious growth rate of 6.8% by 2018

● Growth rates in developed markets are also expected to increase beyond 2014 as

confidence is restored


IMF expects continued strong economic growth from emerging markets

Mine 2014 • Realigning expectations 35 PwC • June 2014

5

Leading to strong consumer demand for metals from the East


2013 Gold consumer demand by country

Source: World Gold Council - Gold Demand Trends Full Year 2013, February 2014

1 066

975

175140

92 77 72 68 57 38 25 21 18 16

190

12177 73 65

23 20 20

200

400

600

800

1 000

1 200

(tonnes)

EAST WEST

Total East: 2,840

tonnes

(83%)

Total West: 573

tonnes

(17%)

630 tonnes

in 2008

450 tonnes

in 2008

6

But, commodity prices have been weak, volatile

● 2013 was another challenging year, with double digit decreases not uncommon

● Gold lead the way with a 28% price drop, its biggest decline in 30 years

● Nickel and gold have recovered some ground in 2014, but other metals continue to fall


Commodity prices continued to fall last year

Mine 2014 • Realigning expectations 35 PwC • June 2014 – Source: World Bank

7

Gold price has been hard hit with little respite in sight


Historical & forecast gold prices

Source: Broker Research, AME, FactSet as at 6 January 2014

(a) Points on the curve represent the average price for the year. Nominal forward curve adjusted by US inflation of 2.0% per annum

0

200

400

600

800

1 000

1 200

1 400

1 600

1 800

2 000

Jan

02

Jan

03

Jan

04

Dec 0

4

Dec 0

5

Dec 0

6

Dec 0

7

Dec 0

8

Dec 0

9

Dec 1

0

Dec 1

1

Dec 1

2

Dec 1

3

Dec 1

4

Dec 1

5

Dec 1

6

Dec 1

7

Dec 1

8

Gold AME Price Broker Average Forward Curve

(US

$/o

z, re

al te

rms

)

(a)

GOLD PRICING DEVELOPMENT

Broker Max & Min

Annual, Real 2013 Terms(a)

Max:

$1,500/oz

Median:

$1,268/oz

Min:

$815/oz

8

Gold is becoming scarce (1)


World gold supply trends – steadily retreating

Source: Credit Suisse (6 Jan 2014), Morgan Stanley (3 Feb 2014), Société Générale (29 Nov 2013), AME, Bloomberg

24162589 2709 2812 2861 2890 2855 2780 2655

1315

15491655

1610 1615

11201000

900875

840

300

150

15

353 731

4 138

4 364 4 422 4 476

4 850

4 155

3 845

3 565

0

1000

2000

3000

4000

5000

6000

2008 2009 2010 2011 2012 2013e 2014e 2015e 2016e

Mine Supply Scrap ETFs Hedging

Supply of gold from mines, scrap, ETFs and hedging (tons)

9

Gold is becoming scarce (2)


Number and average grades of gold discoveries have dropped dramatically

Source: GFL/MinEx Consulting

10

Increasing Resource Nationalism


Governments and communities are increasingly antagonistic towards mining

“Resource nationalism

a key threat to mining”BlackRock, Oct 2011

“Resource nationalism

plagues the oil market”Wall Street Journal, Mar 2012

“Resource nationalism:

the usual suspects or a

wider problem?”RigZone, May 2012

“Resource Nationalism

#1 on mining risk list”Ernst & Young, Aug 2011

“Miners encounter the

hard rock of resource

nationalism”The Telegraph (UK), Nov 2011

“Resource nationalism is

miners’ number one fear

and major threat to

global security”Mining.com, December 2012

“Canada’s veto of

Petronas deal raises

spectre of resource

nationalism”Daily Telegraph (UK), Oct 2012

11

Communities are finding their voice


Number of conflicts between mines and communities

Source: ICMM

12

Industry costs are piling up while yields are down


Key KPIs in terms of costs and new discoveries have turned against gold miners

Note: Cost per tonne is the weighted average of 8 major gold producers by total ore mined; average grade is the weighted average of 8 major gold producers by total ore mined;

Major Gold producers: AngloGold Ashanti, Barrick, Harmony, Kinross, Goldcorp, Gold Fields, Newmont and Newcrest.

Source: Gold Fields company data; annual reports, Condemned to Excellence report(IAMGOLD Corporation, Dec 2012)

2012/13

costs

have

come

down

2012/13 costs have

come down, but at

what consequence:

• Reduced mine

development

• High grading

• Project deferrals

• Mine closures

13

Industry is halting new investments…


Low margins and declining equity prices are putting mining investments under threat

Sources: Factiva, Literature search

A harsh environment with new projects increasingly being

delayed and cancelled

14

… and cutting back on existing operations


Existing mining operations are being curtailed and may shut down prematurely

Existing mines under pressure from price

decreases and cost increases; greater taxes

will aggravate the problem

150 jobs go as Tanami closes mine

The West Australia\n – April 24, 2013

Brunswick Mine closes Bathurst-area

operation: Unemployment hit 20.2%

CBC News - May 1, 2013

Xstrata's Sinclair

mine in WA to close,

follows closure of

nearby Cosmos

Dow Jones - May 2, 2013

South African miner

Amplats closes

shafts and cuts jobsBBC – Jan, 2013

Sibanye Gold to Cut 1,110 Jobs to

Return Beatrix West to ProfitBloomberg – May 29, 2013

The mining industry in 2013Sourced from PwC Top 40 Mining Companies survey

16

Mining revenues continued to fall

● The Top 40 realised a decline of 2% in mining revenues to US$512-bn in 2013

● Copper and iron ore revenue increased in 2013, supported by demand from China

● Emerging market factors, such as China’s urbanisation, will keep demand strong


As commodity prices fell revenues for mining firms decreased


17

Operating costs remain stubbornly high

● With costs up, aggregate net profits for the year dropped to US$20bn, the lowest level for the

Top 40 in a decade

● Cost saving initiatives are taking time to bear fruit, but early 2014 reporting indicates some

successes, particularly with gold companies reporting substantial all-in cost reductions


Top 40 are struggling to bring rising operating costs under control


18

Industry had record impairments … again

● 2013 was another year of write downs for

the Top 40 with US$57-bn of impairment

charges recorded, on top of around

US$40-bn in 2012

● One quarter of the Top 40 recorded over

US$1-bn of impairments each in 2013,

primarily gold miners and the Top 5

diversified miners


The mining industry had to make record impairment charges


Source: PwC analysis

19

Share prices of mining stocks have dived

● The performance of the Top 40 mining stocks was down 23% in 2013 to US$985bn

● The HSBC and JSE mining indices declined by 23% and 21% respectively in 2013, while the

Dow Jones and FTSE-100 rose by 27% and 15% respectively

● Gold miners hardest hit with the segment losing 40% off its market cap to US$110-bn


Both SA and international mining indices have underperformed the general markets

Mine 2014 • Realigning expectations 35 PwC • June 2014; Source - Bloomberg

● Source: IMF

27%

15%

(23)%

How should the industry respond to long-term and

short-term trends?

21

1 – The industry needs to make money again

● Capital providers will not return to the

sector unless their investments yields a

strong return

● The focus needs to be on cash returns –

not production growth

● Cost control is fundamental to improving

cash returns

● Full transparency over total costs facing

the mining industry. Launch of All-in Costs

and All-in Sustaining Costs metrics

● Diversification of geographic and

operational risk essential


Equity and debt investors need to return to provide funding to grow the industry

22

2 – The industry needs to innovate

● Innovation can help the industry enhance

profitability, address labour shortages,

costs and develop technologies required in

more difficult conditions (deep level,

remote locations, etc).

● Areas of innovation for mining companies:

Truck and process plant activities

Remote operator controls

Drill and blast technologies

Reef-boring technology

(AngloGold Ashanti SA mines)

Deep-level mechanised mining (South Deep)


Technology and R&D critical to the future of mining

23

3 – The industry needs to mechanise

● Mechanisation is critical for the future of the

mining industry as it enables the mine to be

run more efficiently, safer and attract the right

skills

● Critical areas of mechanisation at our South

Deep mine:

- Move the man from the ore face

Remote operator controls for most machines

Underground workshops to maintain and repair equipment

De-stress mining

Supported by world-class surface infrastructure


Mechanisation will ensure a safer, more modern and more profitable mine

24

4 – The industry needs to upskill to survive

● Mechanisation is critical for the future of the

mining industry as it enables the mine to be

run more efficiently, safer and attract the right

skills

● Critical areas of mechanisation at our South

Deep mine:

- Move the man from the ore face

Remote operator controls for most machines

Underground workshops to maintain and repair equipment

De-stress mining

Supported by world-class surface infrastructure


From Jurassic to Joystick mining

25

5 – Sound ESG policies to be maintained and implemented

Moving from philanthropy to systematic creation of shared value, recognising the impact of the

GDP multiplier effects


Creating Shared Value with our communities and other stakeholders

26

6 – Better communication of the mining sector’s benefits (1)

World Gold Council – The direct economic impact of gold in 2012

● >$210bn Gold’s total direct economic value-add contribution (GVA) to annual global GDP

across 15 largest gold producing and 13 largest gold consuming countries

This includes:

• $25bn Gross value added from recycling gold

• $70bn Gross value added from gold jewellery

• $38bn Gross value added from gold bars and coins

• $4bn Gross value added from use in technology fabrication

● >$78bn Gold mining’s economic value-add contribution (GVA) across 15 largest gold

producing countries


Illustrate the gold industry’s direct economic impact

27



Illustrate the gold industry’s total value creation and impact

World Gold Council - Total global expenditure by leading gold companies to employees,

governments, capital providers, suppliers and communities:

2009: $30.5bn 2012: $55.6bn

2009 2012

Start 0 0

Payments in country (producing operations) 23,320 39,243

Payments in country (non-producing operations) 1,756 5,425

Payments out of country 4,975 10,926

2009 2012

Start 0 0

Payments in country (producing operations) 23,320 39,243

Payments in country (non-producing operations) 1,756 5,425

Payments out of country 4,975 10,926

28


• GDP growth is essential for

governments targeting effective

transformation

• Growing the mining economy,

especially for resource-rich

developing countries, has significant

direct and indirect impacts

• Mining punches above its weight

with its GDP multiplier effect through

procurement, socio-economic

spending in mining communities and

technology transfers


The mining economy has large multiplier effects

Source: Facts about mining ins South Africa (South Africa Chamber of Mines, November 2012), The Socio-Economic Impact of Newmont Ghana Gold Limited (Newmont

Ghana Gold Limited, June 2011), The economic contribution of large scale gold mining in Peru (World Gold Council, May 2012). South Africa: IDC and Quantec study

Mining has

boosted RSA

GDP by R468

billion or 18.7%

of total GDP

~2.5x for

South

Africa

~3.2x for

Ghana

~1.7x in

Peru

29


• Mining punches above its weight

with its GDP multiplier effect

• One direct mining job supports one

indirect job and one impacted job

• …in SA, one job supports on

average around nine dependents


Job and livelihood multiplier effect is significant

Note: Peru study based on five mines and Ghana study based on analysis of one mine

Source: The Rise of Resource Nationalism report (South African Institute of Mining and Metallurgy, February 2012), The Socio-Economic Impact of

Newmont Ghana Gold Limited (Newmont Ghana Gold Limited, June 2011), The economic contribution of large scale gold mining in Peru (World Gold Council, May 2012);

IDC and Quantec study

~27x for S.

Africa

~28x for

Ghana

~18-19x in

Peru

30

7 - Establish partnerships with stakeholders


Job and livelihood multiplier effect is significant

Challenge Mitigation

Partnership Working and collaborative partnerships between

miners, governments, labour and communities

Balance Balance long-term growth strategies with short-term

fiscal imperatives

Transparency Total transparency in reporting individual asset

performance

Certainty Long-term commitments from governments not to

change the rules of the game

Simplicity Simple rules of the game that align interests and can

be applied to all assets

How Gold Fields has responded

32

The transformation of Gold Fields


The journey started with the speech to the Melbourne Mining Club

Building a sustainable business at US$1,300/oz

Portfolio Review

Aug - Dec 2012

Sibanye Gold

Dec - Jan 2012

New Cash Strategy

2013 Business PlanA New Paradigm

15 April 2013

Gold Price

< US$1,300/oz

A Fundamental Shift In Strategy

“It’s all about cash – not ounces”

33



A structural shift in the production and cost base

US$450 million removed from cost base in 2013

0

200

400

600

800

1 000

1 200

1 400

1 600

1 800

0

100 000

200 000

300 000

400 000

500 000

600 000

700 000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2012 2012 2012 2012 2013 2013 2013 2013 2014

Gold Produced Gold Price AIC

Gold Fields’ costs under control ● 7 out of 8 mines at or below gold price

(US$1,283/oz)

● 8th Mine (South Deep Project) cash break-

even end 2014 early 2015 – (Q1 2014:

US$1,597/oz v Q1 2013: US$2,223/oz)

● 2014 Group guidance ~2.2 Moz at AIC of

US$1,150/oz

2012 Q1 2013 2013 Q1 20142014

Guidance

AISC US$/oz

1,310 1,303 1,202 1,066 1,125

AICUS$/oz

1,537 1,476 1,312 1,114 1,150

Production oz

2,031 477 2,022 557 2.200

34



International diversification

An international gold producer operating in good countries

Australia

43%

Ghana

28%

Peru

13%

● In 2013 Gold Fields transformed its production base

Unbundling of Sibanye Gold in South Africa

Acquisition of Yilgarn South assets in Australia

Marginal production stopped in Australia & Ghana

● 100% mechanised mid-tier producer

16%

28%43%

13%

2014 Production Guidance*

South Africa Ghana

Australia Peru

* Attributable production

.

0

500

1000

1500

2000

2500

3000

3500

2012 2013 2014*

Attributable Production

South Africa Ghana

Australia Peru

* 2014 Guidance

SA

16%

35

Conclusion: The gold mining industry at a crossroads


The industry needs to work with stakeholders to grow the mining economy

Mining

Economy/

GDP

impact

Mining

Economy/

GDP

impact

• Long term collaborative

partnerships (Miners,

Governments, Labour,

Communities, Dev. Agencies)…

• … leading to more investment

• The result: increased

employment, development

and GDP growth____________________________________

__

• Rising costs of mining….

• … combined with a greater

fiscal take…

• …jeopardise further

investment

• The result: loss of jobs, a

shrinking pie

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