GEOFF CANDY: Nick, Recently, the World Gold Council put out a guidance note on costs, given how vocal you have been and how vocal Gold Fields has been around the cost issues, I wanted to get your sense of how it’s likely to impact on the sector as a whole and in particular if it’s likely to change the manner in which investors look at gold stocks?
NICK HOLLAND: Ja, look, I think from the investors’ perspective they generally have all of the information and have been able to calculate these numbers even though companies have not been as forthcoming and as transparent in the reporting as they should have been. As you know, we adopted an all-in cost measure called NCE or notional cash expenditure already five years ago and I’ve been saying for a long time that we need to really understand and report the total cost to producing an ounce. So I think the investors by and large understand the issues. I think the people who don’t understand these issues very well at all is all the other stakeholders – communities, governments around the world, employees possibly too and that will help to actually get people focused on the fact that the sector, even when gold prices were at US$1600, $1700 was not making super profits at all and was probably only just about making enough money to sustain the business, never mind grow it. Now we’re down to prices below $1300 and as you’ll see I think over time as people report that is below the all in cost of producing an ounce of gold for the sector. So the sector is under water at the moment. So getting this reporting out will help to explain that better. Some investors I think don’t understand but the bulk of them do. What does it really mean? Well, it means that people are going to focus more on the fundamentals of the gold industry and say, well, on this basis either the price has to go back up or alternatively the industry has to shrink itself to cope with the lower prices. That information wasn’t necessarily available to them before. So I think it’s a positive from that perspective that governments in particular understand the plight of the industry and organised labour in various countries, employees, so that if we want to sustain this industry a better understanding of the cost profile is a good starting point.
GEOFF CANDY: Nick, where did things go wrong for the gold sector? We’ve seen over the years gold was at $250 an ounce and it was tough, and then it went up to $1900 and it was still tough at one level, and we’ve seen suddenly a lot of write downs by the big guys. We saw Anglo Gold saying it expects to write down over $2bn. What has happened? Was there a halcyon period that we skipped through that people didn’t quite realise or has it always been tough and if so, why?
NICK HOLLAND: I think if you go back to the late ‘90s when gold was at a low of about $250 per ounce the industry at that time was really hanging on by its teeth and in order to do so was high grading and if you look at the average grades companies were mining it exceeded the reserve grade and that was never sustainable. The other thing is exploration was cut back quite a lot and there’s typically a timeframe of anything up to ten years or even longer between initial grassroots exploration and discovery and construction of a new mine. We’re seeing the impact of some of that coming through the lower grades, grades have been declining steadily over the last ten to 20 years, against that backdrop we’ve seen cost inflation on a per ton basis – if you take out the grade effect – of anything between 10% to 15% per annum. That compounded means you would double your costs in five years, four to five years you’d double your costs. If you’ve got a grade decline on top of that you can see the overall impact on your total cost of producing an ounce. There’s a dearth of exploration projects, the industry is struggling to replace what it mined. All the projects that were [UNCLEAR 4:43] to do that as you see are either being deferred or cancelled in many respects. So I think the industry is going to shrink further and I think the one positive of this kind of measure and where the gold price is today is that I think it’s going to clean up the industry and a lot of the marginal production that shouldn’t really have been brought in to play or built is going to disappear and we’ll get more supply discipline into the gold industry over time. The other thing is wage inflation across the world has been much higher than CPI in most countries. You look at South Africa, wage inflation over the last five to ten years is probably 5% higher than CPI on average. The compound effect of that is huge and we’ve seen decline in productivity. Decline in productivity and wage hikes beyond inflation are not a good recipe if you repeat it year after year and that’s one of the reasons why the South African industry I think is in decline and has been in decline for some years now.
GEOFF CANDY: Where do you see the South African gold sector? I’ve spoken to a good number of people over the last few months and even about 12 to 18 months ago now and people were talking about, well, we’re probably about 75% mined out on the gold fields in South Africa, have you got a sense of basically how long this industry has left?
NICK HOLLAND: Look, I think that interestingly enough gold mines tend to go on much longer than people realise. So I do think you will see a lot of mines in this country exceed people’s expectations but I think they will be smaller and by definition I think they’re going to reduce their production profile, as they have done. So I think the trends you’ve seen historically there is nothing to suggest that that trend is going to change, I think we’ll see further reductions. The gold industry in South Africa now produces about 167 tons of gold a year; where is that going to be in five to ten years? I would say a distinct possibility of that declining by another third, quite possible within the next five years that we’d see another third of that decline and that will have a concomitant on jobs as well. It comes down to a lot of the ore bodies, a lot of the old shaft systems are old, they’re operating way beyond their date that technically they were set up to do. The maintenance costs of fixing a lot of the infrastructure relative to the financial gains of doing so, given declining grades, increasing depths, increasing wages, the power tariffs, etc, carbon taxes, which we can ill afford. The cumulative effect of all of that is going to reduce the size of the sector further. I would say that worldwide it’s not going to be hugely different, I think we will see a further decline in the gold industry worldwide for some of the same reasons that we’re seeing in this country.
GEOFF CANDY: I know your former chairman, Dr Mamphela Ramphele, spoke about the need to move the industry into the twenty first century and she was talking about mechanisation and all sorts of things like that. How effective can mechanisation be in the South African mines given that the veins are so narrow and a lot of these mines are so old and so deep?
NICK HOLLAND: Ja, I think it’s very difficult to retrofit existing mines that’s the first point. You’ve got on average 35 degree dips, as you’ve said now, vein mining, one to two metres, it’s very difficult to mechanise in that area even in a start-up but on existing operations to retrofit is very difficult. I think there are opportunities at depth to look at things differently, there are opportunities like taking out stability pillars, using remote mining. These things are they going to be a quantum change? Probably not. Are we going to see major breakthroughs in the next five years or so, so that we could get into remote mining, robotics? Gold Fields have spent a lot of time over the last five years or so looking at these kinds of things, robotics, and it’s fair to say that it’s an area that requires significant R&D in future. So the big focus now I think is not so much mechanisation but how can you take the man away from the face and if we can take man away from the danger area so that they can operate drill rigs remotely, even if it’s five to ten metres away that I think is the art of the possible and what we should be looking at. That’s what I want people to do. As far as Gold Fields is concerned, however, at South Deep we already have a mechanised operation, we effectively now have our people outside of the area of danger most all of the time and that’s enabled us to have a much better safety record than would otherwise be the case I’m sure.
GEOFF CANDY: Nick, the vision of South African mining that you painted, particularly for South African gold mining, is clearly a little bit more mechanised, a lot smaller than perhaps people are used to, how does that reconcile do you think with the visions that government is putting forward for the mining sector and as a pillar for economic growth into 2030 and beyond?
NICK HOLLAND: I think we have to work together to harness the value of our resources in the country, that’s the first thing and I’ve said this before and my views are no different from what they were a year ago or two years ago is that I think everybody has to work together – industry, government, organised labour, all have to work together and everybody has to contribute something. There’s no point pointing fingers at the industry and saying the industry this, the industry that. I think we all accept the legacy of the industry possibly is not all we would have liked it to be but how are we going to change that trajectory and the only way we can do that is work together and that means that I think government has to see what they can do to improve the administration of their own departments that facilitate mining, water affairs, mining etc. How can they improve the capabilities internally to speed up things, avoid bureaucracy and get the rules of the game clear and consistent and not keep changing them. This carbon tax, for example, is something the industry simply can’t afford and all it’s going to do it’s going to increase the cut-off grade and sterilise resources. That is not the best way forward for us and had there been deliberation with industry we could have come up with a different formula to address some of the issues with the government and there are good examples of how that’s been done in other countries. Organised labour needs to understand we can’t just keep on giving above inflation wage increases without a productivity trigger somewhere. That’s what we have to do, if we don’t improve productivity in this country we’re not going to see a major future for the mining industry.
GEOFF CANDY: What kind of productivity triggers? How would you envision that?
NICK HOLLAND: Well, I think certainly on wages, if organised labour have aspiration for higher wages than maybe CPI there would need to be some kind of gain-share that’s put in place that becomes self-enhancing so that organised labour and its members can benefit from the improvement of productivity and at the same time it can sustain the business. In other words, the business benefits, the employees benefit, the shareholders benefit, that sort of thing, how do we work together in improving the working conditions. Fortunately at South Deep we work 352 days a year, the rest of the gold mining industry I think is only working around about 260 days a year. Now that has to be an opportunity for those other mines to close the gap in some way and how do we work together with organised labour to do that for the mutual benefit of everyone. In other words, how do we come up with a win-win solution for industry, government and organised labour? Otherwise all we’re going to do is we’re just going to continue to shrink the pie instead of growing the pie and when you shrink the size of the pie there’s no point bickering about who gets the bigger slice because the whole thing is declining anyway. We’ve got to grow it and then everyone will benefit, how do we change that dimension that’s the key.
GEOFF CANDY: But can you grow the industry now, given where it sits, given the cost increases that we’ve see and where gold prices are?
NICK HOLLAND: Well, I think if we look at the mining industry overall, if I could deviate for a moment and not just talk about gold, we are endowed with significant resources in platinum, in coal, ferromanganese, etc there are opportunities, iron ore, there are opportunities for us to incrementally grow those areas with the right conditions in place. Investors will back projects if they really understand that the rules of that game are clear, we have stability and clarity in fiscal regimes, we understand the legal title issues, etc and we can let industry get on with the job. I think if we can move towards that kind of model which has been successful in other countries then I think we can grow the mining industry. Gold I think it’s a function, as we discussed earlier, of what’s in the ground, the God-given resource in the ground, a lot of deep, we’re into the deeper part of the saucer now if you look at the Wits Basin and that’s going to require new technologies because I don’t think we necessarily want to send employees down doing handheld mining at four or five kilometres, I don’t think that’s possible. We’re seeing some companies trying to figure out how we’re going to access those resources at depth over time. But that’s going to take time, it’s not going to be something we solve over the next couple of years.
GEOFF CANDY: Nick, speaking to Dr Strydom yesterday from the Chamber, she was talking about a number roughly at R400 000 a kilogram, you’re looking at about 60% of the country’s mines under water and if you add in capex then none of them are profitable at this stage. From your perspective where is a breakeven? Is it at $1500 and where do you need prices for Gold Fields’s mines to be looking good?
NICK HOLLAND: South Deep can work at R400 000 because it is a mechanised more productive operation, which at full production employs only 5000 people, 5000 people producing around about 700 000 ounces a year will be a very productive mine in terms of grams per total employee costed. So we can operate at R400 000 but we’re a different operation, we’re a growing mine and some of the mature operations are probably going to need something a little bit higher than that over time. The rand has certainly helped to cushion some of the impact that the international mines don’t have, the rand being at around about ten. So if we could get back to the R450 000 a kilogram level, which is where we were not so long ago that should be in real terms a price that we can sustain the industry at, in my view, and provide opportunities for the conventional mines to get longer life. But certainly they’re not going to be building new mines, I think the art of the possible again how do we just continue to extend the lives of these operations, I don’t think we’re necessarily going to grow them.
GEOFF CANDY: Nick, just quickly to close off, we spoke earlier about costs, we spoke earlier about the position of the gold sector over the last ten years or so, there does seem to have been almost a cycle in that gold was $200 an ounce and then suddenly it became this legitimate asset class almost and investors were jumping in, and I think there were a number of them that were disappointed and I assume or I have a sense that a lot of those were new generalist investors coming into the sector looking for perhaps things that weren’t necessarily there. Do you think, given the performance of gold shares over the last ten years, that this is a sector that people are going to avoid for a while?
NICK HOLLAND: Well, at some point it’s going to get cheap, it’s very cheap already you could argue. If you look at the metrics, price to net asset value, enterprise value divided by EBITDA estimates but you can look at the broker estimates they’ve put out, the metrics have come down significantly. If you follow the logic of cycles at this stage the gold equities are way outside the band of what you would expect to see. So at some point I think they will trigger a buy again I’m sure in the minds of some investors. I think what we’ve got to do is just ride this out, from our perspective we want to retain the integrity of our operations, let’s keep investing in development, let’s keep investing in waste stripping so that we’ve got a future in our mines and don’t curtail that and that’s one of the things we’re trying to do, at the same time obviously not lose money. But these things work in cycles, Geoff, and gold equities will be back in vogue one day, gold will be back in vogue one day. The fundamentals that have underpinned the gold industry over the last decade have not really changed, if you go and analyse them one by one, governments have been buying, the Chinese and the Indians have been the big source of demand and that will continue to be the case as the growth in those countries is far greater than anywhere else. Producer supply has declined, scrap sales are always a function of price, if the price pulls back the scrap comes off the market. So we could well be heading again for a deficit in the gold industry and that would help to underpin prices but sentiment is obviously driving these markets more than the fundamentals and sentiments can change positively and negatively very quickly. So I don’t think gold at all has lost its benefit in the portfolio and any investor, in my humble view, should have some gold exposure in their portfolio because how confident are you of the values of the other asset classes you have.
GEOFF CANDY: Nick, you mentioned cycles, and just quickly, in terms of exploration now, you spoke about it a little earlier and the fact that there’s a dearth of exploration happening at the moment, given particularly on the junior side a lack of financing, one gets the sense that that old model where the juniors explore and then the majors buy them out and build those seem to, at least for the moment, to have broken down. Now, if the juniors aren’t exploring and the majors aren’t really exploring at this stage, when it comes to the point where you can start building new mines is there going to be an even longer lag because there is no exploration activity happening?
NICK HOLLAND: Absolutely, that’s back to the fundamentals. As I said earlier, there’s at least a ten year timeframe between grassroots exploration and building a mine and we’re going to see the impact of this down the road. Financing has dried up, banks are not willing to lend to distressed companies, particularly juniors, the equity markets haven’t been available to them, they’ve had to just close up shop and try and just retain the optionality. Things have got cheap and yet they still haven’t been bought. That probably tells you that things could get cheaper again before they go up. So all of this is going to feed in to a declining profile going forward and a lack of replacement of what’s being mined now. So watch out over the next five to ten years we are going to see a contraction in supply in the gold industry from the plus-minus 68m ounces we’re mining now, I think it will be a lot lower in five years than that.
GEOFF CANDY: Nick, is Gold Fields looking at anything in particular? Would you be a buyer in this kind of market?
NICK HOLLAND: I think you always have to be on the lookout for opportunities, Geoff, and this is the time to buy if you have the confidence in the future of the gold industry but one has to pick your targets very, very carefully and make sure that you’re going to be buying stuff that is going to survive the test of time and it’s going to improve the quality of the portfolio. That’s not easy to find but we’re always on the lookout.
GEOFF CANDY: And then finally, have you got any sense of how long the wage negotiations are going to last for?
NICK HOLLAND: It’s always difficult but one would hope that we’ll have resolution within the next couple of months. Certainly the employees obviously will start to ask questions if the process goes on too long. I don’t think that’s in anyone’s interest, not ours, not the unions, etc. But the starting positions are far apart, so who knows. This could go on even longer than we’ve seen in the past, we’ll have to see.
GEOFF CANDY: Nick, thank you so much for your time,