Gold Fields Ltd. (GFI:US) said third-quarter profit fell 11 percent as strikes and a fire cut output at its South African mines, increasing the possibility the country’s second-largest producer will reorganize.
“You’ve gone through a strike that’s cost you 2 billion rand ($225 million) in revenue, we’ve lost 145,000 ounces of production, it’s worsened our financial position, and some of those areas that we didn’t mine for a while we’re still trying to build back up, so it’s a big headwind,” Chief Executive Officer Nick Holland said in an interview today at Bloomberg’s offices in Johannesburg.
Output was hurt by a deadly blaze at the Ya Rona shaft that made the operation inaccessible for about 46 days. A wave of strikes that halted gold, platinum, coal, diamond and iron-ore mines in South Africa also curbed Gold Fields’ production. The company has been trying to boost output to take advantage of prices for the metal that have increased for 11 straight years.
About 29,000 employees joined two months of wildcat strikes at Gold Fields sites. That, combined with rising power and labor costs “is increasing the risk of a significant restructuring of our South African operations in the near to medium term,” the company said in a statement.
South African output fell 11 percent to 387,000 ounces in the quarter, with 30,000 ounces lost from the fire and 35,000 ounces during a strike at the KDC operation. Total production slid 5.9 percent to 811,000 ounces from the second quarter.
Gold Fields rose 1.5 percent to close at 106.62 rand in Johannesburg, the highest for almost two weeks.
“We did have guidance for impact of the strike in the third quarter, but I think more importantly Gold Fields announced that it will have a strategic portfolio review,” David Davis, an SBG Securities Ltd. gold analyst in Johannesburg, said in a phone interview. “They want to maximize cash revenue.”
Earnings excluding one-time items declined to 1.4 billion rand, or 1.95 rand a share, from 1.6 billion rand, or 2.20 rand, in the previous quarter, the company said in a statement. Gold analysts in South Africa compare quarters sequentially.
Gold Fields and other South Africa-based producers are reviewing their assets and “looking for quality in their portfolios, not quantity,” SBG’s Davis said.
The company said in August, prior to the strikes, it would produce no more than 3.4 million ounces of gold-equivalent metals in the year through December. It already trimmed its full-year production target to 3.5 million ounces in May. The previous range was 3.5 million to 3.7 million ounces.
The Chamber of Mines, an industry group representing South African producers, anticipates that mining companies will be forced to cut their workforces as a result of high pay increases they awarded to end the strikes.
“The mining industry is going to restructure, there are going to be retrenchments because the levels of wages are high, not in absolute terms, but relative to productivity,” the chamber’s CEO Bheki Sibiya said in Cape Town last week. He estimated the cuts wold exceed 10,000 workers.
While job losses are a last resort, they are “still a risk,” Gold Fields’ Holland said. “One of the key things we’re going to have to determine in 2013 is how we can improve the productivity, because if we can get the productivity up, we can do a lot to save jobs.”
Gold Fields, with operations in Peru, Australia and Ghana, has its main production in South Africa. International regions accounted for 424,000 gold-equivalent ounces, compared with 425,000 ounces in the previous quarter, the company said.
Gold Fields intends to reduce South African operations to 40 percent of total output, preferably by increasing volumes mined outside the country, Holland said. There has been a “natural decline” at some South African production sites of around five to seven percent annually for the last five years, he said. “If we could reduce that, or just flatline our production for 2013, that would already be a major achievement.”
The mining company’s management appear to be seeking to diversify further, “for example, moving out of South Africa as fast as they can to protect the business in case South Africa erupts into a mass of protest and violent strike action again,” John Meyer, a partner and mining analyst at SP Angel in London, said in an e-mail. “A fall in gold prices could be terminal for some shafts and many jobs.”
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