Sun setting on SA gold mines?
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NICK Holland is CEO of Gold Fields.
SUMMIT TV: Gold Fields has had a tough September quarter along with the other mining companies in South Africa, net earnings falling from R1.6bn to R1.4bn. It seems the strike action and fire cut about 60,000 ounces from production but most of that is going to be felt in the December quarter?
NICK HOLLAND: That’s right — because the strike went on for most of October we’ve estimated the strike will probably cost us another 100,000 ounces and that will hit the December quarter so that’s not going to be too good either in terms of the overall impact. The good news is at least we are back to work and, from my perspective, we have to look back and say the fact that we had no injuries of substance to 40,000 employees during this long period of time and we had no damage to property, the fact that our teams managed this in a fantastic way — and we didn’t capitulate on the 2011 wage agreement — for me is an outstanding result in the face of a very difficult situation.
STV: How confident are you that it’s not going to flare up again? You do allude to dissatisfaction with NUM National Union of Mineworkers) management that’s out of your control…
NH: There is always a chance it could flare up — but the one thing we’ve just gone through is a process whereby workers have lost their basic pay for a significant period of time, they’ve lost their bonuses and we have lost a lot of money as well. Nobody has won in this process. We haven’t capitulated on wages and, other than a nominal adjustment that we had to do in terms of the 2011 wage agreement in terms of grading levels and entry levels, it’s the same as where we were before. If people want to embark upon these actions in future it’s not going to generate a different response from us and I think the bulk of the workers didn’t want to strike and that’s the important thing.
STV: Is there anything that Gold Fields has to look at in terms of the way relationships have been with its mineworkers that needs to change?
NH: We need to engage more directly with our workforce — in the past we relied on working through the branch structures of the various unions, and that’s fine as a strategy but it’s not the only way we can engage with the workforce. The other way to engage with the workforce is directly, with two-way communications and a dialogue where we really understand their issues and what their concerns are, and we also need to communicate what our objectives are. I am looking for a whole new way of communicating and a whole new way of working together that is required if we are going to sustain the gold industry in South Africa that’s been declining in the past few years.
STV: You’ve indicated the risk of restructuring in South Africa has increased significantly — which mines or shafts may be vulnerable to closure, and what is your thinking around what this would entail?
NH: If we carry on the way we are going, with production declines in South Africa of between 5% and 7% per annum and costs in rand terms continue to escalate between 10% and 15% per annum and a blowout on the gold price, then we are heading for a significant restructuring in a short period of time, probably within two or three years — so we need to do something different. I remember four years ago when I got into this job I opened a dialogue with the unions about changing working arrangements and looking at possibly working Saturdays, which would add another month of production every year. I’m glad to see the industry, through the Chamber of Mines, has started to pick that up again. Those are the things we need to think about to save the industry and I think we can if we do the right things.
STV: Going back to my point about closures are there any mines that are vulnerable?
NH: There’s a number of shafts that are vulnerable if we don’t do something different. There’s 13 shafts at KDC — without going through all of them and how much production is attributable to each because I prefer to look at the overall business. We will focus on individual shafts but we also need to focus on the whole structure of the operations and the way we do things and the processes we are involved in — so rather than single out particular shafts saying "this one with so many ounces of production and so many ounces is in danger", I prefer to say "the business overall needs an overhaul". If we can just get a little more productivity, like an extra blast every month and an extra metre a month, that would already make a big difference so let’s start there. If we can do that and turn the declines we’ve seen for five years around, the result will be fantastic and that’s the best we can hope for.
STV: Would you consider splitting or selling off the South African operations?
NH: This has been an ongoing debate that we’ve seen that I guess has been fuelled of late by foreign investors that have retreated from the share registers of some of the mining companies in South Africa. It’s not just about that — it’s also about how you run the assets where you have to have profitability and productivity. If you just repackage the assets in a different corporate structure and you think that’s going to create value, it’s not that simple. It comes down to looking at the issues and how does one turn the performance around? If you do that in tandem then there are prospects of success — but just repackaging assets per se isn’t going to be the answer.
STV: So that’s a no…
NH: There is never a no on this kind of issue because it is an ongoing debate — in the industry we are not the only ones looking at this. I’ve probably thought about this every year I’ve been on this job and we will continue to think about it as the business evolves. The business has already evolved a lot over the past four-and-a-half years, with 68% of production having come from South Africa where that’s now down to 48% and in that period we’ve added 700,000 ounces of international production so the business has changed already and you will see more changes in time.
STV: You initiated this review of your strategy and the way you go about your business a few months ago. What are some of the resolutions?
NH: No M&A heroics — but that doesn’t mean no M&A. Certainly the gold sector has become cheaper over time and if there are opportunities for us to acquire interesting production ounces in reasonable jurisdictions, we are always going to be on the lookout for that. This all culminated in a presentation I was asked to do to the Melbourne Mining Club in July, where I decided I’d look at the industry and where we’ve been over the past five years and sadly although the gold price has gone up significantly over that time we haven’t opened up margins or made more money for shareholders. That has to be the key issue — how do we make more money for shareholders? That means we have to say it’s not ounces for ounces’ sake and it’s not projects because we like growth, and this means we are going to have to look at things differently. I think it’s challenging but also exciting.
STV: Are there projects that are going to fall of the radar as a result? You say Chukapaka in Peru is not going to deliver acceptable returns…
NH: There could be. That one is not off the table yet — what we’ve said is the configuration for exploiting that ore body is not optimal. It’s a big ore body and one of the most significant discoveries in South America in the past 10 years but our challenge is to deliver that in a way that gives robust returns for shareholders and we are focused on that.
