South African gold miner Gold Fields Limited (NYSE:GFI) posted its fiscal year 2008 earnings today. The company has been hit hard by higher costs, lower production, and a cave-in that killed eight miners. The company reported net profit for the year of $662.6 million on production of about 3.64 million ounces of gold.  What is most interesting here is that the issues inside the company may offer some great insight to the problems inside other global gold miners. 

Gold Fields’ new Nicholas J. Holland CEO is focused on cash flow. He noted that he hadspoken to many fund managers around the world, "And the thing thatcomes through clearly time and again is that it’s not reserves in theground that counts, it’s not ounces of production that counts – it iscash flow." So cash flow, he says, is the measurement by which GoldFields is to be measured. By that measure, Gold Fields did not do sowell. Total cash flow for the fiscal year equaled a net loss of nearly$91 million.

In order to turn that around, Gold Fields intends to reduce its all-incosts (operating costs plus capex, which it calls notional cashexpenditure) to $725/ounce. For the 2008 fiscal year, the company’snotional cash expenditure was $796/ounce. If Gold Fields can do that,it’s all-in costs will be lower than Newmont’s (NYSE:NEM) andGoldCorp’s (NYSE:GG), but still higher than either Barrick (NYSE:ABX)or AngloGold Ashanti (NYSE:AU). The company’s production target is 4million ounces/year.

The company is also investing heavily in other areas of the globe, butprimarily as a non-majority partner in what appear to be higher risk,lower value properties. That makes some sense if Gold Fields wants toimprove its cash flow quickly. It’s a lot cheaper, and less risky, tobuy a piece of a producing property than it is to go searching for new,big discoveries.  It also appears that the company is lowering itshurdle on project goals measured in ounces per year production.  Thatis something we’ll be paying close attention to for more details and tosee if that becomes more of an industry standard.

As with oil, it seems that virtually all the big and easy discoverieshave been made.  We are essentially only in the second century of oilproduction.  Gold has been sought after for more than 2,000 years.

The SPDR Gold Shares (NYSE:GLD) tracks the price of gold bullion minusfees.  The Market Vectors Gold Miners ETF (AMEX:GDX) tracks theperformance of the gold mining stocks.  If you have watched the priceof gold rise over the last month, you may have also noticed that thehigher bullion prices haven’t translated into massive profit growth atthe miners.

Paul Ausick
September 29, 2008

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