It's ironic that Gold Fields Ltd (GFL), a group that maintains a policy of not hedging on gold sales as a core strategy, should prove so good at hedging on currency deals.
GFL decided to go this route when it invested US$235m to buy the St Ives and Agnew gold mines in Western Australia from WMC Resources in November 2001. At the time the Australian currency was worth US$0,50 but GFL management believed it was considerably undervalued and would appreciate against the US buck.
So GFL borrowed the funds needed in US dollars and then put in place an A$1bn currency hedge over five years at rates between US$0,49 and US$0,52. The decision paid off. The Australian dollar firmed to US$0,56/A$ by the end of December and had reached US$0,64/A$ by early May.
GFL CEO Ian Cockerill happily points out that every 1c appreciation in the value of the Australian dollar results in a gain of US$10m/quarter for GFL. As of end-March the market value of the currency hedge was a positive US$70m compared with the outstanding balance of US$180m on the funds borrowed to pay for the mines.
When you're hot, you are very hot, and GFL has been hot for the past five years. It has transformed itself from "also ran" status into one of the world's top five global gold companies.
It has done so through operating improvements on the group's flagship SA mines - Driefontein, Kloof and Beatrix - and a cost-effective internationalisation strategy which has expanded GFL's production in Ghana and taken the group into Australia. In both countries GFL has gone for assets that have provided immediate paybacks on the investment and substantial expansion potential, which the group is now realising.
Last year GFL bought the Damang mine, about 30 km from its existing Tarkwa mine in Ghana on the same geological structure. The ground between the two mines holds exploration opportunities and, says Cockerill, an "aggressive" exploration programme is being carried out.
In May GFL announced it would spend US$160m at Tarkwa to build a new mill and carbon-in-leach gold recovery plant.
Tarkwa and Damang sold 632 000 oz of gold in the nine months to end-March, 18% of GFL's total gold sales of 3,5m oz. The Australian mines sold 480 000 oz, equivalent to 14%, while the SA operations contributed 2,3m oz or 68%.
If there are problem areas for GFL they involve black economic empowerment and diversification into platinum . Empowerment will come once regulations are clear, says management.
