JOHANNESBURG () -- Gold Fields [NYSE:GFI; LSE:GFI] quarterly results for September 2006 show gold production is down slightly at over 1 million tonnes, cash costs rise to $350 an ounce, operating costs are $30 million a tonne and operating profits are down slightly at $280 million with operating margins down slightly at 42%. Headline earnings are $98 million and net earnings are also $98 million. Here's a chat with Gold Fields CFO Nick Holland about the results and rising costs.
GIULIETTA TALEVI: Nick, one of the major concerns of the September quarter from the analysts was the rise in cash costs - can you tell us why costs were up over the quarter?
NICK HOLLAND: We should talk about costs firstly in rand millions, then we can talk about the unit costs. Costs in rand millions went up 10% quarter on quarter to R245 million (US$33 million)- against that background the rand depreciated against the US dollar by about 70 cents from 6.39 to 7.10 and the Australian dollar went from 4.77 to 5.38. It's important to recognise that, because there is a translation effect in that increase in costs as a consequence - translating the costs from operations in Ghana, Australia and Venezuela into rands saw an effect of about R110 million (US$15 million) with the rand weaker against those currencies. That's almost half the increase already, and then we had the annual wage increase in South Africa that kicked in 1 July 2006 of around 6%. In addition we had an increase in volumes against the previous quarter - both in terms of square metres mined and development.
GIULIETTA TALEVI: You had a higher rand gold price over the quarter with the weaker rand and the gold price not really going anywhere, and you had these higher costs - it seems as if you couldn't translate the higher rand gold price you received over the quarter into higher operating profits.
NICK HOLLAND: Correct. The main reason for that is we've had decreasing grades at Driefontein and Beatrix - at Driefontein we've been impacted by instability at the shaft pillar at the very high grade No 4 shaft, and as a consequence of that we've lost a lot of high grade panels we would normally mine. Driefontein's gold production quarter on quarter has gone down 800 kilograms, and in this industry where you have fairly high fixed costs - around 70% of your costs are fixed - with that kind of drop in gold production of course your unit costs are going to go up. That's inevitable. So I think the issue is it's not that we haven't controlled our costs - we've controlled them - regrettably we haven't got the gold, and in particular the grade. We've got the tons out of Driefontein, but we didn't get the grade.
GIULIETTA TALEVI: Do you expect this to improve in the next quarter?
NICK HOLLAND: We don't expect it to improve because the problems around the high grade No 4 shaft are going to continue for a number of quarters. We are looking at potentially accessing part of that ground - there's about 59 tonnes of ground in total around that shaft, but the affected area is around about 20 tonnes. We are looking at accessing that from alternative shafts - from the No 1 and No 5 shafts at Driefontein - so I think we are in for a tough period at Driefontein for at least the next two quarters. After that I would hope production would increase again closer to historic levels.
GIULIETTA TALEVI: Which operations are doing well? The Australian operations look as if they were performing pretty nicely over the September quarter?
NICK HOLLAND: We had a good quarter in Australia both at St Ives and at Agnew - both increased their production over the previous quarter. At Tarkwa in Ghana we were marginally off the previous quarter, but nothing material, and Damang in Ghana as expected did reduce - we moved out of some high grade pits that we knew were going to finish into lower grade pits. That's going to be down for a while until we get into new areas. Beatrix and Kloof in South Africa both increased their production, so I think if you took the Driefontein blemish out it would have been a very good quarter - but I think it's tough to get all operations totally on song in one quarter.
GIULIETTA TALEVI: I suppose that's one of the advantages or weaknesses of a diversified company. The operations in Ghana were affected by power outages - I read somewhere that power cuts reduced production by between 25% and 50% there, and that Gold Fields and AngloGold Ashanti [NYSE:AU] have suffered from this. Do you expect that situation to improve?
NICK HOLLAND: I don't think it's going to improve in the short term. Two-thirds of the power in Ghana comes from hydro-electric - the Volta Dam has experienced lower water levels allied to some breakdowns of oil-fired plants. The latter problem I think will be resolved soon, but the water problem at the dam won't necessarily be solved soon and there's been new consumers coming on board so the demand for power is increasing. Longer-term there are solutions in terms of gas lines from Nigeria, but I think it's probably inevitable that we are going to experience some sort of increase in power costs going forward.
GIULIETTA TALEVI: Future Gold Fields projects on the go include deepening the shafts at Kloof and Driefontein - when is that going to kick in?
NICK HOLLAND: Those projects start in earnest next year. It's going to take some years for each of those projects to come to full production - they are long life projects that will significantly extend the life of both Kloof and Driefontein, but it's going to be some years before we see the impact of those coming on line. Those are designed to replace some of the lost gold that we're going to experience from some of the other shafts - it's not going to increase overall production, but will ensure that we can retain production at these levels for a longer period.
GIULIETTA TALEVI: Will that mean higher costs going forward?
NICK HOLLAND: The cost estimates from the projects means it could well be that we can drop the costs, but at this stage I think it would be too ambitious to say overall costs would go down. I think we really need to see where we are when we get into those areas, but the feasibility studies seem to indicate that we could drop the costs.
GIULIETTA TALEVI: Your safety record isn't something we mention very often on Classic Business Day, but safety over the past quarter and year has been pretty poor - there's been nine fatalities in the September quarter, and that brings to 29 the number of fatalities this year. What is Gold Fields going to do to stop this? At depths of more than three kilometres below surface at which you're mining are you going to be able to stop the fatalities from taking place?
NICK HOLLAND: We do a complete analysis after each fatality takes place - we look for the root cause and whether procedures were or were not followed. Obviously if procedures are not followed we take action to make sure we remediate that, and that includes disciplinary action if people haven't followed what they should have done. Where procedures aren't in place we would look to make sure they're put in place - but what I can tell you is that 90% of the time it's not following procedures that results in fatalities. We are upping the overall efforts - you are quite correct and it's completely unacceptable to have these levels of fatalities. We have to work a lot harder to make sure that we don't have a recurrence of this going forward. It's very high on our agenda - if we can't mine safely we shouldn't be mining.
