Gold Fields’s spending plans leave much to ponder

WHAT grade might one give a CEO whose company has gained nearly 200% so far this year? An A, surely? In the rarefied world of gold shares, however, you might opt for a B or even a B- if that company is Gold Fields. That’s one way to read the outcome of a presentation on November 12 in which the firm’s spending plans left analysts asking questions.To start with the good news: as part of its capital allocation plans, Gold Fields restructured its shareholder payout policy, in terms of which it will pay 35% of free cash flow before discretionary capex and a minimum of 50 US cents per share annual dividend. Rival gold miners have announced similar schemes, aimed at sharing the vastly enhanced cash flow from a higher gold price. But shareholders in Gold Fields will also receive $500m in special dividends and/or share buybacks over the next two years.The concerns, however, start with the group’s gold production plans over five years, and beyond. In terms of this, output is forecast to be 2.5 million to 2.7 million ounces, increasing to about three million ounces from about 2030. Three steps are being taken to achieve this, all of which have been questioned.First, Gold Fields has increased its reserve price to $2,000/oz. Second, it has planned to spend $2bn in “discretionary capital”, either extending the lives of mines or investing so they remain cost competitive. Third, it has updated the capital cost of a project in Canada called Windfall to $1.7bn-$1.9bn, double its $790m capital estimate in 2022, when it first bought a stake in the mine.Nedbank Securities analyst Arnold van Graan, who is among those who are more upbeat about Gold Fields’s proposals, said higher capex will be a feature of the sector in the future. His view is that the higher gold price is being leveraged by Gold Fields at a time when it needs a plan.But other analysts had reservations. In a flash note to clients, UBS bank expressed concern. It said Gold Fields’s guidance implied “weaker cash generation than it expected”, while the new dividend policy “makes little impact”.Will increasing the reserve price translate into profitable gold, asked RMB Morgan Stanley analyst Christopher Nicholson at the presentation. Another poser is how discretionary the $2bn capex is, given that failing to spend it would involve cutting the life of the newly commissioned Salares Norte project in Chile by four years.Gold Fields CEO Mike Fraser said in an interview that the increase in the firm’s reserve price is to level the playing field so that brownfields production growth has a chance to compete for capital with greenfields or merger & acquisition (M&A) opportunities. The upgrade is due anyway, he says. The long-term price consensus for gold has been increased to $2,300; never has the discrepancy between reserve price and what’s happening in the market been so wide, he adds.Furthermore, Gold Fields is not mining lower grades, and sometimes increasing reserves of economically mineable gold assumes incorporating much lower than average grades. That’s not happening at Gold Fields, he said.To give Fraser his due, it’s probably worth stepping back to consider the company’s plight in 2022, shortly after the departure of CEO Chris Griffith. This was amid shareholder reluctance to support his $6bn takeover of Canadian miner Yamana Gold.Griffith was motivated by fears of a production shortfall. According to some estimates, gold production was expected to fall about 600,000oz a year to 2.1 million ounces by 2030. For two years, Gold Fields was in strategic drift as the capable miner Martin Preece was acting CEO.For most of 2024, Fraser was putting out fires at Gold Fields. Salares Norte ran into production problems, which led to capex overruns. There were problems at the Australian and South African mines, which resulted in a one-fifth production downgrade in 2024. Only this year has the opportunity of establishing a strategic pathway for Gold Fields truly come into view.Still, analysts are unconvinced. The capital allocation plans throw the spotlight on the mixed bag of Gold Fields’s asset base and raise questions of whether this is a company that will be driven back to M&A in the long run, said one analyst, who asked to remain unnamed. Fraser said at the capital markets day that M&A is the group’s least preferred production growth option because it is the most expensive.That is true, especially in today’s gold market. But Fraser hasn’t fared badly in this regard either. This year alone, he spent $3.8bn buying out joint venture partners Gold Road Resources ($2.4bn) and Osisko Mining’s stake in Windfall ($1.4bn). Buying shares in known assets, especially from joint venture partners, is the best brand of M&A available.On top of that, both deals were done well before gold defied its sceptics by charging up another $1,000/oz to its currently heady levels of $4,000.A version of this article first appeared in the Financial Mail.The post Gold Fields’s spending plans leave much to ponder appeared first on Miningmx.Weiter zum vollständigen Artikel bei Mining.com Weiter zum vollständigen Artikel bei Mining.com