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Minister decries Gold Fields' job-cut plan at cash-burning South Deep - Mining Weekly

Tuesday, 14 August 2018

JOHANNESBURG (miningweekly.com) – They say South Deep will be the last gold mine standing, but every report coming out of it indicates that it is an extremely hard nut to crack, with production hopelessly below guidance.

Since 2006, Gold Fields has pumped R32-billion into South Deep without even breaking even, let alone making a profitable return.

Despite many interventions, the deep mechanised gold mine is losing cash at a rate of R100-million a month and exactly when this will stop has still to be definitively timeframed.

"We first have to get the restructuring done and then we have to embed the new practices,” Gold Fields CEO Nick Holland told a media conference in which Mining Weekly Online participated.

Much of the capital spent over the last eight years has been to open up the superior "new mine", which is gradually taking over from the still dominant but lower yielding “current mine”.

“We’ll start to see a greater improvement once we get into the new mine area because the infrastructure there’s been set up to lend itself to bulk, non-selective, mechanised mining, whereas what we’re migrating from in the shallow part of the mine is more scattered, remnant mining, which has a greater degree of volatility. As we sit today, that’s a little bit more than half of our total mining.

“In the next three or four years, that will reduce in importance. There is only about a million-and-a-half ounces of gold there. The bulk of the reserve will be in the new mine area. So, better infrastructure will derisk a lot of the issues that we’re trying to grapple with. This is not all about a workforce that is learning more about mechanised mining at depth. It’s also about derisking and debottlenecking and a lot of money has already been spent in putting those initiatives in place,” Holland said.

“We believe there’s more in South Deep for the shareholders by continuing than not continuing and throwing away all the money we’ve spent. But clearly, we cannot continue to haemorrhage cash the way we have, so hence the need for us to take these short-term interventions to turn the tide,” he added.

South Deep is staffed for a far higher production rate than is being achieved and steps are now being taken to cut the personnel complement to match output.

The plan is for ahead-of-schedule new mine development to be deferred, fleet replacement to be held back and fleet size diminished, and South Shaft operations to be restaffed.

Management, which has begun consultations under Section 189 of the Labour Relations Act, envisages cutting 1 100 permanent employees, which is roughly 30% of its 3 614 full-time employees, and 460 contractors, which is roughly 25% of its 1 940 contractors

The proposed reduction comes on the back of a 25% reduction in management level employees last year and a further voluntary reduction of 260 people at the beginning of this year.

“Regrettably, the management and the board are faced with the decision now that we have to restructure the operation while we improve the shorter-term delivery and build the mine from here in 2019 and beyond.

“We know what the issues are and we know what needs to be done. The job is not an easy one. It’s going to take time, but the management and board still believe that the effort is worth it," Holland commented.

South Deep is a medium grade 5 g/t mine compared with mines around it with grades of 8 g/t to 10 g/t, and requires bulk mining to be profitable, but the bulk mining has failed to reach the required levels ofl on training, which is roughly double the mining industry average. It has a mechanised mining training centre on the site, but more work needs to be done to migrate training skills into the workplace.

Gold Fields' headline earnings per share for the six months to June 30 are expected to be unchanged at $0.08 per share, rendering the basic loss per share 743% lower than the basic earnings of the first half of last year.

The restructure plan has been met with objections from Mineral Resources Minister Gwede Mantashe, who accused the Johannesburg- and New York-listed company of going ahead without due regard for the processes enshrined in the Mineral and Petroleum Resources Development Act (MPRDA).

The Minister met with Gold Fields on Monday, when he requested the company to follow the processes outlined in Section 52 of the MPRDA, which studies commercial alternatives prior to embarking on any retrenchments.

“There is keenness on the side of the Department of Mineral Resources for engagement. We will engage. Just remember that Section 189 is first and foremost a consultation process. We’ll have the opportunity to talk to different stakeholders about their view. We understand that the Minister is concerned about the long-term sustainability of South Deep and job losses, as are we, but we have a door opened for continued engagement over this period and are happy to listen to ideas,” Holland told Mining Weekly Online.

Meanwhile, South Deep has been further impaired by R4.8-billion to a carrying value of R20.7-billion.

With overall labour productivity significantly below the industry average, a restructuring plan is under way for the deep gold mine that was meant to set a new trail in mechanised mining.

Cash burn in the second quarter of this year was R295-million following the R361-million of the first quarter.

The mine has struggled to meet its production forecasts despite a number of interventions by numerous management teams.

South Deep is a high cost base mine that is currently resourced for production levels way beyond actual production.

The 60-m-long, 15-m-wide and 20-m-high open stopes are so high one could drive a double-decker bus through them 3 km below surface and all the large voids created must be backfilled to allow mining to continue.

The minimum wage entry level at South Deep, including fulco allowances, is between R13 000 and R14 000 a month and Gold Fields, unlike the rest of the South African gold-mining industry that is still involved with wage negotiations, reached a wage settlement with its unions in March and is not part of the collective negotiations.

“Our people are reasonably well paid here,” Holland said in response to Mining Weekly Online.

Labour makes up 50% of the R4-billion-a-year total operating cost. The number of machines will also be reduced by 25%, which will also reduce demand for consumables.

Part of the footprint at the top of the mine will be shut down, which will reduce fixed costs still further. From a mining perspective, everything will be run out of the Twin Shafts as opposed to running it out of the Twin Shafts and also South Shaft, which will save money.

Taking a breather on new mine development will save R300-million a year and fleet replacement is being deferred.

“We’ll endeavour to get the operation back to break-even and then build from there. But we have to get through the volatility,’ he told Mining Weekly Online.

Bank of America Merrill Lynch mining analyst Jason Fairclough described the journey at South Deep as an “ongoing misadventure” and asked “do we actually see somebody fall on his or her sword for this debacle?”

Holland replied that there had been considerable churn at senior management level, which had created operational instability.

“Clearly, what’s being attempted is unique deep-level underground mechanised mining. A lot of the stuff we’ve been doing has been pioneering in a sense and the mining method has been rolled out as we’re going. Obviously, all the accountability rests with the board and the management and that’s one of the reasons we’re making the significant restructuring decision. We do believe that this can still be successful, but these are the critical steps we need to put in place to move South Deep to the next evolution,” he said.

Gold Fields on Tuesday cited the key challenge as being the difficulty in transitioning the mine acquired in 2006 from one run with a conventional mining mindset and practices to mining with a modern, bulk, mechanised mining approach.

Operating and overhead costs, which are not aligned with the profile of a high-volume, medium-grade operation or with current output levels, have been rising, with consistent failure to meet mining and production targets.

Long-hole stoping mining at a depth of 3 000 m, with attendant ground conditions requiring extensive support, has proved complex, with overall labour productivity being significantly below industry average.

Despite extensive skills development and changed shift configurations, the mine continues to lose nearly R1-billion a year.

South Deep continues to face a number of organisational and structural challenges that directly impact performance. The mine did not see much improvement in the second quarter of this year, even after earlier restructuring and shift changes, with production only marginally higher at 1 518 kg (49 000 oz) from 1 485 kg (48 000 oz) in the first quarter.

A reduction in fleet numbers and associated labour complement is required to carry the high fixed cost base and deliver sustainable profitability.

SECTION 189 PROCESS

Section 189 notices have been served on the National Union of Mineworkers and UASA, with Gold Fields proposing a temporarily suspension of mining activities at 87 Level and redeployment of these mining crews into the 4W corridor.

Water and backfill reticulation, water pumping and ventilation will be provided to the full mining operation.

Development has outperformed the plan in recent years, which allows for flexibility to reduce growth capital expenditure for the next 18 months to lower the cash burn.

Given the significant impact of the restructuring from late 2017 and early 2018, the impact of the proposed large scale restructuring on production in 2019 and beyond is unquantifiable, rendering the previously guided build-up plan for the mine a high degree of risk and uncertainty and can no longer be relied upon.

In addition, based on the current situation, detailed mine planning will be undertaken over the next few months. Once the full impact of the mine planning exercise and proposed restructuring is completed, Gold Fields will provide guidance for 2019 and beyond.

The under performance in 2018 and the resultant knock-on impact has necessitated a further impairment of South Deep. Currently, South Deep is bereft of output forecasts for 2019 and beyond, because so many of the past forecasts, once at 750 000 oz/y and then reduced to 500 000 oz/y, have been grossly over optimistic.

TRADING STATEMENT

Normalised earnings are expected to be $0.05 a share, 44% lower than the US$0.09 a share of last year’s first half.

The net loss has been impacted by non-recurring South Deep impairment of a gross R6.5-billion or R4.8-billion net of tax, as well as $96-million related to the change to contractor mining in Ghana, involving $65-million for retrenchment and $31-million on fleet and inventory.

Attributable group gold-equivalent second-quarter production of 504 000 oz is expected, up on the first quarter, with all-in sustaining costs (AISC) held at $973/oz compared with $955/oz in the first quarter and all-in costs (AIC) of $1 187/oz, up on the first quarter’s $1 150/oz.

Half-year gold equivalent production is expected to be 994 000 oz, with AISC of $965/oz and AIC of $1 169/oz.

Gold Fields will release half-year financial results on Thursday.


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