Summary
- Gold Fields is one of the worst-performing gold producers this year, down 11% year-to-date, which I attribute to a weaker 2023 outlook than some might have hoped for.
- Aside from group AISC that are expected to increase ~20% year-over-year (2023 vs. 2022), Salares Norte is behind schedule and won't pour gold until Q4 2023, representing a six-month delay.
- The good news is that 2024 should be a much better year with partial commercial production from its monster Tier-1 scale asset, Salares Norte, helping to claw back lost margins.
- However, with Gold Fields still not offering a meaningful margin of safety and up against tough comps because of last year's outperformance vs. peers, I see better opportunities elsewhere for now.
2022 was a tough year for the Gold Miners Index ( GDX ) with many companies missing on production and costs and generating underwhelming free cash flow figures relative to their valuations. One obvious example was sector-leader, Newmont ( NEM ), which generated just ~$1.07 billion in free cash flow in FY2022 (down 58% year-over-year despite a higher gold price) compared to an enterprise value of ~$36.0 billion. Fortunately, Gold Fields ( GFI ) was one name that actually beat its initial cost guidance, an impressive feat given that nearly every major either missed by a mile or came in near the top end of their stated range, including those benefiting from high-grade mines and hydro electricity, like Agnico Eagle Mines ( AEM ).
However, while Gold Fields delivered on production and operating costs last year ($1,105/oz vs. $1,140/oz to $1,180/oz), the 2023 outlook isn't nearly as robust, with all-in sustaining costs [AISC] expected to increase over 20% year-over-year. Although this is temporary and related to sustaining capital, we will see material margin compression and decline in free cash flow without further help from the gold price. So, while I see Gold Fields as a solid buy-the-dip candidate, I'm not sure that it will outperform its peer group given the weaker free cash flow profile this year and margin compression. Hence, I still don't see a low-risk buying opportunity even after the 28% plus decline in the stock to US$9.40.
Q4 and FY2022 Production
Gold Fields released its Q4 and FY2022 results last month, reporting quarterly production of ~600,000 ounces of gold and FY2022 production of ~2.40 million ounces of attributable production. Fortunately, this still translated to higher production year-over-year, with help from its Australian Operations, and another strong year from South Deep in South Africa. Regarding operating costs, although Gold Fields' all-in sustaining costs were up on a year-over-year basis and it saw 10.7% effective mining inflation across its portfolio (this was worst in Peru at 14.3%), the company at least did a better job on forecasting this inflation than its peer group that guided too low.
Gold Fields - Quarterly Production by Mine (Company Filings, Author's Chart)
Digging into the operations a little closer, South Deep had a phenomenal year, producing ~316,000 ounces at AISC of $1,294/oz, which was an improvement from the year-ago period despite inflationary pressures. This translated to adjusted free cash flow of $129 million (FY2021: $97 million), and the company commissioned its 50-MW solar plant in Q4 and also successfully put negotiated a two-year extension to its wage agreement, providing labor stability through to 2026. Finally, on productivity, long-hole stoping tons per rig/month remained well above FY2020 levels at 13,100, and the decline year-over-year is only due to mine layout according to the company.
Moving to Cerro Corona in Peru, it was a better year here as well, with ~260,000 gold-equivalent ounces (GEOs) produced with only a slight step-up in unit costs, helped by higher recovery rates. At Tarkwa in Ghana, production increased to ~478,400 ounces (2% increase year-over-year) due to slightly higher tonnes processed, with all-in sustaining costs of $1,248. Finally, at its largest Australian operation, St. Ives, production was down slightly year-over-year (~376,700 ounces vs. ~393,000 ounces) because of fewer tonnes milled, but AISC came in at industry-leading levels at just $1,030/oz, well below the industry average of ~$1,300/oz.
Given the solid production and cost performance, Gold Fields finished the year with adjusted free cash flow of ~$855 million before capital expenditures related to its major growth project (Salares Norte) or ~$431 million after Salares Norte capex and interest, and this was before the net Yamana ( AUY ) break fee because of Yamana's choice to go with another suitor. While this free cash flow figure isn't that significant a figure for a company with an enterprise value of ~$9.0 billion, Gold Fields exited the year with a stronger balance sheet, with net debt down to just $704 million (Q4 2021: $969 million). Let's dig into group costs and recent developments:
Operating Costs and Recent Developments
Looking at Gold Fields' cost performance, group AISC increased by 4% year-over-year from $1,063/oz to $1,105/oz, with costs coming in well below the industry average and below that of its peer group. As noted earlier, solid cost performance ($1,041/oz vs. $1,065) at its Australian Operations helped (specifically Granny Smith and Gruyere (50%), as did higher production and lower unit costs from its relatively high-cost South Deep Mine in South Africa. And with Gold Fields working on potentially implementing a micro-grid to reduce costs at its St. Ives operation, this could halve electricity rates per kilowatt-hour.
Gold Fields - Annual Production & AISC (Company Filings, Author's Chart, Company Guidance (2023))
From a bigger picture standpoint, Gold Fields noted it remains quite confident in its Salares Norte Project (Chile) having industry-leading AISC below $750/oz once in production, with life-of-mine AISC estimated at $745/oz. These costs are over 40% below the FY2022 industry average of $1,300/oz and would go a long way to pulling down Gold Fields' consolidated costs with a massive operation (500,000 GEOs in 2024 and ~355,000 GEOs over the life of mine) with extremely high margins. So, while we aren't seeing the benefit of Salares Norte just yet with project completion at 87%, this will be a differentiator for the company post 2024 as few other producers are bringing a project online that represents over ~20% or more of total production.
So, what's the bad news?
While Salares Norte is an incredible project and waste movement is tracking well against plans (~51 million tonnes moved to date) and the company reached first ore at its Brecha Principal Pit in Q4, the overall project is well behind schedule. In fact, first gold pour is now expected in Q4 of this year vs. the end of Q1 previously, and with a relatively long ramp-up, it could be summer 2024 before the mine reaches commercial production. The result is that we'll see minimal contribution from the asset in 2023 (as little as 20,000 ounces this year), before it ramps up to 500,000 ounces in 2024 and ~600,000 ounces in 2025.
The other negative development was that Gold Fields reported ~$378 million in combined impairments from Cerro Corona (Peru), Tarkwa (Ghana), and its Far South East Project (Philippines). Gold Fields noted the impairments were because of inflationary pressures and an increase in discount rates (4.8% to 8.1% at Cerro Corona and 8.3% to 15.9% in Ghana), plus the investment at the Far South East Project being written down to a carrying value of zero. This isn't a colossal figure and is certainly much better than the large write-downs we saw in the previous cycle, such as Goldcorp's $2.3 billion write-down at Cerro Negro after over-paying for Andean in 2010 . Unfortunately, this is a trend that we could see more of sector wide.
2023 Outlook
As for Gold Fields' 2023 outlook, it came in well below my expectations, partially lending to the delayed start-up at Salares Norte. Based on the guidance mid-point, Gold Fields is expecting to produce just ~2.38 million attributable ounces (AGM 50% ownership included) at all-in sustaining costs of $1,320/oz. If the company can't beat this figure, this would translate to a 19% increase in costs year-over-year, a massive increase that would lead to considerable margin compression. In fact, even if we assume an average realized gold price of $1,900/oz, AISC margins would dip from ~$700/oz to ~$580/oz.
Gold Producers - Cash Costs, AISC & AISC Margins + 2023 Estimates (Company Filings, Author's Chart & Estimates)
While this outlook is disappointing and Gold Fields' margins are going to be going in the opposite direction of most of its peers given that many saw cost blowouts in 2023 with flat to lower costs expected this year, this is temporary. This is because Salares Norte will help to pull down costs in 2023 and we should see AISC dip back below $1,200/oz in 2024 and 2025. That said, with up to ~$1.2 billion in capex and lower cash flow generation due to weaker margins, I would expect to see a material decline in cash flow this year which isn't ideal relative to other producers that are set up for year-over-year improvements due to lapping much easier comparisons from 2022.
Valuation and Technical Picture
Just over a month ago, I wrote on Gold Fields , noting that while the company would likely deliver into its 2022 guidance, an impressive feat given the challenging environment, there was no margin of safety accounted for in the stock at US$12.10. This is because the stock was trading at over 6.0x forward cash flow, above its 10-year average cash flow multiple. Since then, the stock has declined by over 20%, and while it's becoming more reasonably valued, I still don't see enough margin of safety here to rush in and buy the dip. The reason? Even at a share price of US$9.40, the stock is trading at ~5.1x forward cash flow and only a 22% discount to what I would consider being fair value (6.5x forward cash flow = US$12.10 per share).
Gold Fields - Historical Cash Flow Multiple (FASTGraphs.com)
Regarding large-cap producers, and especially those with exposure to Tier-3 jurisdictions (South Africa), I prefer a minimum 35% discount to fair value, and this translates to an ideal buy zone of US$7.90 or lower vs. what I believe to be a conservative fair value of US$12.10. Obviously, there's no guarantee that the stock must sink to these levels, and there's a good chance it doesn't get there if gold's new floor is at $1,700/oz. However, I prefer to get the right price (meaningful discount to fair value) or pass for cyclical stocks unless the story is very special, and while I think Gold Fields is a solid name, I don't see it as a top-10 producer. Hence, I don't see any reason to rush into the stock here.
Summary
Gold Fields put together a solid year in 2022 and was one of the few producers to beat its initial FY2022 cost guidance ($1,140/oz to $1,180/oz). However, 2023 will be a much higher-cost year with elevated sustaining capital before we see a material drop off in unit costs as Salares Norte enjoys a partial year of commercial production in 2024. Previously, I saw Salares Norte as a game changer, with the potential for costs to decline below $1,050/oz (consolidated basis) with a Tier-1 scale asset with sub $750/oz AISC. However, it now looks like Salares will only claw back lost margins from sticky inflationary pressures, making GFI less of a standout among its peer group.
To summarize, while I think GFI would become very attractive if it were to dip below US$7.90, I don't see a case for investing in the stock here at US$9.40, and I think there are a couple of more attractive bets elsewhere in the sector.
For further details see:
Gold Fields: Margin Compression On Deck