Anyone who follows the gold market knows that the price of the metal, which is currently hovering around $1,200 per ounce, has put much pressure on mining firms. Gold Fields Ltd. (GFI, Financial), a South African firm with a global presence, has experienced the drop in profitability first hand. Despite a solid business model, promising projects, and a healthy balance sheet, the company has seen margins shrink continuously due to the drop in gold prices. Nevertheless, this stock is still held by important gurus such as Jean-Marie Eveillard, John Paulson and Jim Simons, and thus, taking a closer look at Gold Fields is a must.
Goodbye South Africa, Hello Australia
Gold Fields is mainly dedicated to the production of gold, which it extracts from its mines in South Africa, Ghana, Australia and South America. As of late 2012, the company reduced the number of operations in its stronghold South Africa, retaining only its flagship mine South Deep. This move was executed in order to escape the labour and profitability issues plaguing the African nation in recent years. And, in late September, Gold Fields proceeded with the acquisition of 3 Western Australian mines from Barrick Gold Corporation (ABX, Financial), which collectively form the Yilgarn South Assets. The move towards more stable and low-cost regions is a clear attempt by the firm to recover lost ground.
Dropping Share Prices
The price of Gold Fields’ common stock has been losing value steadily throughout 2013. While shares were trading at $10.75 at the beginning of the year, they are now available for less than $3.7 per share, barely above their 52-week low of $3.5. The sharp drop in net earnings is largely responsible for the heavy selling of shares, which has led to the strong decline in share prices. As reported in their third-quarter report, Gold Fields’ net earnings only reaching $9 million, compared to the $122 million it had generated in the same quarter last year.
With share prices trading at such low values, an interesting opportunity arises for those looking for a value investment at a bargain price.
Cost Reductions Already En Route
Despite suffering from reduced margins due to low gold prices, and expansion away from South Africa, an operation which has put additional strain on Gold Fields, new cost reductions were achieved. According to 2013 third-quarter results, the firm was able to reduce the cash cost of mining gold from $793 per ounce, to $772 per ounce. Going forward, these reductions in costs should increase, as the firm expands its operations in lower-cost Western Australia. Additionally, production at South Deep, the only mine Gold Fields has retained in South Africa, is being ramped up, and is expected to be generating 700,000 ounces of gold per year at a low-cash cost in coming years.
Reducing Exposure to Inflation Will Be Crucial
Looking forward, Gold Fields’ strategy to avoid rising inflation in South Africa by moving its operations to Australia should be rewarding. Additional low-cost assets in South America, such as Cerro Corona in Peru, are expected to contribute positively to profit growth. Due to the uncertainties surrounding future gold prices, reducing cash costs for will crucial for Gold Fields in the long-term.
Overall, Gold Fields has a sound business model, enormous gold reserves, and offers an attractive annual dividend yield of 7 percent. Its balance sheet might have taken a hit from the 6-month drop in gold prices, yet the firm’s potential as a long-term value investment is undeniable. Especially since the stock is trading at a 10-year low, savvy investors should definitely take Gold Fields into consideration. I personally feel bullish regarding this firm’s future, since I anticipate gold output to increase in Australia, and at South Deep, while costs can surely be further reduced.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.
Goodbye South Africa, Hello Australia
Gold Fields is mainly dedicated to the production of gold, which it extracts from its mines in South Africa, Ghana, Australia and South America. As of late 2012, the company reduced the number of operations in its stronghold South Africa, retaining only its flagship mine South Deep. This move was executed in order to escape the labour and profitability issues plaguing the African nation in recent years. And, in late September, Gold Fields proceeded with the acquisition of 3 Western Australian mines from Barrick Gold Corporation (ABX, Financial), which collectively form the Yilgarn South Assets. The move towards more stable and low-cost regions is a clear attempt by the firm to recover lost ground.
Dropping Share Prices
The price of Gold Fields’ common stock has been losing value steadily throughout 2013. While shares were trading at $10.75 at the beginning of the year, they are now available for less than $3.7 per share, barely above their 52-week low of $3.5. The sharp drop in net earnings is largely responsible for the heavy selling of shares, which has led to the strong decline in share prices. As reported in their third-quarter report, Gold Fields’ net earnings only reaching $9 million, compared to the $122 million it had generated in the same quarter last year.
With share prices trading at such low values, an interesting opportunity arises for those looking for a value investment at a bargain price.
Cost Reductions Already En Route
Despite suffering from reduced margins due to low gold prices, and expansion away from South Africa, an operation which has put additional strain on Gold Fields, new cost reductions were achieved. According to 2013 third-quarter results, the firm was able to reduce the cash cost of mining gold from $793 per ounce, to $772 per ounce. Going forward, these reductions in costs should increase, as the firm expands its operations in lower-cost Western Australia. Additionally, production at South Deep, the only mine Gold Fields has retained in South Africa, is being ramped up, and is expected to be generating 700,000 ounces of gold per year at a low-cash cost in coming years.
Reducing Exposure to Inflation Will Be Crucial
Looking forward, Gold Fields’ strategy to avoid rising inflation in South Africa by moving its operations to Australia should be rewarding. Additional low-cost assets in South America, such as Cerro Corona in Peru, are expected to contribute positively to profit growth. Due to the uncertainties surrounding future gold prices, reducing cash costs for will crucial for Gold Fields in the long-term.
Overall, Gold Fields has a sound business model, enormous gold reserves, and offers an attractive annual dividend yield of 7 percent. Its balance sheet might have taken a hit from the 6-month drop in gold prices, yet the firm’s potential as a long-term value investment is undeniable. Especially since the stock is trading at a 10-year low, savvy investors should definitely take Gold Fields into consideration. I personally feel bullish regarding this firm’s future, since I anticipate gold output to increase in Australia, and at South Deep, while costs can surely be further reduced.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.
