What Do Investors Want From A Gold Mining Stock?

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
d Nick Holland CEO, Gold F Fields Limited Keynote Pre esentation, Melbourne Mining Club g 31 July 2012
Good Mo orning Ladie and Gent es tlemen. When I w invited t talk to you here toda the organ was to ay nisers told me that I ca talk about any subject m an under the sun, excep about my own comp e pt y pany. I therefor decided n to talk about Gold F re not Fields Limite - not to tell you that Gold Fields is one of ed t t the most innovative gold mining companies with the most excitin project p g s, m ng pipeline, and one of the d e best cash producing and dividend paying p h pedigrees in the industry. n The topic that I want to focus on today is a c t actually som mething that, surprising many of us have n gly, not given mu thought to over th past few years. And that is what do inve uch t he w d estors want from a go t old stock? In coming to the vie g ews that I am sharing with you to a oday Ive pe ersonally sp poken to 72 investors in 2 one-on-one sessions so far thi year. And theyre not necessarily investo rs in Gold Fields toda is d ay, but they are large fu unds that te to show the way. My views also incorpo end w a orate a num mber of other independ dent intervie ews and sur rveys condu ucted on my behalf with several le y h eading gold investors, a as well as a recent JP M Morgan surv of over 200 investm vey ment funds from aroun the world nd d.
Nick Hollland, Melbourn Mining Club ne b
What is g going on in t gold sec the ctor? Well, lets try and an s nswer this question. I remember when we la q aunched thiis product via the Wor v rld Gold Cou uncil. When we introduced the inaugu produc the so-ca e d ural ct, alled GLD, which now makes up about 60% to w a 70% of th total hold he dings in gold ETFs, we set ourse e elves some targets. We thought th if over a 5 e hat to 10 yea period we could get sales of 500 tonnes, th would be a home ru ar e s 0 hat e un. As you c can see we hit that and gone w beyond it. In fact, there are currently 12 gold ETF ve way 1 Fs available to investor with a further 8 sim ilar product These fu rs, ts. unds have a total combined mark ket value of ~ ~US$120 bi illion and ho a massiv 2,500 to old ve onnes. ght The good news: ET have made it easy to invest in gold and have broug many new investo d TFs y n ors into the g gold fold. ET TFs have exceeded alll expectatio and that must be go for gold. on ood . However, there is a also a dow wnside for s stocks: 1) investors ha often b ave bought ETF instead of Fs stocks and 2) ETF have co Fs ontributed t a widen to ning gap be etween the gold pric and stoc e ce ck performance. For go stocks, ETFs are a double-edg sword. old E ged Obviously the simpl way for people to g into gold is just go and buy the ETF. Its simple to y le get understan and you dont have to worry ab nd bout stock selection etc s c.
The ETF craze has been giv F ven further impetus as the inve a estor univer rse in gold stocks ha d as changed. Ten years ago we used to ha . s ave more professiona gold inve al estors. Tod day we hav ve generalis investors and emerging market investors who want to get gold in their por st w nto rtfolio. What ts the easie way to ge in? Just get the ETF est et g F. Now, I do think w can blam all of th e ills of the gold secto on ETFs because the total go ont we me e or s t old market ca apitalisation is about $400 billion , which is still significa n $ s antly more t than the co ombined ET TF market va alue of abou US$120 billion. ut But you c can see fro recent trade volum om t mes that the has been a prono ere ounced mov into ETF ve Fs rather tha into ma an ajor gold eq quities. It h has canniba alised some investme away fr ent rom the go old stocks. The challenge now f gold stoc is how t provide investors with leverage over the gold price an for cks to e nd to attract some of the incremental investme into gold equities. e ent d
Why do p people want to buy gold stocks? t d They wan to get lev nt verage to the gold price e e. They want to see that, with a rising go price, th old here is mo than a one-to-one relationsh ore e hip between the gold pri and earnings. ice And effec ctively they want us as manage to optim y a ers mise our as ssets and m make sure that we giv ve superior r returns. I do think this informatio should surprise any ont on s yone in this room.
There are two types of companies that you can really look at to determine w e u d what measu ures investo ors are looking for. If y you are run nning a sin ngle asset mining com mpany, the metrics are growth in e a productio volumes, margin ex on , xpansion an capital optimisation. In other w nd o words, you want to kee w ep showing that you ca increase the return on the mine and tha you can increase the cash flo an e n at ow available for shareho old olders at a particular go price. p Now, if yo oure a large publicly listed compa with a portfolio of mining asse what els would yo any p m ets, se ou do? Youd look to lev d verage the balance sh heet and ma sure tha you can e ake at enhance yo returns b our by borrowing money an gearing up the equ returns that you ge as a con g nd uity et nsequence. I think that ts common cause. organ just did a surve Dividends Are divid s. dends impo ortant? Som people say they ar me s rent. JP Mo ey which the put out ju before I left to come here the poll of investors indiicates that about 40% of ey ust e eir a them say dividends are importa and abo 40% sa that reinv y ant out ay vesting cas flows to give superior sh returns is important. s In my min if you look at the po perform nd, oor mance of gol stocks ov the past ten years it is importa ld ver t i ant that we offer a hig dividend yield. It n only he gh d not elps to diff ferentiate u but it demonstrate us, d es discipline Investors want to se that if yo get all of these things right, a e. ee ou o and you get a nice go old price kick then you get a multiplier effect like we used to see in the gold sector som years ag k, me go. Thats wh investor are lookin for. hat rs ng
As you a know the gold price over the p all e e past few ye ears has ris strongly and main sen y ntained thes se strong lev vels of late. Five years few of us w would have predicted current price levels. c e This ma akes the performanc of gold equities so disap ce d ppointing. We have significant tly underperf rformed the gold price. et Often wh I go into investor meetings, th graph gets pulled out and I ge asked: W hen o m his o Whats goin ng on?
To get to the botto of this lets look at how the industry has perform o om e med agains these ke st ey measures over the la decade? s ast ?
Gold prod duction. If y look at the eight m you majors (liste on the slide), we m ed make up just over a third (35%) of the industry current production o about 60 million to 70 million ou ys p of 7 unces. Ive been going to investor co n onferences over my la 15 year at Gold Fields and theres on ast rs d ne consisten theme in the prese nt n entations o all of the large go produce of old ers, includin us - th ng hat productio is going t the moon on to n. But if we had actually met all our product o tion promise over the last five y es e years then we would n w not have drop pped output on a comp pound annu basis by 2% betwee 2006 and 2011. ual y en d Even thou the gold industry as a whole h gone up somewha - by 3% p over this period - it ugh a has at p.a. s s not come from the m e major produc cers. Other producers have instea increase productio by 6% p.a ad ed on a. since 200 though m 06 most of this growth has come since 2008. s These tre ends are als evident in a geograp so n phic breakd down of prod duction, wh ich has dropped in all of the more mature ma arkets such as South A Africa, Australia, Peru and the USA where an a A, nnual productio declined by ~5.3Moz since 200 6. Emerging markets, notably Chiina, Mexico Russia an on z o, nd Colombia have added a combined ~7.6Mo of additio a, oz onal produc ction since 2 2006.
rowth in pro oduction has come fr snt rom the go-t stocks us by inve stors when they want t to sed to So the gr allocate s some funds to the gold space. We eve got to ask ourselve why not w a es when the gold price ha as increased by 21% p. over those five year d .a. rs. A lot of it comes dow to the fac that Gold is becomin scarce. wn ct d ng Its not so easy to fin gold any more. Cert o nd tainly from an exploration perspec a ctive we kno how ow difficult it is to find ne deposits ew s. Central b banks, as yo will see la ou ater, are bu uying, not se elling. ETFs are increa s asing. Dema is and increasing. But supp isnt keeping pace. ply Theres o more iss - back in the days when the gold price was $200, $3 one sue g w 300, $400 an ounce a the avera grade th was being mined w often hig age hat was gher than th average grade of ou reserves. he ur But that is no longer the case and as a res we have really gr s r sult ent rown produ ction volum mes. In fact, ne weve gon the othe way. er That is why I believe investors are right to be sceptica of claims that over th next five years e a al he productio growth w average 6% per ann on will num. It is lik kely that at best the ind b dustry in particular the p e majors - w merely maintain ou will utput. The key m message he is that gold miners have not met their pro ere g m oduction pro omises and investors have bec come sceptical. This ha in recent months led to a chang in rhetoriic from mine Cash is as d ge ers. s now king, not growth and were reining in spending. This raises two questio h, e T t ons. Is this just rhetoric c? And, wha will the re at esultant gold scarcity m d mean for futu gold pric ure ces?
10
Expandin margins. How have the majors done in te ng s erms of EBITDA margiins - which is effective ely operating profit? We over the period from 2002 to 20 you can see the impact. g ell, m 011 c If you me easure the compound growth in EBITDA be etween 200 and 201 the eigh companie 06 11, ht es have achieved growth of only 8% against a annual in an ncrease in the gold pric of 21%. t ce us Its obviou that we h havent delivered the le everage. Margins a up, but nowhere ne the rise in the gold price over the same ti me frame. are ear t
11
Lets try a explore why. and e Operating costs are increasing Paulson & Co told me last year that h istorically they felt co g e g. d y t ost inflation h been ar had round 10% per annum What I tho m. ought was scary is tha they were predicting s at e and this is just on a cost per ton basis that cost inflation was probablly going to be 15% per t w annum go ver oing forward This mea youre g d. ans going to see a doubling of costs ov five yea e g ars. Why is th the case Its skills shortages. Its the cos of consumables. Its energy costs. The go hat e? . st s old price, Im afraid, doe m esnt go up by itself. E Everything else moves with it. The oil price goes up. Th e e g he steel pric goes up. Cement go up. Wa ce oes ages go up. So were not as leve ered to the gold price a as we think we are. Th hats one of the revela o ations that maybe was as wel l understoo five to te snt od en years ago as it is today. o, Of late a lot of the la arge mining companies have warn that cas costs are going to be 20% higher s ned sh e e next year How is th possible Its the c r. hat e? combined effect of all of these is e ssues I men ntioned. Co ost inflation i increasin and it is escalating even more today be is ng, s g ecause of the rapidly rising soci ial responsib bility costs t that the indu ustry is attra acting. The other issue that the industr has to co t ry onfront is th our grad has decl ined over ti hat de ime. Averag ge yields am mongst the m major produ ucers have d dropped by 5% per annum over th last five years. Som y he me of this de ecline will have been driven by a gradual de d ecline in the quality of ore-bodies, a trend th e hat can be se in longeen -term explor ration disco overies: Over the last 30 years, ore gra ades from g global prim mary gold discoveries g greater than 1Moz hav n ve declined by ~3% per annum. This trend ha continued more recently, with g as grades fallin by 4% per ng annum fr rom 1998 to 2008. As these disc o coveries come through to produc h ction, were likely to se ee further do ownward pr ressure on average yie a elds.
12
How hav we done as an indu ve ustry in ter ms of optim mising our capital? He eres anothe interestin er ng comparis son. Over la ten year on a com ast rs, mpound annual growth basis, the gold price has risen b h e by 20% per annum. The indus strys capita expenditu on a pe ounce ba al ure er asis, howeve has gon up by 32 per ounc er, ne 2% ce per annum over the same perio Growth iin capital ex m od. xpenditure per ounce h been dr p has riven more b by greenfield developm d ment capex, which on its own has gone up by an estimate 50% per annum fro s g ed r om 2006 to 2 2011. And then on top of th M&A sp hat pend has go up 17% per annum on a $/oz basis over the past 10 one % m years. An of course M&A hasn grown th e productio base, as you saw ea nd e nt on arlier. What it has done e is actually replace pr y roduction th has bee n falling off. So were spending m hat s more to stand still. d If you loo at the combined effe of all of that, it mea that we ok ect ans eve got to m mine more tonnes of ore t at a lowe grade to g the sam gold and combined with rising cost inflatio it is cos er get me d, d on, sting us more on a per o ounce basis to actually sustain an build new operations. s y nd w
13
If you com mbine the e effect of the increases iin operating costs, the decline in g g grades, the increase in n capital ex xpenditure as depicte by the No ed otional Cas Expenditu (NCE) y can see on this sh ure you e chart we have in fa not creat much le e act ted everage at all. a Compare with the explosion in the gold p ed n price over the same pe t eriod the a assumption most peop ple would ma ake is that the indust trys all-in-c costs - repr resented by NCE - sh y houldnt have escalate ed anywhere near the s e same exten In fact w nt. weve had a 16% annu increase in our tota costs. As I ual e al s said to yo earlier, in five years that means costs have doubled. Weve lost a lot of the upside! ou n s Just a b brief word on NCE. At investor conferenc A r ces the ind dustry often extolls it cash co n ts ost performance that w are mak we king significa operatin cash flow margins - sometimes in excess of ant ng w s $1,000 an ounce. n Who are we trying to kid? We dont kid the investors because th know ho much ca we really o d e hey ow ash generate after every ything is acc counted for. The sell-side also und derstands th his. The only people were kidding are govern nments and communities who, no surprising say oka ot gly, ay, youre ma aking super profits, ple r ease pay u p. And befo we know it we hav windfall taxes, higher ore ve royalties and so on. Weve go to change the lens through wh ich we and the world view this in ot e t v ndustry, and start talkin d ng about wh it really costs to pro hat oduce an o ounce of go I dont care if we c it NCE or somethin old. c call ng else, but to talk abou cash cost only is no telling the full story. ut ts ot e It is like s scoring an o own goal ev very time yo play, and being prou of it! ou ud
14
What has happened to capital expenditure If you ta the ave s d e? ake erage marke cap of th eight larg et he ge gold com mpanies and you look at their spe d ending over the last five years in relation to that mark n o ket cap, wev invested 40% of our market ca Thats more than what we did the previou five year ve ap. m w us rs. And if you look at co u ommunicate investme plans for the next fiv years, it s going up even furthe ed ent r ve er. of Good work done by the World Gold Counc shows that if we imp G cil plement all o the proje ects that hav ve been ann nounced in t gold ind the dustry over the next ten years, the gold indus will prob n e stry bably have to spend its market ca again - in other wo s ap ords $400 billion would have to b spent to bring thes b be o se projects into product tion. It is es stimated tha as much as 60% of market valu may have to be spe at m ue ent over the n next six yea to progre all of th projects currently on the table. ars ess he c n Whats c concerning is that the ese projects arent all going to be growth because the base is s h, declining. We know that were mining finit resources A lot of that is going to be repl te s. g lacement. S So were dea aling with a situation where, in or w rder for us to sustain this industry at somew t ry where aroun nd 70 million to 80 millio ounces a year, it is going to co a lot of money over the next ten years. n on ost m Having said that, investors are fed up wiith promises of jam to e omorrow an they are sending th nd e he message to the indu e ustry. And we are starti ng to wake up to what investors w w want. Most rec cently, and in line with the broad mining industry, gold CEOs are indica h der g ating a muc ch greater e emphasis on capital spend discipliine. Gold miners are beginning to walk the talk of reinin n m b o t ng in capital spend, and focusing more on ret d m turns than on growth. We can exp o W pect announ nced plans to be trimmed. But this will in tur impact o future pr s rn on roduction gr rowth in an already fla productio n at on environm ment. But the ju is still ou and, not surprising, iinvestors ar cynical. ury ut s re
15
Lets look at some of the financial issues c k confronting the industry t y. The one depicted here, in particular, is difficult: provide ba p s alance she eet leverage with deb bt. Historical the gold industry has turned to equity deals to fina lly d h d ance major expansion Were n r ns. not really leve eraging a lo of the balance sheet with debt. So you mig argue in some case we haven ot t ght es nt leveraged enough. d Having said that, a lot of the balance she b eets have been put un b nder pressu by gold hedges th ure hat have had to be retire as well as extra fund d ed a ding that ha been nee as eded for ove erruns on projects. But certa ainly if were going to follow a cla e assic mode of leverag returns its somet el ged s, thing that w we havent necessarily o optimised in the gold in n ndustry and should con d nsider more in future. e The long-term debt m markets are attractive, but this wo last fore e ont ever.
16
Dividend yields cont tinue to und der-perform in a yield-h hungry envir ronment. So what has happened to o the gold sector? Weve lagged The min d. ning sector overall has picked up recently, but the go s p old sector ha not done so. as Historical weve fel that this was ok beca lly lt w ause gold is money. Yo buy gold stocks you buy mone s ou d u ey. But peop arent lo ple ooking at gold counte in the same way anymore and the so g ers o-called go old premium isnt as att tractive as it used to b So were not paying dividends that are competitive in be. e s c comparis with other mining sectors. son Ive been asked by s some invest tors why ca we pay out a divide yield of 5% to 10% If we really ant end %? want to g our stock up weve got to push dividend yields into th get k h y hose territor ries. But we simply can e nt do that, because th hen we will be paying out all ou earnings We wont have any l g ur s. t ything left f for sustaining capital or maintaining our curren productio base. g g nt on But inves stors are hungry for a dividend yie so theyre not particularly enth d eld, hralled by th argumen his nt. Having said that, Gold Fields is ahead in the gold sector at th moment. We are paying out a n s he . p an average d dividend yie of about 3.8%. The rest of the peer group is at an av eld t verage of ab bout 1.8%. Why dont we get c credit for it? Because iinvestors dont believe we can re ? e epeat that performanc p ce. not Paying ou one good year of dividends is n enough Youve go to repeat that perfor ut d h. ot t rmance aga ain and again to be belie n eved in a world that is becoming incredibly cy ynical.
17
The posit tive rating m multiplier eff fect is also not a good news story. The gold iindustry use to trade at ed a premium to other s m sectors. We eve actually come bac to the S& 500 and diversified miners hav y ck &P d ve closed the gap, thou were st trading a t a premium to base metal miners ugh till m m s. The gold premium is still a very important consideration, but the gap has n s y e narrowed. So we haven S nt been able to get the re-rating. Weve been punished in part beca e e W n ause of som of the issues Ive ju me ust talked ab bout. Investo have rea ors acted throu gh the ratin ngs.
18
Guidance Over-prom e. mising and under-deliv vering. If yo go back over time 4 ou o 40% of us have not bee en able to ac chieve our g goals within a tolerance level of 5% n e %. This is cr ritical as mo and mor investors are investing, first and foremost, in manage ore re s d ement. Its n not estion of can you guys execute? Can you ta the late enough to have grea ore bodie Its a que o at es. ake ent potential that exists in your com mpany and t translate tha into botto at om-line deliv very? Managem ment credibility for the industry is a big issue and we dont do ourse elves any fa avours by n not meeting our guidance. Im see eing the ev ven in the senior peer group mo compan ore nies are no ow starting to revise the guidance and that in o eir e, ncludes us. Its a black eye for th e industry. The other thing with the industr is that if one of us gets it wrong, investors retreat fro the sect ry g s om tor as a who When o of the la ole. one arge compa anies gives bad news, the genera alist fund managers wh ho dont ana alyse compa anies to the nth degree often take that as a sell signal fo the entire sector. e, e s or e Theyve g a secto get oral view on what they should do. So we shouldnt th n y s hink if some ebody gets it wrong, were going t be unscathed. They think its ou turn next. And often it is. to ur .
19
So, Im af fraid to tell y you, and if were really brutally ho w y onest with ourselves, th industry has not don he ne terribly well on any o the six ke metrics o of ey over the pas decade. st
20
So the qu uestion is, w whats the model for t he industry going to be in the fut y b ture and wh hich road are we going to take?
21
First of all, lets talk about our product. If w dont have a produc that is at p we ct ttractive the a lot of our en decisions would be easier. But our produ is attrac s uct ctive and golds funda amentals re emain stron ng. ETFs con ntinue to inc crease. We eve gone w beyond the 500 ton way nnes dream and there is no reaso m on to believe that dema will wan significan e and ne ntly. Furthermore, even a current investment le at evels, investment in go is very lo Its only 1% of glob old ow. y bal assets un nder manag gement. Sur rely there is potential fo this to inc s or crease. The doom msday prop phets will sa that the gold price has run too far, that it is a bubble and it is a ay o t e all going to end in tear But more and more people ar putting th money into gold because the rs. e e re heir b ey know that the world economy is not in grea shape, an it is not going to get better in a hurry. s at nd g t Investors are recogn s nising golds role as a safe haven and there are no sig that this will chang n e gns s ge fundamen ntally any time soon.
22
Demand. China and India have doubled th demand of gold in five years from 25% of the total to d e heir d o around 5 50% now. T These are the only tw large economies in the worlld which have reporte wo e ed meaningf growth o late and which accou ful of w unted for 35 of globa GDP grow last yea Admitted 5% al wth ar. dly their grow has slo wth owed, but growth proje g ections for 2012 are somewhere between 8% for Chin s e 8 na and 7% fo India a lot better th any of t other la or han the arge econom mies. Those tw countries have a stro affinity towards go And eve though In wo s ong old. en ndia has co ome off it a b bit recently, it is still a s strong cultu issue in that country and gold off-take s ural n d should incre ease again in future. So I believe that dema e and is reas sonably so olid and sho ould remain so, provided the tw n wo principal drivers, China and India, continue to grow int the future which loo likely. e to e, oks
23
Central b bank buying has been a strong fea ature of the market ove the past fi years. er five Central b banks are st trange anim mals. They t tend to sell when the price goes d down and th buy whe hey en it goes u So if go keeps going up th up. old g hey will pro obably keep buying. I this way increment In y tal demand i self-gene is erating. China is sitting with a massiv over-exp h ve posure to US Dollars and theyre looking for ways to s diversify. They dont want to bu gold in th open ma t uy he arket, because they do want to signal pan ont o nic buying. T They want t keep a nice balanc between the US do to n ce ollar and the gold price So theyre e e. absorbing all the pro g oduction in their countr but, even though Ch ry n hina is now the worlds largest go w s old producer, on its own this is not enough to s n satisfy the states dema s and.
24
Productio Primary gold produ on. uction has n gone up anywhere near dema not p and growth. On a class sic supply-de emand fund damental ra atio, with go rising five or six times over e old eight or nin years, yo ne ou would ha thought thered be a lot more gold comin to the market. But its just not that easy to ave e ng m t find any m more, as I h have said ea arlier So what has been t the filler? All sorts of people selling their jew A wellery. Th ere are gold merchan nts going aro ound trying to buy you old jewel lery. Obviously they want to mak money so theyre n ur w ke s not going to p what its really wor How mu of this can still keep coming to market? pay s rth. uch c o Based on analysis b the World Gold Cou n by d uncil, were going to ne to see h eed higher price for more of es those sales to materialise. So if it wasnt f people selling their jewellery a i for s r and mercha ants buying it g the gold industry would already be in mass sive deficit.
25
We have talked abo the fund e out damentals a and they do support a higher go price. Heres what is old interesting. If you loo at the for ok recast gold prices over the last se r even years, against the actual pric e ce, its a telli ing picture. The analy ysts, who k keep telling us the gold price is g going down have bee n, en wrong se even years o of seven Thats a r out n. remarkable track recor rd! And despite that, t theyre still telling us that gold is going down again The CIB long-ter d n! BC rm consensu forecast is US$1,214 per ounce us e! Now, the big eight companies all-in cost (on an NC basis) today bas e t CE t sed on the March 201 12 quarter - was US$1,380 per ou unce of golld produced Based on that, and if we belie the CIB d. eve BC long-term consensus forecast of US$1,214 per ounce we dont have an ind m s o 4 e, h dustry. So, if all o this is tru what we should be doing is to stop all of our capital investment now, and to of ue, e e o t harvest a get as m and much as we can in the next two or three yea before the dooms e e o ars, sday scenar rio hits us. If you loo at future prices this graph is based on futures curves built on Bloomb ok es o c t berg data f for contracts that expire at year-ends in 2012, 2013, 2014 and 2015 - what can you expect s e 4 t? The way the analyst see it, the gold price is going down. Its going to be up in the short term b ts e d but its going to be down in the lon term. Jud k ng dging from their past 7-year track record, yo draw your 7 ou own conc clusions.
26
What do investors w want us to do o? We need to believe in our produ If were going to su uct. e ustain this business int the future and if were b to e going to drive long-t term returns, weve go to believe in the gol price. Do bet aga ot e ld ont ainst the go old price. Ob bviously we shouldnt be using ridic culous price but we shouldnt ca it down to low. es, s all oo Investors interested in gold sto s ocks believe in our pro e oduct and th want us to do so as well! Sta hey s ay focussed on gold. Th is the st hat trong messa coming back consistently ove the last th age g er hree years. And stay focussed o gold as there is still a gold prem on mium. On a fundament absolute value bas tal, e sis there is n a gold p not premium rig now bec ght cause the senior peer group are trading at about 0.85 to s a NAV com mpared to 1. to 2 times a few yea But against base metals there is still a go premium .5 s ars. m e ood m. If we acquire pure ba metals assets, we will dilute our relative premium. I nvestors do not want u ase e o o us to do this They can do it thems s. selves witho paying an acquisition premium Having a base meta out a m. als compone from gold assets is fine, but th ent heres no place in a go miners p old portfolio for pure copper r assets. Hedging. I will guara antee you that hedgin g is going to come ba into vog t ack gue. It will be a mistak ke and we s shouldnt do it. In the lo run you cant bea spot. Emp o ong u at pirical data supports th view. Yo his ou may get it right in ce ertain peaks and trough but you will give it all back ove r time. hs, w a How muc has been spent on repairing ba ch n r alance shee ets? Possibly as much as $30 billion in retirin ng underwat hedges. Im afraid to tell you, hedging is coming ba ter s ack. Its a s silly thing to do. Rema o ain unhedged investor can hedg for thems d rs ge selves
27
Focus on cash flow. At the end of the day why are we here? We are here t generate shareholder n d y w e to e returns. E Everything w do has got to be m we measured against sha a areholder re eturns. If it doesnt me eet those crit teria we hav to ask ou ve urselves wh hether it makes sense at all. a equity style approach to managin the business. Priva Now, you uve almost got to take a private e e e ng ate equity is very, very tough on allocation of capital inv a f vestments. They want short payb t back period ds. They wan to see ro nt obust return with cons ns servative te echnical par rameters. A And youve almost got to a take a big company like us, or this industry and say le change the way we run this business, as if g y, ets e e s r this is our own mone Every do ey. ollar we spe is absolutely critica end al. o Im not sa aying were not doing it, but the s ector overa probably needs to do more of it And its n i all t. not about ass stripping Its abou optimising how we run our mines, sweatin our asse Its abo set g. ut g r ng ets. out optimising every Dol we spen and max g llar nd ximising our ore flow an our grad e. r nd Cash and cash retur d rns. Making sure we d o get our money back. That will d g m demonstrate to investo e ors that we have the righ to spend more mone ht ey.
28
So what d does this m mean for the industry? Weve go to get back to really looking at KPIs that measure whether we a ot y m actually ma money or ake we dont. And it is no about oun ot nces in the ground. Its not about production. Its not abo reserves s . out s. It means focusing instead on metrics such as free cas flow per share. sh s Thats a m mind shift fo us, because everyo ne in the in or ndustry is te errified that t their produc ction is goin ng to go dow What am I going to tell my inve wn. m o estors? How can I tell them that m productio is going to w my on decline? Many inv vestors still focus heav on produ vily uction. The say, wer going to look at you productio ey re ur on, were goi ing to look at your co osts, and we figure out what the gold price is. But it shouldnt b ell o e e be ounces fo ounces sake. It sh or hould be ou unces that make mone Fewer o m ey. ounces that make more money ar surely a b re better option?
29
We as an industry ne to get a much bett grip on so-called growth and su n eed ter s ustaining ca apital to demonstr rate the true value of our investme e ents unfoc cused susta aining capita spend ca destroy a al an company ability to provide inv ys vestors with leverage over the gold price. d As I expla ained earlie we at Go Fields ha reported for some time on a to cost ba we ca er, old ave otal asis all this Notio onal Cash E Expenditure (NCE) - wh hich capture both the operating c es costs and ca apital costs of running a mine. N g NCE tells it like it is. And if we can get the indu d ustry to tell it like it is, it might solv ve nalism. Gov a lot of ou problems linked reso ur s ource nation vernments are seeking to impose significantly a g y higher tax on us b xes because the think wer making super profits - the oppo ey re s s osite is true. . We are now taking N NCE a step further to s seek greater transparen on the r r ncy returns generated by capital sp stain mine operations pend, which historically has simply been cons h y y sidered essential to sus o and to en nsure that effective cap pital disciplin is applied. ne Focus on the all-in c n cost of produ ucing an ou unce of gold Dont get mixed up in the debate on what is d. n e s sustaining replacem g, ment or grow capital. Its all going to end up in the sam e bucket be wth g ecause, at the end o the day, w of what has the industry d e done over fiv years? The top eigh companie have not ve T ht es t grown. Al capital is s ll sustaining capital. Tha is the real of our bu c at lity usiness tod day.
30
The indus needs t look at al of the optiions and no just the marginal oun that get you over stry to ll ot m nce ts the line. The inves stment case has got to stand on it own two feet, based on the hard technical information e o ts f d n that we have in front of us. t The key p point here is to be bullish on the g s gold price.but not to allow this to justify goin after mor a o ng re ditional mar ounces th are not e hat economical These add l. rginal ounce will not n es necessarily provide investors with the lev verage to th gold pric they seek The risk is that chasiing margina ounces he ce k. al encourag mine tea ges ams to incre ease produ ction or ext tend lives of mines, rath than op f her ptimise cash h returns. Consider a project w r where the kn nown ore bo is attrac ody ctive, but too small to c carry the co osts of the required p processing plants. The project fea e asibility team recognise the projec return and payback is m e ct d marginal, but justify a decision to proceed on the basis of the unq , t quantified o option value of the e unexplore ore body in the vicin of know resources. This can be danger ed y nity wn n rous. s, Key point ensure that the proje feasibility considers all commercial options not just the preferred t: ect y s d technical solution tha barely cle at ears the inv vestment hu urdle.
31
Nick Holland CEO, Gold Fields Limited Keynote Presentation, Melbourne Mining Club 31 July 2012
What investors want
1. Believe in our product
Manage portfolio for cash returns and investment payback Translate cash returns into production guidance (and not vice versa)
2. Focus on cashflow
Ensure guidance is realistic and transparent regarding likely impact of gold price movements
3. Deliver on relevant promises
Ultimately, delivery remains paramount
30
This industry is suffering from a management credibility discount. Im not sure what that discount is, but it is high because we dont deliver on our promises. Execution is everything. We can have great assets, we can have great ore bodies, but if we cant execute on our promises there is a massive discount. We need to focus on metrics that we can control and not lose sight of cash returns. We must give realistic production and cost guidance, supported by underlying information that is credible.
32
Nick Holland, Melbourne Mining Club
Earn the right to spe money. end If we wan to go and spend a whole lot of m nt money on growing this company, llets make sure we do it g s off a solid platform. d How are people goin to believe that the in ng e ndustry should go and spend anot ther $200 billion or $30 00 billion, wh we hav not been able to man nage their money as optimally as we should have on ou hen ve m ur existing a assets? Its a fair question, I have to say So we ha to earn the right to spend mon y. ave t ney. Show that were actually u using invest tors money wisely.
33
This char shows the average expected an rt e e nnual shareh holder retur for the m ajor gold pr rn roducers from 2011-2015, ass suming that the gold p price increas to $2,00 ses 00/oz by 20 015 On the le you can s that the average re eft see e eturns will ju exceed the growth in gold pric if average ust ce e valuation multiples re emain as th were in 2011 whi using EV hey ich V/EBITDA w about 8x EBITDA was 8 across the Top 8 gold majors So, if we believe in a gold price of $2,000 b 2015 and if we belie that cos inflation will continue by d eve st w e at 10%, w what sort of returns are we going t get by 20 e to 015? On our cu urrent multiples as an industry we have a rea i e asonable op pportunity to make retu o urns on the investment that is in line with an apprection of the gold price. At that level assuming we have the n n d t w e cost disci iplines in pla I talked about earl ier - we hav a chance for the firs time in fiv years to ace d ve e st ve demonstr rate that we can offer le e everage to the gold pri ice. Matchin the gold price would represent a ng d major turn naround. If we can achieve tha an improvement in o ratings should follow. And at a 25% increase in our at our s rating b rating here were talking princip by pally about enterprise value divide by EBITD we can e v ed DA n deliver co onsiderable high levera vs the g age gold price, with average returns of ~15% vs gold price w e f g growth of ~7% p.a. T f This should make more investors sit up and take notice. e
34
But, if the gold price remains sim e milar to toda ays price, were not go w oing to see any leverag against ge the gold p price, unles cost inflat ss tion can be dramaticall reduced, which - giv current price trends ly ven s will not ha appen If you are going to in e nvest in gold stocks, yo need to believe in a gold price o at least $2000/oz in d ou b of $ the short term. And y have go to believe that the in you ot e ndustry will be able to d deliver the gold price in g n higher ret turns for shareholders and that m anagement can actually do that. D t Deliver their growth projects a deliver on their pro and omises. So, mana agers and d directors dont bet aga d ainst your in nvestors they believe in gold.Th expect t e hey the gold p price to rem main robust but they d demand tha you provid them wit a decent return at at de th that highe price. er Thank yo for your a ou attention.
35

What Do Investors Want From A Gold Mining Stock?

Enviado por

Dados do documento

Descrição original:

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

What Do Investors Want From A Gold Mining Stock?

Enviado por

Direitos autorais:

Formatos disponíveis

What Do Investors Want From a Gold Mining Stock?

Nick Holland Chief Executive Officer Gold Fields Limited

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

What investors want

1. Believe in our product

3. Deliver on relevant promises

Ultimately, delivery remains paramount

Nick Holland, Melbourne Mining Club

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Nick Hollland, Melbourn Mining Club ne b

Você também pode gostar