What Do Investors Want From a Gold Mining Stock? Key Note Speech - PDF document

What Do Investors Want From a Gold Mining Stock? Key Note Speech Presented to the Melbourne Mining Club on 31 July 2012 by Nick Holland Chief Executive Officer Gold Fields Limited

Nick Holland d CEO, Gold F Fields Limited Keynote Pre esentation, Me lbourne Mining g Club 31 July 201 2 Good Mo orning Ladie es and Gent tlemen. When I w was invited t to talk to yo u here toda ay the organ nisers told m me that I ca an talk abou t any subje ct under the e sun, excep pt about my y own comp pany. I therefor re decided n not to talk a bout Gold F Fields Limite ed - not to t tell you that t Gold Field s is one of the most innovative gold mining g companies s, with the m most excitin ng project p pipeline, and d one of the e best cash h producing and divide nd paying p pedigrees in n the indust ry. The topic c that I want t to focus o n today is a actually som mething tha t, surprising gly, many o f us have n not given mu uch thought t to over th he past few w years. And d that is w hat do inve estors want t from a go old stock? In coming g to the vie ews that I a am sharing with you to oday I’ve pe ersonally sp poken to 72 2 investors in one-on-o ne session s so far thi is year. And d they’re n ot necessa rily investo rs in Gold Fields toda ay, but they are large fu unds that te end to show w the way. My views a also incorpo orate a num mber of oth er independ dent intervie ews and sur rveys condu ucted on my y behalf with h several le eading gold investors, a as well as a recent JP M Morgan surv vey of over 200 investm ment funds from aroun nd the world d. 2 Nick Hol lland, Melbourn ne Mining Club b

Nick Holland d CEO, Gold F Fields Limited Keynote Pre esentation, Me lbourne Mining g Club 31 July 201 2 What is g going on in t the gold sec ctor? Well, let’s s try and an nswer this q question. I remember when we la aunched thi is product v via the Wor rld Gold Cou uncil. When we e introduced d the inaugu ural produc ct, the so-ca alled GLD, w which now makes up a about 60% to 70% of th he total hold dings in gol d ETF’s, we e set ourse elves some targets. We e thought th hat if over a a 5 to 10 yea ar period we e could get s sales of 500 0 tonnes, th hat would be e a home ru un. As you c can see we’ ’ve hit that and gone w way beyon d it. In fact , there are currently 1 12 gold ETF Fs available to investor rs, with a fu rther 8 sim ilar product ts. These fu unds have a a total com bined mark ket value of ~ ~US$120 bi illion and ho old a massiv ve 2,500 to onnes. The good d news: ET TFs have m ade it easy y to invest i n gold and have broug ght many n new investo ors into the g gold fold. ET TF’s have e xceeded all l expectatio on and that must be go ood for gold. . However , there is a also a dow wnside for s stocks: 1) i nvestors ha ave often b bought ETF Fs instead of stocks a nd 2) ETF Fs have co ontributed t to a widen ning gap be etween the e gold pric ce and stoc ck performa nce. For go old stocks, E ETFs are a double-edg ged sword. Obviously y the simpl le way for people to g get into go ld is just g o and buy the ETF. It’s simple to understan nd and you don’t have to worry ab bout stock s selection etc c. 3 Nick Hol lland, Melbourn ne Mining Club b

Nick Holland d CEO, Gold F Fields Limited Keynote Pre esentation, Me lbourne Mining g Club 31 July 201 2 The ETF F craze ha s been giv ven further impetus a as the inve estor univer rse in gold d stocks ha as changed. . Ten years s ago we used to ha ave more professiona al gold inve estors. Tod day we hav ve generalis st investors and emerg ing market investors w who want to get gold in nto their por rtfolio. What t’s the easie est way to ge et in? Just g get the ETF F. Now, I do on’t think w we can blam me all of th e ills of the e gold secto or on ETFs s because t the total go old market ca apitalisation n is about $ $400 billion , which is s still significa antly more t than the co ombined ET TF market va alue of abou ut US$120 billion. But you c can see fro om recent t trade volum mes that the ere has be en a prono ounced mov ve into ETF Fs rather tha an into ma ajor gold eq quities. It h has canniba alised som e investme ent away fr rom the go old stocks. The chall enge now f for gold stoc cks is how t to provide i nvestors wi th leverage e over the g old price an nd to attract some of the e incremen tal investme ent into gold d equities. 4 Nick Hol lland, Melbourn ne Mining Club b

Nick Holland d CEO, Gold F Fields Limited Keynote Pre esentation, Me lbourne Mining g Club 31 July 201 2 Why do p people want t to buy gold d stocks? They wan nt to get lev verage to the e gold price e. They wa nt to see that, with a a rising go old price, th here is mo ore than a one-to-one e relationsh hip between the gold pri ice and ear nings. And effec ctively they y want us a as manage ers to optim mise our as ssets and m make sure that we giv ve superior r returns. I do on’t think th is informatio on should s surprise any yone in this room. 5 Nick Hol lland, Melbourn ne Mining Club b

Nick Holland d CEO, Gold F Fields Limited Keynote Pre esentation, Me lbourne Mining g Club 31 July 201 2 There are e two types of compan ies that you u can really look at to d determine w what measu ures investo ors are looki ng for. If y you are run nning a sin ngle asset mining com mpany, the e metrics a are growth in productio on volumes, , margin ex xpansion an nd capital o optimisation . In other w words, you w want to kee ep showing that you ca an increase e the return n on the m ine and tha at you can increase t he cash flo ow available for shareho olders at a p particular go old price. Now, if yo ou’re a larg e publicly li sted compa any with a p portfolio of m mining asse ets, what els se would yo ou do? You’d d look to lev verage the balance sh heet and ma ake sure tha at you can e enhance yo our returns b by borrowing g money an nd gearing up the equ uity returns that you ge et as a con nsequence. I think that t’s common cause. Dividends s. Are divid dends impo ortant? Som me people s say they ar ren’t. JP Mo organ just did a surve ey which the ey put out ju ust before I left to come e here – the eir poll of in vestors indi icates that a about 40% of them say y dividends are importa ant and abo out 40% sa ay that reinv vesting cas sh flows to give superi or returns is s important. In my min nd, if you lo ok at the po oor perform mance of gol ld stocks ov ver the past t ten years i it is importa ant that we offer a hig gh dividend d yield. It n not only he elps to diff ferentiate u us, but it d demonstrate es discipline e. Investors want to se ee that if yo ou get all o of these thi ngs right, a and you ge t a nice go old price kick k, then you get a mult iplier effect like we us ed to see i n the gold sector som me years ag go. That’s wh hat investor rs are lookin ng for. 6 Nick Hol lland, Melbourn ne Mining Club b

Nick Holland d CEO, Gold F Fields Limited Keynote Pre esentation, Me lbourne Mining g Club 31 July 201 2 As you a all know the e gold price e over the p past few ye ears has ris sen strongly y and main ntained thes se strong lev vels of late. Five years few of us w would have predicted c current price e levels. This ma akes the performanc ce of gold d equities so disap ppointing. We have significant tly underperf rformed the gold price. Often wh hen I go into o investor m meetings, th his graph g ets pulled o out and I ge et asked: “W What’s goin ng on?” 7 Nick Hol lland, Melbourn ne Mining Club b

Nick Holland d CEO, Gold F Fields Limited Keynote Pre esentation, Me lbourne Mining g Club 31 July 201 2 To get to o the botto om of this let’s look at how the e industry has perform med agains st these ke ey measures s over the la ast decade? ? 8 Nick Hol lland, Melbourn ne Mining Club b