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The Gold Stock Strategist analyzes leading junior gold producers and major gold mining companies.

Comments are welcomed!

Thursday, February 4, 2010

Gold Fields Falls Hard

Earlier today, Gold Fields ($GFI) kicked off the Q4 2009 gold miner earnings season by announcing a 44 percent gain in profits over the previous quarter. The company earned net profits of $187 million during the fourth quarter of 2009 compared with earnings of $129 million in Q3 2009. Profits were $54 million during the fourth quarter of 2008. The bottom line boost for Gold Fields was driven higher by a rising gold price in the fourth quarter compared to the previous quarter.

The company reported attributable production of 900,000 ounces of gold for the quarter, down from 906,000 ounces in the previous quarter due to mining safety delays. The company estimates that Q1 2010 attributable equivalent gold production will be 850,000 ounces due to a decrease in the South African region operations for the quarter. On the positive side, production in other regions are expected to rise for the first quarter of 2010. Looking forward, the company stated it hopes to achieve greater consistency in production for 2010.

Nick Holland, CEO of Goldfields said the company is still on track to be a million ounce per quarter producer. “It’s just taking longer to hit our target, but if I look at all the brownfields opportunities around … and the big increase in production at South Deep, we’re in good shape to still hit that target in the medium term.”

On other less positive news for Gold Fields, cash costs were higher by 5 percent in U.S. dollars to $613 an ounce, owing to a stronger South African rand. Third quarter cash costs were $586 an ounce. South African gold producers sell gold in U.S. dollars and pay operating costs in rand.

Political fears about South Africa were also on the table for today as CEO Holland was reported to have said he has been given assurances by the South African government that it would not nationalize the nation’s mining industry.

Gold Fields sports a 9 forward price to earnings ratio (p/e) based on recent consensus annual earnings estimates for 2010. Gold Fields has the lowest forward p/e compared to other major and intermediate gold producers (see chart).



2010 P/E RATIO

Gold Fields Ltd. ($GFI)


Buenaventura ($BVN)


Barrick Gold Corp. ($ABX)


Harmony Gold ($HMY)


Newmont Mining ($NEM)


Yamana Gold ($AUY)


AngloGold Ashanti ($AU)


Lihir Gold ($LIHR)




Kinross Gold ($KGC)


Agnico-Eagle ($AEM)


Goldcorp Inc. ($GG)


Eldorado Gold ($EGO)


Randgold ($GOLD)


Like other South African gold miners, Gold Fields is more highly leveraged to the price of gold than other major producers because of its high cash cost per ounce and lack of price hedges. As a result, earnings are much more volatile than the industry as a whole. In a rising price of gold environment, the company will outperform other major gold miners significantly on earnings growth. When the price of gold falls, Gold Fields earnings will decline more sharply.

Gold Fields’ volatility of earnings—when combined with continued mine safety problems, active unions, and fears of nationalization—create uncertainty and make it difficult for investors to have confidence in earnings forecasts.

Gold Fields is not a recommended play for investors. However, traders with an eye to moving in and out of stocks may find fertile ground in Gold Fields.

Gold Fields is the world's fourth largest unhedged producer of gold with mines in South Africa, Ghana, Australia and South America. The company has total attributable gold reserves of 81 million ounces and a massive resource base of 271 million ounces.

Shares of Gold Fields were trading at $10.96 per share midday on Thursday, down $0.98 or about 8 percent, on a lower price of gold, projections of falling gold production for Q1 2010, concerns about South Africa nationalizing gold mines, and disappointment with the interim dividend of 50 cents per share.

The price of gold is trading at $1,062 an ounce midday, down $47.50 or 4.3 percent.

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