We Think Gold Fields Can Meet Its 2011 Production Goals, but Increased Costs Are Worrisome

Gold Fields reported lackluster second-quarter results with decent gold production growth offset by some disappointments on the cost front, especially in South Africa. Gold Fields produced 872,000 attributable gold ounces during the quarter, which represents a 5% sequential increase from the first quarter of 2011, but is slightly down from the year-ago quarter. Much of the increase was driven by the firm increasing its equity stakes in the Damang and Tarkwa mines in Ghana, as well as the continued ramp-up of production at South Deep. While Gold Fields only produced 1.7 million attributable gold ounces in the first half of 2011, we think the firm can reach its 2011 production target of 3.5 million-3.7 million gold ounces. We expect the firm to benefit during the second half of 2011 from its increased equity stakes in the Tarkwa, Damang, and Cerro Corona mines, as well as from fewer holidays (and therefore less downtime) in South Africa.
While Gold Fields' production growth is meeting our expectations, the firm's cash costs during the quarter were somewhat disappointing--soaring to $816 per ounce, up significantly from $688 in the year-ago quarter. However, on a constant currency basis, the year-over-year increase in cash costs was much smaller at 7%, which is in line with or slightly lower than the average increase across the gold mining industry. The higher cash costs were driven by a 28% increase in South African electricity prices, which took effect in April 2011. Nevertheless, while we may slightly increase our near-term cash cost assumptions for Gold Fields due to continued mining cost inflation, we believe this will be more than covered by the recent strength in gold prices. As a result, we do not plan to change our fair value estimate for the firm.