Gold Fields Harvests a Golden Cornucopia with Salares Norte Project

Gold Fields Harvests a Golden Cornucopia with Salares Norte Project

Price $10.45                          Recent Purchase                        June 15, 2021

  • Powerful production growth to drive dividend higher.
  • Cashflows increase dividend payout ratio to over 30% of earnings.
  • Gold output expected to jump by 405kOz a year when the Salares Norte project comes online in FY2023.
  • Investments to extend longevity of mines in Ghana and Chile help maintain production.
  • Bonus production on the probable reopening of closed Philippine mine.
  • Socially and environmentally responsible leader in the mining sector.
  • Socially and environmental management drives efficiencies in both physical and human capital thus driving improved profitability and revenue growth.

Investment Thesis

Gold Fields Limited’s (GFI) new Salares Norte mine will boost gold production by 20% over the next few years. Combined with GFI’s operational excellence and shareholder-friendly dividend policy, we expect strong dividend growth and a higher stock price. Gold’s status as a hedge against inflation and market chaos makes it an attractive asset at a time of unprecedented synchronized global deficit spending and central bank expansion. Gold Fields (GFI) provides additional benefits with sustained dividend growth and capital appreciation potential through its large expansion in Chile, longevity initiatives in its existing mines, and operational, environmental, and social excellence.Toyota has long been at the forefront of vehicle development, offering one of the first-ever electric vehicles, and the first-ever commercially successful hybrid. Couple this with one of the largest and most successful brands on the planet and you have a recipe for success far into the future. They have lofty goals and plans spanning into the 2050s, but based on previous success and good management, we think that these goals are more than achievable.

Gold Fields

Gold Fields (GFI) is a global mining firm with 9 mines in 5 countries, headquartered in South Africa. They have a commitment to expanding dividend payouts and have shown consistent decreases in cost per ounce (oz). Gold Fields (GFI) leads the mining sector in ESG, being placed within the FTSE/JSE socially responsibly investment index and winning environmental awards in Peru. For these reasons, we believe that GFI is a good choice for both ESG friendly dividend payout and potential capital appreciation.

Expansion and Strategy

Salares Norte is GFI’s largest expansion project, operating a new mine in Chile, that will produce both gold and silver. This is expected to increase the overall output of GFI by 450,000 oz of gold a year. In addition to this large new mine, there are various sustainability projects to extend the longevity and efficiency of existing mines in Peru, and in Ghana which should extend the life of these mines well past 2030. These extension projects would greatly increase the mineral reserves in these mines. In mining, mineral reserves are resources that are economically viable to mine in the short term as compared to mineral resources, which are potentially mineable in the long term.

Integrated Annual Report 2020

There is the potential for further expansion in the Far Southeast mine (FSE) in the Philippines that GFI has a current 40% stake in (with the option to expand to 60%). However, the mining license for FSE expired in 2015, and they have been unable to come to an agreement with the government relating to its reinstatement. The case is currently pending before the Philippine supreme court. In December 2020, the President of the Philippines instructed the Department of Finance to begin final terms for the renewal, which could mean a further expansion of output in 2021 but this is dependent upon an unpredictable Philippine government.

Actual

Estimated Mineral Reserves (thousands of Oz)

2020

2021

2022

2023

2024

2025

54,292

54,966

55,491

59,517

59,471

60,909

 

GFI estimates that they will be able to maintain production of >2 million oz a year over the next 10 years, while adding to their reserves once the Salares Norte project comes online in FY2023, adding around 4 million oz in gold reserves. There is a significant exploration budget of over $100 million, so we expect them to add further mines in the future or expand existing mines further.
In part, because of environmental pledges, GFI is expanding its solar farm to provide electricity to their flagship South African mine. Currently, they can generate approximately 20% of the mine’s electricity needs and this expansion should be able to raise that number even higher over the 5-year investment horizon. By 2025 they expect to reduce their energy cost by $25/oz and their solar capacity to >55 Megawatts across their entire portfolio.

Mine

Gold Production (kOz)

Change (yr / yr)

All-in-Cost (USD/Oz)

Change

(yr / yr)

50% Stake – Gruyere

(Australia)

258

(129 attributable)

+160.6%

931
(466 attributable)

-67.9%

Granny Smith

(Australia)

270

-1.8%

1,010

+9.5%

Agnew
(Australia)

233

+6.3%

1,053

-8.6%

St. Ives
(Australia)

385

+3.7%

873

-13.1%

Far Southeast
(Philippines)

Not Currently in Operation

Tarkwa
(Ghana)

526

1.3%

1,017

+6.1%

Damang
(Ghana)

233

+12%

1,035

-9.8%

45% Stake – Asanko JV

(Ghana)

250

(100 attributable)

No Change

1,314
(591 attributable)

+8.2%

Cerro Corona
(Peru)

119

-23.7%

715

+34%

Salares Norte

(Chile)

Not Yet in Operation

South Deep

(South Africa)

248

+2.1%

1,260

No Change

Total FY2020

2,522

(2,243 attributable)

+ ~9%

1,024.75

(876.3 attributable)

– ~1.2%

 

All-in cost includes the cost to maintain the mine, cost to expand the mine, and other related expenses. As mines age, miners must dig deeper to reach harder to hit deposits, so in general, newer mines produce lower-cost gold.  For example, the Cerro Corona mine in Peru had a large increase in cost mostly attributable to capital expenditure, as GFI is spending money to expand the viability of the mine to 2030. Another example is the Australian Gruyere mine which opened in 2019: it has high output and low cost because the gold is easy to reach.

Though gold production fell in Q1 2021 by 3% across the entire company, they had a further reduction of cost by around 9%.

Actual

Estimated Gold Output (thousands of Oz)

2020

2021

2022

2023

2024

2025

2,522

2,536

2,589

3,043

3,005

2,958

 

Environmental and Social

Most mining firms – and in particular South African ones – have a poor reputation when it comes to sustainable value creation; however, GFI is the exception. They have earned A ratings on ESG scores in environmental and social and an A- overall. The longevity and sustainability of their operations are essential for both the shareholder and the local communities in which they operate. Mining is dangerous for workers, and GFI maintains a system of safety that is ISO certified, ensuring that behavior-based safety programs are implemented in every mine they operate to minimize risk to workers. In the local communities, GFI assists in educational and advancement opportunities for indigenous persons.

Mining also has the reputation of being destructive and greenhouse gas harsh business, GFI seeks to change this without jeopardizing output, demonstrated by their solar efforts which reduce costs and greenhouse gas emissions. Of their water usage, 71% of it was recycled. They seek to increase the recycling ratio of the water, while also reducing the amount of water they use by 3-5% a year – and so far they have beaten these targets. GFI wants to achieve carbon neutrality by 2050, with expansive targets in 2025 and 2030, seeking to reduce carbon emissions by 702,000 tons a year. For this effort, they have the distinction of being in the Top 5 ESG mining firms globally and have a top 30 spot in the FTSE/JSE socially responsibly investment index.

Risk

Increasing political risk in the countries in which GFI operates is something to consider. GFI does maintain relationships with both the miners and governments to reduce political risk. Luckily, their large holdings across multiple countries do allow them to diversify out of country-specific risk. As with any commodity, gold could depreciate, which could negatively affect GFI’s ability to remain profitable and pay, or grow, its dividend.

When dealing with mining raw materials, there is also the risk of weather or other events like earthquakes, mine collapses, or other natural risks. In Q1 2021, the Peru mine had to close temporarily during unseasonably high rainfall.

Metrics

Gold Fields has maintained competitive metrics over its life. They have a solid free cash flow and maintain a higher-than-average return on their invested capital giving them cash to fund further growth. GFI maintains a healthy dividend which we forecast at about 3.1% for 2022 based on current price. We expect further growth thereafter as mine openings drive revenue and free cash higher. Historically, GFI targets between 25-35% of earnings paid out to shareholders but plans to increase payout north of 30% in FY2021 which we believe will create accelerated dividend growth

 

 

Current Price

Projected Price-to-Earnings

 

 

E2021

E2022

E2023

Gold Fields Ltd (GFI)

$ 10.45

10.5

9.7

8.9

 

GFI has a relatively low valuation given its probable production elevation that we expect with the opening of the new mine in Chile in FY2023.

Projected 2021 Metrics

 

Company

EV / Revenue

EV / EBITDA

Price-to-Earnings

Price-to-Cash Flow

Price-to- Book Value

Price-to-Sales

Dividend Yield %

Market Cap ($ billions)

 

 

Gold Fields Ltd

(GFI)

2.6

4.7

10.8

5.8

2.3

2.3

2.60%

9.7

 

 

Barrick Gold Corp

(GOLD)

4

6.9

17.8

7.7

1.7

3.4

2.80%

41.3

 

Newmont Corporation

(NEM)

4.3

7.7

19

10.1

2.2

4.2

3.10%

56.3

 

Newcrest Mining Ltd

(NCMGY)

4.1

7.6

15.1

9.9

1.6

4

1.50%

17.8

 

Agnico Eagle Mines Ltd

(AEM)

4.7

8.8

22.3

10.1

2.7

4.3

2.00%

17.4

 

Sibanye Stillwater Ltd

(SBSW)

1.1

2.3

4.3

3.5

1.6

1.1

7.80%

13.8

 

Kinross Gold Corp

(KGC)

2.3

4.5

10.4

5.1

1.2

2.1

1.50%

9.9

 

AngloGold Ashanti Ltd

(AU)

2.2

4.5

8.2

5.9

1.9

2

1.80%

9.1

 

Harmony Gold Mining Company Ltd (HMY)

0.9

2.8

5.5

16.5

0.9

0.9

3.30%

2.9