Gold Fields stock: Inflationary pressures are hurting free cash flow (NYSE: GFI)

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Part I – Presentation

In 2021, Johannesburg-based Gold Fields Ltd. (NYSE: GFI) published the results of the fiscal year for the first half of 2022 on August 25, 2022.

To note: This article is an update of my article published on June 2, 2022. I followed GFI on Looking for Alpha since April 2021. Below is a brief overview of the company’s production assets around the world.

Map

Presentation of the GFI S1 2022 asset map (GFI presentation)

The South African gold miner reported a better than expected production quarter of 621,000 Au Oz or 1,201,000 Au Oz for the first half of 2022. Revenue for the first half of 2022 was $2,235.3 million. dollars, up 12.7% compared to the first half of 2021.

Revenue for the first half of 2022 was $2,235.3 million, up sharply from the $1,983.6 million for the first half of 2021.

1 – Acquisition of Yamana Gold scheduled for mid-November

Gold Fields has updated its pending acquisition of Yamana Gold Inc. (AUY). GFI expects to complete the purchase by mid-November (subject to shareholder approval).

GFI has significantly underperformed AUY since the announcement of the deal.

Chart

GFI comparison table between AUY, GFI and GDX (Ycharts)

The deal is valued at $6.7 billion and will create one of the world’s top four gold companies. I advise you to read my article on this subject by clicking here.

I was not in favor of such an agreement, and wrote:

The problem is that this “good deal” was sanctioned by a damaging sale for GFI. This is news that shareholders generally fear the most. Regardless of the quality of the deal, the market’s reaction to a major acquisition is always the same. A complete surprise that erases all winnings in a few hours. In short, investors fired first and asked questions later.

Table

GFI: why buy AUY? (GFI presentation)

2 – The investment thesis

Gold Fields is an excellent choice for a long-term investment that I recommend in the gold sector. The stock price has fallen significantly over the past five months, and I see this as an opportunity.

The company is globally diversified (Africa, Australia and South America) and has good growth potential with its North Salares Project, 77% completed as of June 30, 2021. In addition, GFI is set to expand with the acquisition of Yamana Gold.

However, Gold Fields Ltd is highly correlated to the price of gold even though the company produces some copper.

The outlook for gold has deteriorated markedly since the FED decided to aggressively fight inflation. The FED is expected to raise interest rates by 75 bps at the end of this week or even more, and we could see further weakness in the gold sector as the US dollar strengthens.

Thus, it is even more imperative to trade short-term volatility, and I recommend using around 40-50% of your position to take advantage of short-term highs and lows.

I recommend trading LIFO while keeping a long-term base position for a much higher level and enjoying a meaningful dividend yield of 4.50% in the meantime.

3 – Stock market performance

The GFI has fallen sharply since April and is down 8% year-on-year. However, the stock performed better than most of its peers and the VanEck Vectors Gold Miners ETF (GDX).

Chart

Comparison of 1 year GFI charts (Ycharts)

Part II – Gold Fields – H1 2022 Review and Production History: The Raw Numbers (ADR ratio 1:1)

Note: As most are South African gold and PGM miners, results are released every six months. However, the production is indicated by quarter and by semester which can lead to confusion.

fields of gold H2 2020 H1 2021 S2 2021 H1 2022
Total revenue in millions of dollars (6 months) 2,137.8 1983.6 2211.6 2,235.3
Net income in millions of dollars (6 months) 567.5 387.4 401.9 509.7
EBITDA Millions of $ (6 months) 1,355.4 973.2 1077.3 1,223.1
Diluted EPS in $/share (6 months) 0.63 0.43 0.45 0.56
Cash flow from operating activities in millions of dollars (6 months) 562.8 688.6 541.6 871.0
Capital expenditures in millions of dollars (6 months) 352.1 469.3 590.7 519.8
Free cash flow in millions of dollars (6 months) 210.7 219.3 -49.1 351.2
Total cash $ millions (6 months) 886.8 703.5 524.7 724.1
Long-term debt (incl. current) in millions of dollars (6 months) 1,443.4 1,366.6 1,078.1 1,175.3
Diluted share outstanding in millions 905.83 895.35 887.72 894.67
Dividend $/share 0.2134 0.1477 0.1720 0.1782

Source: Company booklet and fun conversations

Gold Fields: Balance sheet details

1 – Revenue was $2,235.3 million in the first half of 2022

Chart

GFI 6 Months Earnings History (Fun Trading)

GFI announced revenue of $2,235.3 million for the first half of 2022, up 12.7% from the first half of 2021. Net profit was $509.7 million or 0, $56 per diluted share, compared to $387.4 million or $0.44 in the first half of 2021. Higher production and gold prices were enough to offset the impact of higher costs.

Cost of sales before A&D was $923 million for the six months ended June 30, 2022, primarily due to inflationary increases across all regions, partially offset by the decline in the Australian dollar and South African rand.

2 – Free Cash Flow was $319.9 million in H1 2022

Chart

GFI 6 months Free Cash Flow History (Fun Trading)

Note: Generic free cash flow is cash flow from operations minus capital expenditures. The company has a different way of calculating free cash flow. The company reports adjusted free cash flow of $293 million.

Generic trailing 12-month free cash flow is $732.1 million, with $351.2 million in the first half of 2022.

The company said in the press release:

Consistent with our dividend policy of paying out between 25% and 35% of normalized earnings as dividends, we have declared an interim dividend at the high end of the payout ratio of 300 SA cents per share, relative to the 2021 interim dividend of 210 SA cents per share. This represents a 43% year-over-year increase

The interim dividend for the first half of 2022 is approximately $0.1782 per ADR or a yield of 4.50%.

3 – Net debt is improving. Net debt was $451.2 million at the end of June 2022 (or $851 million including lease debt)

Chart

GFI 6 months History of cash versus debt (Fun Trading)

Net debt is now $451.2 million, with a net debt to adjusted EBITDA ratio of 0.33x. Net debt, including lease liabilities, is $851 million.

Chart

Presentation of the GFI balance sheet (GFI presentation)

4 – Details of gold equivalent production in H1 2022

4.1 – Below are the details comparing H1 2022 to H1 2021

AISC fell in 2022 from $1,093 per ounce to $1,148 in H1 2022. However, attributable gold production was 1,200.7 K Oz in H1 2022, compared to 1,104.2 K Oz in H1 2022. H1 2021.

A confusing issue is that the company also gives quarterly production. In addition, investors must differentiate between 100% production and attributable production.

Chart

GFI Group Gold Production (GFI Presentation)

4.2 – The attributable gold equivalent produced in the second quarter of 2021 was 620.7 K Au Oz, and the production for the first half of 2022 was 1,200.7 K Au Oz.

Attributable production was 620.7,000 ounces in 2Q22, compared to 580,000 ounces in 1Q22. To compare H1 2022 to H1 2021, you add 1Q22 plus 2Q22 for H1 2022 and 1Q21 plus 2Q21 for H1 2021.

Chart

Quarterly production history of GFI (Fun Trading)

4.3 – Gold Fields operates nine mines and one project in five countries around the world.

  1. West Africa generated 33.3% of group results (consolidated basis)
  2. Australia 41.8%
  3. South Africa 13.4%
  4. And the region of the Americas, Cerro Corona in Peru by 11.5%.

The majority of producing mines are partly owned, as you can see in the table below:

Chart

GFI Production by mine H1 2022 (Fun Trading)

4.4 – History of AISC and gold prices.

Inflationary pressures hurt. Total CapEx was $519.8 million in the first half of 2022, compared to $469.3 million in the prior half. The price of gold was $1,820 per ounce, down from $1,884 per ounce in 1Q22. The AISC for 2T22 is $1,146 per ounce.

Chart

Quarterly gold price GFI and historical AISC (Fun Trading)

4.5 – Salares Norte project: Progress reached 77% at the end of June 2022.

The company announced that the project would experience delays (one to three months) due to extreme weather conditions, impacting construction activities towards the end of 2Q22.

Table

GFI Salares Norte Update (GFI Presentation)

5 – Guidance 2022 (excluding Asanko)

Gold equivalent production is expected to be 2.25 Moz to 2.29 Moz in 2022. Details are shown below:

Table

GFI Orientation 2022 (GFI Presentation)

Part III – Technical Analysis (Short Term) and Commentary

Chart

Short Term GFI TA Chart (Fun Trading StockCharts)

Note: Chart has been adjusted for dividends.

GFI is forming a descending channel pattern with resistance at $8.7 and support at $7.2.

The trading strategy I recommend is to take LIFO profits between $8.6 and $9.1 (about 25%) and buy back below $7.5.

However, depending on the strength of the price of gold and the action of the Fed, which is becoming more hawkish by the day, GFI could break through resistance and retest $10.90 to $11 or lower below $7.

Watch Gold as a Hawk.

Warning: The TA table must be updated frequently to be relevant. This is what I do in my stock tracker. The table above has a possible validity of approximately one week. Remember that the TA chart is a tool only to help you adopt the right strategy. This is no way to predict the future. Nobody and nothing can.

Author’s note: If you find value in this article and wish to encourage such continued efforts, please click the “Like” button below as a vote of support.

About Myra R.

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