South Deep Production Declines Amid South Africa’s Gold Dip

The Deep South mine that was built to target the world’s second-biggest known body of goldbearing ore and slow South Africa’s gold decline has yet to yield results and it’s losing money for owner Gold Fields (NYSE:GFI).

As reported by Bloomberg on Monday (July 30), the deposit has the potential to produce gold for the next 70 years, but problematically rests 3,000 meters below the plains southwest of Johannesburg and has left Golf Fields grappling with the cost and technical challenges of working so far underground.

Despite causing the company to consistently miss production targets, Gold Fields CEO Nick Holland believes that the mine can succeed, stating, “[i]n South Deep, we have probably one of two remaining world large ore bodies in the gold industry that are actually discovered and delineated.”

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“We can be around here for a long time. We do have a vested interest to make this work,” he added.

All told, the company has spent approximately US$ 2.3 billion on South Deep, most of which has gone to mechanizing the mine to increase output and productivity.

The company is zoning in on workers’ training in the use of modern equipment and technologies—bringing in instructors from Australia—and shifting to remotely controlled operations.

The South Deep mine is also Gold Fields’ only asset in South Africa and it holds the world’s largest gold deposit, accounting for 60 percent of the company’s mineral reserves.

In order to turn South Deep into the profit maker that Gold Fields hoped it would become and help the country with its fledgeling gold industry, the company has put certain markers in place to make this attainable.

To start, the company has set a new target of mining 500,000 ounces a year of gold by 2022. The company noted that it plans to reassess its entire strategy for the mine if time progresses and the new goal seems unattainable.  

“We are seeing some green shoots in a number of areas, better performance in a number of our operators,” Holland stated.

“But we need to increase the volumes, if we increase the volumes the unit cost comes down because of the high fixed costs in the business,” he added.

Finally, the company noted that some of the reasons that the mine misses its output targets include slow progress in training local workers on the new mining equipment, tremors deep underground, worker deaths due to rock falls and a series of mistakes in the mine plan.

“Gold Fields isn’t in the business of running loss-making operations and each of the company units must make at least a 15 percent margin,” Holland said.

He added that shareholders who may be “frustrated” by delays in revealing the value at South Deep may have to weigh the benefits of waiting to receive an “annuity” for the next five to six decades.

“As things stand today, there is a reasonable prospect we will get there,” he said. “It’s another two to three years re-investing before we see the benefits,” the CEO noted.

Adding, “[b]ut we wouldn’t want another five to 10 years of year and year having the same issue. Clearly we have to see results and progress towards our targets.”

As of 3:57 p.m. EST gold was trading at US$ 1,221.00 per ounce.

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Securities Disclosure: I, Nicole Rashotte, hold no direct investment interest in any company mentioned in this article.  

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