GFI - Gold Fields Likely Won't Be This Affordable Again

2023-03-08 18:54:50 ET

Summary

• Gold Fields Limited's recent capitulation is likely overplayed and presents investors with a value gap.
• Despite challenges such as Eskom power cuts, mine commissioning delays, and systemic risks in Ghana, Gold Fields' production remains best-in-class and is growing exponentially.
• Clearer weather in Australia and high grades from the South Deep mine, accompanied by a pending launch of an open-cast project in Chile, formulate a bullish argument.
• Gold Fields stock is relatively undervalued and presents investors with a compelling dividend that yields above 5%.
• This pro-cyclical stock could be one of the primary breadwinners in the coming quarters.

Gold Fields Limited's (NYSE: GFI ) pro-cyclical nature means that its more than 17% month-over-month capitulation is of no surprise, especially considering a concurrent decline in gold prices induced by a volatile global monetary policy environment. However, in light of Gold Fields' uncertainty, we decided to initiate coverage on a stock that we deem undervalued, oversold and underappreciated.

Similar to our other South African mining stock reports on Seeking Alpha, today's thesis starts with a parsimonious outlook of Gold Fields' operations, which will be expanded upon in follow-up articles. Moreover, valuation and dividend metrics are brought into play.

However, without further ado, let's explain why we believe Gold Fields stock is undervalued after its recent slump.

Gold Price Argument: An Equilibrium State of Affairs

Technically speaking, gold looks overvalued, as implied by the commodity's 200-day moving average chart. On top of that, since the turn of the year, excessive bullish chanting from the media makes one wonder whether a price ceiling has been reached.

In our opinion, both a bearish and bullish argument can be drawn for gold. Setting technical price levels aside, seminal research suggests that gold prices succeed whenever tail risk is heightened, and fear of an economic event is present among market participants. Thus, drawing from today's inverted yield curve (which economists deem signals an incoming recession), it can be said that gold possesses a few noteworthy tailwinds.

Although many other factors need to be considered before providing a verdict on gold's trajectory, a few valuable inferences can be drawn from the aforementioned technical and fundamental factors, one of which is that there is no linearity in a bullish or bearish argument without the obstruction of a counterargument.

Operational Talking Points

South Deep Is Handling The Eskom Crisis Effectively

South Africa is in the midst of a power crisis as Eskom's collapse has provided the nation's miners with a stress test. As explained in many of our previous articles, it is unlikely that Eskom will recover, and a gradual decline into the abyss is the most likely scenario.

Despite its load curtailment concerns, Gold Fields' South Deep mine in the Wits Basin has stood strong, delivering robust full-year results in 2022 as production and free cash flow grew by approximately 12% and 32.9% , respectively.

Looking ahead, it is unlikely that Eskom's situation will improve, and the most realistic trajectory for SA mining is self-generation or a divide in municipal-level energy generation. Nonetheless, Gold Fields has shown that it can cope with systemically-induced risks, lending a premise that its SA-Based assets are underappreciated. In addition, Gold Fields has wrapped up its feasibility study of South of Wrench, and indications suggest that production will assume in the latter part of 2023.

Concerns In West Africa

West Africa attributes to nearly a third of Gold Field's production and approximately 25.6% of the firm's free cash flow. Thus, the segment's 4% year-over-year production drawdown was not well received by the financial markets.

During 2022, the company's Damang asset delivered lower due to a pit cutback project. In addition, Asanko delivered lower throughout, and all-in costs increased by 10% year-over-year amid regional inflation.

Gold Fields has yet to provide a comprehensive update on Damang and Asanko. As such, we cannot determine whether the recent drawdown in production was unusual or non-core. Moreover, Ghana is currently subject to heightened social unrest , which adds country-specific risk to this segment, providing us with a premise that upgraded guidance for 2023's full year is highly unlikely.

Australian Operations Are Growing Linearly

Australia is Gold Fields' cash cow, and we are very excited about the country's mining activities overall.

Gold Fields' Australia segment's production surged by 4% year-over-year, and we believe more is to come as an inflection point has been reached regarding weather delays that set most regional miners back during 2022. The segment's CapEx is anticipated to notch up due to higher maintenance costs in 2023 amid pre-strippings at Gruyere and an equipment cycle upgrade, which includes a new pebble crusher at Gruyere.

All in all, there aren't any indicators suggesting that Gold Fields' Australia unit is set to abate its robust performance in what's left of 2023.

Salares Norte Project Update: Lowering The Cost Base

For those unaware, Salares Norte is a high-grade open-cast gold-silver project based in Chile, which is 100% attributable to Gold Fields. The mine's feasibility study was completed in 2018, conveying a mine life of 10 years and average production of 450 000 ounces for the first seven years.

As previously planned, Gold Fields was ready to commission the mine early this year. However, weather delays and skills sourcing contractor debacles have pegged back production to late 2023.

Despite its delays (which have caused an unwanted draw on Gold Fields' CapEx), the asset is believed to host high-quality oxidized minerals that can be mined at low-cost. All in all, the asset is anticipated to yield financial synergies while extending Gold Fields' footprint in Latin America (as a proxy to Africa).

Valuation and Dividends

At a price-to-book ratio of 1.93, many might argue that Gold Fields stock is in fair value territory. However, a closer look suggests that the stock's price-to-book multiple is at a cyclical low, indicating that the asset possesses a value gap.

Furthermore, Gold Fields provides its investors with carry returns in the form of a cash dividend. In our opinion, the stock's 5.36% forward dividend yield is compelling, and the security's exponential dividend payout growth forecast can be substantiated by its status as a cyclical gold miner.

Final Word

Gold Fields Limited's substantial month-over-month drawdown provides investors with an opportunity to secure an investment in the stock at a low-cost basis.

Although the gold price is an opaque argument, Gold Fields Limited is benefitting from exponentially growing production in South Africa and Australia. Yes, the firm's geopolitics and production alike in Western Africa are concerning. However, concluded development at Salares Norte might be priced favorably by financial market participants.

Key metrics suggest that Gold Fields Limited is relatively undervalued and presents a compelling dividend, which yields above 5%.

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