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Mid Cap Darlings – Goldfields


Mid Cap Darlings – Goldfields

Published Date: 2019-10-16 | Source: INCE|Community | Author: Sifiso Skenjana

Mid Cap Darlings – Goldfields

All that glitters is certainly not Gold. But, with Goldfields it might just, with a tinge of copper just for control. Goldfields has mining interests in South Africa, Ghana (for the Jollof Rice), Australia and Peru.

Their operations largely involve underground and surface gold mining and surface copper mining, including exploration, extraction, and smelting.

Business Model: The South African, Ghanaian, Australian and Peruvian businesses make up 7%, 36%, 15% and 42% of Goldfields total gold production respectively. The company's revenues depend largely on the prevailing gold price, operating cost management (largely labour costs, contractor costs, power, and water) and the company's level of production. Health and safety on the mines is a core focus area for regulators and shareholders as safety-related stoppages are likely to result in lower production levels, and potentially injury or loss of life.

Macro Landscape: The gold mining industry is generally exposed to macro-financial risks, risks pertaining to permits and operating in particular jurisdictions, community relations, access to capital and the economic climate. The trade war between China and the US, for example, has two contrasting effects on the gold miners; on the one side, the trade war has resulted in lower expected growth globally, which means lower demand for gold and jewelry. On the other side, gold is generally viewed as a safe haven so investors run to gold when there is volatility and uncertainty in the global geopolitical landscape. The year alone the gold price reached its highest level in six years, going as high as $1542 by end of August this year.

Results (6 months ended 30 June 2019): Goldfields was finally able to turn cash flow positive in the six months ended 30 June 2019 with a net cash flow position of US$49 million, and an interim dividend of R0.60 per share after two negative halves, on the back of their investment drive. In their South Deep mine in South Africa gold second-quarter production increased 67% quarter on quarter and a net cash flow position of R71m for the quarter. Their West Africa mine Asanko experience a record Q2 in terms of gold production while their Australia business (largest) ramps up capital expenditure to deliver higher output levels in the medium term.

Growth Prospects: The group delivered 7% lower revenue from continuing operations for the six months despite an improving net cashflow position. Global demand continues to be a risk for the sector as global growth expectations continue to surprise on the downside. Security of electricity supply in the South African operations also continue to be a risk for the revenue and production expectation of Goldfields. On the positive is that India and China, which account for 50% of global demand for gold will continue carrying the sector - combined these two countries have seen demand for gold grow by more than 70 %.

About The Analyst: The Mid Cap Darlings is brought to you by the Awkward Economist - Sifiso Skenjana. He has a breadth of experience in portfolio management, economic research and investment strategy and management consulting. He is the founder and financial economist at AFRA Consultants. He is currently pursuing his PhD.

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