Are $700/oz production costs around the corner?
Interesting article about Gold Fields and they way they are looking at costs going forward. Seems to be a rational approach, but one that flies in the face of the current convention in the PM mining industry.
Relevant to PM investors is a shift away from "cash costs," which often vary greatly and are often poorly understood/applied by investors. It is not infrequent to see MBs posters make some valuation calculation based on "cash costs" of $350/oz and POG north of 1,000/oz and conclude that "profits" or "cash flow" could be as high as $650/oz. In this case, the NCE rational proposed by GFI might provide a more traditional yard stick?
If this is the case get use to seeing $700/oz "costs" for gold production.
Gold Fields targeting $800m free cash flow by Dec 31, says new CEO Holland
By: Martin Creamer
Published on 2nd July 2008
The gold industry has moved away from saying cash costs are king, ounces of production are king, reserves are king, and is now focused on the fundamentals of creating free cash flow, new Gold Fields CEO Nick Holland reveals, disclosing simultaneously that the company is targeting a free cash flow of $800-million by December 31 this year.
Holland tells Mining Weekly Online in an exclusive interview in Johannesburg that the $800-million is based on an all-in cost per gold ounce of $700/oz-to-$750/oz, production of four million attributable ounces by December 31, and an assumed gold price of $900/oz.
This could provide $200/oz of free cash flow and a business value to shareholders of $800-million.
"That's what we are striving to achieve by December 31," Holland says, adding that, by December 31, Gold Fields' new projects on three continents will have reached full production.
At that stage, Gold Fields' non-South African production will rise to 40% of total production.
The new projects at Tarkwa in Ghana and Cerro Corona in Peru are expected to add 350 000 attributable ounces to the group's total, and Australian expansions another 60 000 oz.
As at the end of the last quarter, Gold Fields had produced 3,3-million ounces in the calendar year, which positions it well to achieve four-million ounces by December 31, given that the new projects should have reached full production by that time.
"We are moving to a new enhanced production level," Holland says, adding that the company has a focus on the all-in cost of production - or the notional cash expenditure (NCE) per ounce - rather than cash costs per ounce.
"The accounting profession, I think, has been responsible for capitalising more and more expenses that ordinarily would have been working costs, like, for example, ore-reserve development costs.
"Over the years, people have tended to capitalise all of that. It makes their cash costs look good, but people see that the capital's gone up, and find that, although their cash costs look good, they don't make any cash, and you say, ‘but why?' and it's because too much has been capitalised.
"We are saying forget about that. What you are to look at is the NCE per ounce, which is capital and operating costs expressed together on a per-ounce basis, because it doesn't matter where the dollar is spent, in the capital budget or in the operating cost budget, it is still spent, and we need to know what the total cost per once is after all of that, and that's going to be the driver for us," Holland tells Mining Weekly Online.
"I am hoping for us to achieve between $700/oz and $725/oz all-in NCE by the end of December, not the December quarter, but by the end of December. I want us to be making four-million ounces attributable and achieving that at between $700/oz and $750/oz. If we have a gold price of $900/oz, the business value that I want to give to shareholders is to make $200/oz free cash flow before tax," he says.
NCE per ounce is an internal measure that Gold Fields executives have decided to adopt "because at the end of the day, this determines whether or not money is made".
"The industry has moved away from saying cash costs are king, ounces of production are king, reserves are king. The industry is now focused on the fundamentals of creating free cash flow.
"On my travels around the world I have talked to most of the fund managers and the key message we are getting from investors is that they are focusing on free cash flow and that is what's important," Holland emphasises.
miningweekly.com
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