AUSTRALIAN INTERNATIONAL MINE MANAGEMENT CONFERENCE 22 AUGUST 2016 CAN THE GOLD INDUSTRY AVOID THE SINS OF THE PAST? NICK HOLLAND CEO GOLD FIELDS
To come to our conclusions, we have analysed MESSAGE OF THE PRESENTATION financial and operating trends between 2012 and 2015 of a sample of the largest global gold producers to form an industry proxy. In 2012 I said that the industry needed to change the way it operated. COMPANIES INCLUDE: The fall in gold price Costs have been cut, Now, producers have to forced a change in unprofitable production provide shareholders focus from growth to closed, greenfields with a return on Free cash flow exploration slowed and investment and leverage new projects delayed to the gold price BUT, have we as an industry done enough? Are we losing focus with the recent recovery in gold price? WHERE TO FROM HERE? 1
MESSAGES FROM THE MELBOURNE MINING CLUB IN 2012 2
2012 MESSAGE UP UNTIL 2012, THE INDUSTRY HAD FAILED TO WHEN I PRESENTED AT THE MELBOURNE MINING OPTIMISE CAPITAL: CLUB IN 2012, I SAID THAT THE INDUSTRY WAS FAILING ITS SHAREHOLDERS IN KEY AREAS: METRIC PASS/FAIL Capex/oz 10-year M&A spend/oz 10- BUT, production had Volume growth CAGR (to 2012) of year CAGR (to declined slightly 32% 2012) of 17% Margin expansion Management teams were in the habit of overpromising and Capital optimisation under delivering Balance sheet leverage However, rhetoric among the producers was beginning to change in 2012: Cash is king, not growth Dividends THE GOLD INDUSTRY WAS FAILING SHAREHOLDERS 3
PARTING THOUGHTS FROM 2012 CONCLUDING COMMENTS FROM 2012 It’s not about ounces for ounces’ sake. The focus had to shift from ounces in the ground and level of production to free cash flow The Industry had to adopt an all encompassing cost measure Mining companies needed to optimise their mining practices and capital allocation Management teams had to deliver on promises (production and cost guidance). No more overpromising and under delivering Believe in the product: stay focused on gold CHANGE WAS NECESSARY 4
WHAT HAS HAPPENED SINCE 2012? 5
MACROS TURNED… GOLD PRICE GOLD TANKED 2 000 US$/oz 1 800 1 600 1 400 1 200 1 000 800 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Source: Bloomberg GOLD EQUITIES LOST SIGNIFICANT VALUE 140 The gold price peaked The gold equity indices 120 at US$1,900/oz in fell on average 75% from 100 September 2011 the beginning of 2011 to 80 before falling to a low their lows at the end of 60 of US$1,050/oz in 2015 40 December 2015 20 0 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 XAU JSE gold index ASX gold index TSX gold index Source: Bloomberg, Indexed at 100 in January 2011 PRODUCERS WERE FORCED TO RESTRUCTURE 6
INVESTORS FLED ETF HOLDINGS VS. GOLD PRICE Moz US$/oz 90 2 000 1 800 80 1 600 70 1 400 60 1 200 50 1 000 40 800 30 600 20 400 10 200 0 0 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 ETF holdings Gold price Source: Bloomberg ASSETS UNDER MANAGEMENT OF GOLD FUNDS HAVE FALLEN SIGNIFICANTLY ETF holdings peaked at Combined AUM at the 9 150 2,632 tonnes (85Moz) in biggest global gold funds 2013. At end-2015, total fell from US$24bn at the 100 assets under management beginning of 2011 to 50 amounted to 1,467 tonnes US$5bn at end-2015 (47Moz) 0 Index (Jan 2011 = 100) Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 First Eagle Gold Fund Asa Gold & Precious Metals Fidelity Select Gold Portfolio Fidelity Advisor Gold Franklin Gold & Prec Mtl Tocqueville Gold Fund Usgi Gld & Prec Metls Usaa Precious Metals & Miner Van Eck Intl Invest Gold Source: Bloomberg CONFIDENCE IN THE SECTOR DECLINED 7
PRODUCTION GROWTH SLOWED PRODUCTION FROM THE TOP 11 PRODUCERS koz 34 000 32 000 30 000 28 000 26 000 24 000 22 000 20 000 2011 2012 2013 2014 2015 Source: Company Reports 5-YEAR PRODUCTION CAGR Marginal increase in production Lower production from the blue 25% from our sample of producers in chips has been replaced by the last 4 years (2011 to 2015) growth from the mid tier 20% producers 15% 10% 5% 0% -5% -10% Barrick AngloGold Newcrest Newmont Kinross Gold Fields Polyus Sibanye Goldcorp Randgold Agnico NO REAL GROWTH IN PRODUCTION Source: Company Reports Note: Gold Fields has been adjusted to account for spin off of Sibanye assets 8
BUT THE PRODUCERS REACTED VAST IMPROVEMENT IN SIGNIFICANT REDUCTION IN EXPLORATION SPEND HAS BALANCE SHEET REPORTED COSTS CAPEX MORE THAN HALVED IN 2015 DELEVERAGING IS FIRMLY COMPARED TO 2012 UNDERWAY • AISC 22% lower in 2015 than in • Both stay-in-business (SIB) and 2012. Three year CAGR of – 8% • US$36/oz in 2015 vs. US$78/oz • Industry proxy of net project capex • AIC 36% lower in 2015 than in in 2012 debt/EBITDA of 1.45x in 2015, 2012. Three year CAGR of – 14% down from peak of 1.89x in 2014 CAPITAL DISCIPLINE HAS IMPROVED 9
REPORTED AISC AND AIC HAVE COME DOWN INDUSTRY AISC AND AIC TRENDS US$/oz 1 600 1 490 In 2013, the World Gold 1 395 Council introduced the All-in 1 400 Sustaining Cost (AISC) measure to show all costs 1 200 associated with producing an 1 115 1 087 1 067 ounce of gold 959 949 1 000 873 800 600 On the face of it, the industry has done a great job in 400 bringing costs under control 200 0 2012 2013 2014 2015 AISC AIC Source: Company Reports Question: Is the lower cost base sustainable or has the industry gone too far? THE INDUSTRY HAS DONE WELL IN CONTAINING COSTS, ON THE FACE OF IT 10
CURRENCIES AND OIL HAVE BEEN MAJOR TAILWINDS CURRENCIES ARE VOLATILE A$/US$ ; C$/US$ 0,14 1,20 1,10 0,12 1,00 0,10 0,90 0,08 0,80 0,06 0,70 US$/ZAR 0,04 0,60 50% - 60% OF PRODUCTION IS IN LOCAL 0,02 0,50 CURRENCIES 0,00 0,40 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Since mid-2012, ZAR has depreciated by 47%, AUD by 26%, and CAD by 21% relative USD/ZAR AUD/USD (rhs) CAD/USD (rhs) to the USD (lhs) Source: Bloomberg OIL HAS FALLEN SIGNIFICANTLY 140 120 100 80 60 US$/barrel 40 20 ON AVERAGE, DIESEL ACCOUNTS FOR 10% 0 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 - 15% OF THE TOP PRODUCERS’ OPERATING COSTS Since mid-2012, the oil price has fallen by 55% Source: Bloomberg CURRENCIES AND OIL WILL NORMALISE AT SOME POINT 11
0,4 0,5 0,6 0,7 0,8 0,9 1,0 1,1 1,2 AUD/USD HISTORY SHOWS THAT CURRENCIES REVERT Source: Bloomberg Jan-00 Jul-00 Jan-01 direction volatile and do not only move in one History shows that currencies are Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 CURRENCIES DO NOT ONLY MOVE IN ONE DIRECTION Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 0,5 0,6 0,7 0,8 0,9 1,0 1,1 CAD/USD 10 12 14 16 18 ZAR/USD Source: Bloomberg Source: Bloomberg 4 6 8 Jan-00 Jan-00 Aug-00 Aug-00 Mar-01 Mar-01 Oct-01 Oct-01 May-02 May-02 Dec-02 Dec-02 Jul-03 Jul-03 Feb-04 Feb-04 Sep-04 Sep-04 Apr-05 Apr-05 Nov-05 Nov-05 Jun-06 Jun-06 Jan-07 Jan-07 Aug-07 Aug-07 Mar-08 Mar-08 Oct-08 Oct-08 May-09 May-09 Dec-09 Dec-09 Jul-10 Jul-10 Feb-11 Feb-11 Sep-11 Sep-11 Apr-12 Apr-12 Nov-12 Nov-12 Jun-13 Jun-13 Jan-14 Jan-14 Aug-14 Aug-14 Mar-15 Mar-15 Oct-15 Oct-15 May-16 May-16 12
CAPEX HAS FALLEN DRAMATICALLY Capital expenditure has been In the charts below, we illustrate Of concern is the notable Was the industry really that one of the ‘low hanging fruits’ the extremity of these cuts decrease in Stay In Business poor at allocating capital or targeted by gold miners in their (SIB) capex from US$305/oz in have miners been cutting too cost cutting drives 2012 to US$160/oz in 2015 much sustaining capex to lower AIC and preserve margins? ABSOLUTE CAPEX OF INDUSTRY PROXY INDUSTRY CAPEX PER OUNCE PRODUCED US$/oz 25 000 400 US$/oz 800 359 US$m Project capex SIB capex 350 700 311 305 20 000 300 600 235 250 500 15 000 180 200 400 160 10 000 150 121 300 75 100 200 5 000 50 100 0 0 0 2012 2013 2014 2015 2012 2013 2014 2015 SIB capex (lhs) Project capex Opex (rhs) (lhs) Source: Company Reports Source: Company Reports SIB CAPEX DECREASED FROM 46% OF OPEX IN 2012 TO 26% IN 2015 13
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