Maybe they will take an equity position in RGC as well.... If so this would fund the next round of drilling there.... hopefullly about 3 to 5 million... I'd like to see a major drilling program anounced for Red Lake...

That would Goldfields exposure to the Newman Todd project in Red Lake... and provide us with a sugar dady of significance!

In doing so it would also bolster Goldfields as they would be seen as taking action outside of Africa... That could be a win win situation.... Also this would provide some publicity for RGC and that would be positive for the share price.

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Gold Fields: it's a kind of carnage

When the stock price of a leading Tier I gold producer hits 12-month lows, it may be an ominous sign of things to come for others in the sector

Author: Barry Sergeant
Posted: Monday , 16 Jun 2008

JOHANNESBURG -

The past five trading sessions on the New York Stock Exchange has seen the pounding and hammering of the Gold Fields stock price. In just a week the stock has sacrificed 11% of its value, as it hit new daily lows; on Friday, it traded at fresh 12-month lows.

This sets Gold Fields, a Tier I global gold producer, apart from dozens of other listed gold stocks, but also highlights increasing investor awareness of rising operating costs across the global resources sector, along with the rapidly rising costs of new capital projects, and maintenance spending that blows through budgets. Gold bullion at $872 an ounce may be 36% above its 12-month low of $640, but Gold Fields has been unable to make any mileage on it.

The development seen in Gold Fields's stock price may be an ominous pointer of what could develop into a far wider theme among resources companies. A broader survey of the behaviour of stock pricing among listed gold stocks suggests that investors have a lightened appetite for stocks with a South African connection, for reasons that have been well flagged in the international media.

Beyond political risks, rising energy costs are a generic global phenomenon. South Africa carries additional risks in the now badly apparent mismanagement of Eskom, the parastatal electrical utility. Deep level gold mines, such as those run by Gold Fields at Driefontein and Kloof, two of the greatest gold mines ever known, use far more power than open cast gold mines.

Creeping investor concern over energy (and other input) costs is being seen elsewhere. To take one example, high-flying Randgold Resources has sacrificed one third of its market value in the past three months, not only on dollar gold bullion blowing off during the first week of March, but also on energy costs faced at its two operating interests, Morila and Loulo.

Both operations are in Mali and both depend on diesel for power generation. Randgold Resources posted net profit for calendar/financial 2007 of USD 45.6m, a decrease of 10% compared to the previous year, despite both higher gold production, and a higher gold price received.

The company put the slimmer profits down to "higher mining costs at both operations, due to the impact of higher diesel prices, the effect of the weak US dollar on the euro-based component of the operational costs, increased royalties payable resulting from the higher average gold price received and general cost increases in other commodities and consumables". This week, as energy futures traded at another round of fresh records, Randgold Resources continued to build new mines in Mali and Ivory Coast.

At Gold Fields, investor concerns have also been increasingly raised over longer term issues, not least the decline in South African yields. These have contracted by more than 25% since 1999, as mines have deepened across the sector. In an attempt to deal with this issue, Gold Fields in 2002 initiated what some analysts now describe as the disastrous (for Gold Fields) Wal-Mart strategy (high volume, low yield) of aggressively chasing after lower-grade material.

This was replaced full house in 2004 when Gold Fields moved to achieving higher yields (known as the Saks Fifth Avenue strategy - low volume, high yield). There was indeed some initial benefit, but after yields started declining again in 2005, Gold Fields again switched, back to the Wal-Mart strategy.

This significant and persistent decline in the South African gold yield profile is seen by a number of industry analysts as a chief reason as to why Gold Fields bought South Deep. Starting in the second half of 2006, Gold Fields went out of its way to acquire South Deep, mainly from Barrick, the world's biggest gold miner, and Western Areas, via JCI, the erstwhile flagship of the late Brett Kebble. These acquisitions, including Western Areas minorities, cost USD 2.5bn, and then, in January last year, Gold Fields closed the South Deep hedge book, one of the most toxic ever known in gold mining, for USD 538m.

After taking out the hedge book, Gold Fields announced a capital raising of USD 1.2bn. From the time Gold Fields took on South Deep, it was heavily and significantly at risk. South Deep, where shaft construction commenced in 1995, has continued to disappoint against production and cost targets. Most concerning of all, it continues to drain significant capital resources from the rest of the Gold Fields group. Given the details of its restructuring, South Deep is for the meantime more of a project than a gold mine.

Gold Fields has been in the markets selling some of its international assets, in order to bolster its cash holdings. Then, on 25 February this year, it announced, following the crisis at Eskom, that it would be scaling down South African gold production by some 20-25% for the March quarter, and then by some 15-20% on a longer-term sustainable basis.

The company also said that it may reduce its South African employee base. While Eskom's electricity constraints were given as the root cause, a number of analysts have for some time been warning about the South African gold industry's unsustainable rate of cost increases, and longer-term grade declines.

In effect South Deep has returned Gold Fields to a predominantly SA-based company, and is now contributing to the cannibalization of other SA operations. Gold Fields also said on 25 February that suspension of the No.9 Shaft project at Driefontein, also on the West Rand, now ensures funding for South Deep.

South Deep has brought with it significant value dilution and significantly higher cost and capital requirements, especially in the short term. South Deep has the capacity, however, to assist neighbour Kloof with higher-yielding ores. South Deep may also add some stability to the longer term yield profile of Gold Fields's overall South African operations base.

Gold Fields CEO Nick Holland, previously CFO, until erstwhile CEO Ian Cockerill suddenly announced his departure in April this year, has recently been on an offshore corporate road show. He is known to be keen to stress the international nature of the Gold Fields assets, but the total South African base currently contributes about 70% of Gold Fields' total gold output, with by far the majority from South African underground mines. This could increase to over 75% in the future as South Deep continues to build up to full production.