The changing face of a gold investor Presenter: Nick Holland CEO - - PowerPoint PPT Presentation

The changing face of a gold investor

Presenter: Nick Holland CEO – Gold Fields AusIMM Global Mining Leaders Conference 2018

Date: September 2018

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AusIMM Conference | September 2018

Certain statements in this document constitute “forward looking statements” within the meaning of Section 27A of the US Securities Act of 1933 and Section 21E of the US Securities Exchange Act of 1934. In particular, the forward looking statements in this document include among others those relating to the Damang Exploration Target Statement; the Far Southeast Exploration Target Statement; commodity prices; demand for gold and other metals and minerals; interest rate expectations; exploration and production costs; levels of expected production; Gold Fields’ growth pipeline; levels and expected benefits of current and planned capital expenditures; future reserve, resource and other mineralisation levels; and the extent of cost efficiencies and savings to be achieved. Such forward looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the company to be materially different from the future results, performance or achievements expressed or implied by such forward looking statements. Such risks, uncertainties and other important factors include among others: economic, business and political conditions in South Africa, Ghana, Australia, Peru and elsewhere; the ability to achieve anticipated efficiencies and other cost savings in connection with past and future acquisitions, exploration and development activities; decreases in the market price of gold and/or copper; hazards associated with underground and surface gold mining; labour disruptions; availability terms and deployment of capital or credit; changes in government regulations, particularly taxation and environmental regulations; and new legislation affecting mining and mineral rights; changes in exchange rates; currency devaluations; the availability and cost of raw and finished materials; the cost of energy and water; inflation and other macro-economic factors, industrial action, temporary stoppages of mines for safety and unplanned maintenance reasons; and the impact of the AIDS and other

• ccupational health risks experienced by Gold Fields’ employees.

These forward looking statements speak only as of the date of this document. Gold Fields undertakes no obligation to update publicly or release any revisions to these forward looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.

Forward looking statement

Gold Fields is a member

• f the ICMM

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AusIMM Conference | September 2018

Setting the scene

• Mine production has peaked
• Costs have decreased significantly but appear to have bottomed
• Capital expenditure has been a focus area in the cost cutting drive, but has the industry cut too

deep?

• Exploration has focused on brownfields projects and near-mine development

̵ Greenfields exploration all but dried up

• Funding is harder to source. Passive/index funds comprise a larger portion of gold companies’

share registers ̵ As these funds do not provide equity funding, companies have to rely more on internal/debt funding to fund projects or acquisitions

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AusIMM Conference | September 2018

Production peaking, costs bottoming

• Production:

̵ Growth in global mine supply has slowed significantly – mine supply increased only 0.2% in 2017 compared to 5.5% in 2013 ̵ 30% of global reserves are currently associated with assets where a construction decision is yet to be made ̵ The World Gold Council estimates an incentive price of US$1,500/oz to maintain global production at current levels

• Costs:

̵ In 2013, the World Gold Council introduced the All-in Sustaining Cost (AISC) measure to show all costs associated with producing an ounce of gold ̵ From 2012 to 2016, industry AISC costs decreased at a compound annual growth rate (CAGR) of 6.2% whilst All-in Costs (including growth capital) fell by a CAGR of 10.7% ̵ In 2017, both AISC and AIC increased YoY, the first annual cost increase in five years

75 80 85 90 95 100 105 110 2010 2011 2012 2013 2014 2015 2016 2017

Moz

Global mine supply

Source: World Gold Council 1 121 1 070 956 892 868 889 1 498 1 376 1 096 986 951 1 016 200 400 600 800 1 000 1 200 1 400 1 600 2012 2013 2014 2015 2016 2017

US$/oz

Industry AISC and AIC trends

AISC AIC Source: Company records

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AusIMM Conference | September 2018

Has the industry cut too deep?

• Capital expenditure

̵ Capital expenditure has been one of the ‘low hanging fruits’ targeted by gold miners in their cost cutting drives ̵ Of concern is the notable decrease in sustaining capital (SIB capex) from US$310/oz in 2012 to US$160/oz in 2016. This increased to US$176/oz in 2017

• Exploration:

̵ After peaking in the 1980’s, the rate at which gold is being discovered has declined over the past three decades ̵ There has been a lack of ‘world-class’ (5Moz +) discoveries capable of producing 250koz pa or more ̵ Exploration budgets were slashed in the wake of the gold price crash in 2012 ̵ The bulk of exploration over the past five years has focussed on brownfields projects and near-mine

• development. Greenfields exploration all but dried

up ̵ Exploration spend increased in 2017 for the first time in five years, but was still significantly lower than levels seen in 2012

10 20 30 40 50 60 70 80 90 2012 2013 2014 2015 2016 2017

US$/oz

Total exploration: US$/oz

Source: Company records 313 240 197 172 161 176 360 287 118 76 68 105 100 200 300 400 500 600 700 800 50 100 150 200 250 300 350 400 2012 2013 2014 2015 2016 2017

US$/oz US$/oz

Industry Capex and Opex per ounce produced

SIB capex Project capex Opex (rhs) Source: Company records

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AusIMM Conference | September 2018

Alternatives to direct equity investing

• Alternative gold investment options have grown significantly
• ver the past decade and a half
• Physically backed gold ETFs have grown significantly since

inception in 2003 ̵ There are currently 69Moz backing ETFs, with a value of US$84.6bn (peak of 83Moz and US$143.7bn in 2012)

• Assets under management at gold equity ETFs:

̵ Van Eck Vectors Gold Miners ETF: US$8.6bn (peak of US$12.4bn in 2017) ̵ Van Eck Vectors Junior Gold Miners ETF: US$5.0bn (peak

• f US$5.6bn in 2017)

0,0 2,0 4,0 6,0 8,0 10,0 12,0 14,0 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

US$bn

Van Eck Vectors Gold Miners ETF AUM

Source: Bloomberg 0,0 1,0 2,0 3,0 4,0 5,0 6,0 7,0 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

US$bn

Van Eck Vectors Junior Gold Miners ETF AUM

Source: Bloomberg 400 600 800 1 000 1 200 1 400 1 600 1 800 30 40 50 60 70 80 90 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

US$/oz Moz

Physically backed ETFs

ETF holdings Gold price Source: Bloomberg

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AusIMM Conference | September 2018

Changing gold investor landscape

• Five to seven years ago, there were a lot more generalist investors investing in gold stocks

̵ Market cap of NA gold companies has decreased to US$130bn from US$250bn seven years ago ̵ Far fewer generalist investors showing interest in the sector today (2016 was the exception)

• Passive or index funds now hold a much bigger proportion of the gold sector’s free float
• Assets under management at traditional gold funds have fallen almost 40% over the past two years
• Traditional gold investors are being a lot more selective about what stocks they invest in compared

to five years ago ̵ Investors will own selected stocks as opposed to any and all of them

• What don’t investors like in a gold company:

̵ Declining production profiles that need to be filled ̵ Poor capital allocation and/or non-delivery ̵ Low shareholder returns ̵ High management compensation

• What are investors looking for in a gold company:

̵ Low or declining costs ̵ Increasing free cash flow ̵ Positive exploration results – finding new deposits with good grade

• ESG issues are increasing in importance in investors’ decision making processes

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AusIMM Conference | September 2018

Changing shareholder landscape: Move to passive

• Passive investing has grown in significance and now accounts for a far larger share of publicly traded assets
• Global assets under management at traditional index funds have grown to US$8.1tn from US$1.8tn 10 years

ago ̵ This represents 25% of all fund assets, up from 12% a decade ago

• The shift to indexing has been most notable in the US where 36% of funds are passively managed compared

to 17% 10 years ago

0% 10% 20% 30% 40% 50% 60% United States Europe Japan

Passive market share of total market

February 2008 February 2018 Source: Morningstar Index Manager Stewardship Study 1 000 2 000 3 000 4 000 5 000 6 000 BlackRock Vanguard Stste Street Fidelity Inv Amundi Legal & General Deutsche AM UBS AM Nomura AM Schwab Nikko AM Lyxor

US$bn Selective asset managers AUM split into active vs. passive

Passive Active Source: Morningstar Index Manager Stewardship Study

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Increased focus on responsible investing

• Associated with the rise in index investing is a growing consensus that the integration of ESG factors into an

investment process and active ownership practices (voting and engagement) reduces risks and leads to superior long-term performance

• Evidence of this is the adoption of stewardship codes
• UN Principles of Responsible Investments (PRI) signatories commit to be active owners and incorporate ESG

issues into their ownership policies and practices

Source: UN Principles for Responsible Investments 200 400 600 800 1 000 1 200 1 400 1 600 1 800 10 20 30 40 50 60 70 80 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

US$tn

Growth in Principles for Responsible Investments signatories

Asset Owner AUM Assets under management Number of Asset Owners Number of Signatories

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AusIMM Conference | September 2018

Evolving share registers of gold producers

0% 5% 10% 15% 20% 25% 30% 35% 40% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% March 08 March 09 March 10 March 11 March 12 March 13 March 14 March 15 March 16 March 17 March 18

Gold producer ownership: Active vs. passive

Passive Active Passive/Active (rhs)

Source: BNY Mellon Gold industry represented by investment in all listings of Barrick, Newmont, Goldcorp, Kinross, Newcrest, Agnico Eagle, Yamana, Eldorado, Gold Fields, AngolGold Ashanti and Randgold Resources

• Passive shareholding in the top 11 gold

companies increased to 26% in Q1 2018 from 12% in Q1 2008

• Over the past 10 years, the ratio of

passive funds to active funds invested in the top 11 gold producers has increased from 13% to 35%

2008 2018 Fund Manager Active/Passive % Ownership Fund Manager Active/Passive % Ownership Fidelity Mgt. & Research Co Active 8.2% Van Eck Associates Passive 8.1% Capital World Active 6.0% BlackRock Inv. Mgt. Active 6.0% BlackRock Inv. Mgt. Active 6.0% The Vanguard Group Passive 5.7% NWQ Inv. Mgt. Active 4.3% BlackRock Fund Advisors Passive 4.3% Capital Research & Mgt. Co Active 2.1% First Eagle Inv. Mgt. Active 3.9%

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Implications of an increase in passive ownership

What does the increase in index shareholders mean for a gold company?

• 1. Unlike active managers, index managers cannot sell poorly run companies if they fall in the index and therefore

tend to hold positions for long periods

• 2. They have a fiduciary duty to investors to push for change that will increase shareholder value. This is done

through voting and engagement – index managers are stepping up engagement efforts despite the associated cost

• 3. Index managers focus on issues that could impact shareholder returns in the long-run, including board

composition, management compensation and effective oversight and disclosure of relevant risks

• 4. Shift to index investing has not led to an abdication of stewardship responsibilities. In fact, stewardship teams

have grown significantly over the past two to three years

• 5. Index managers are increasingly committed pushing companies to improve ESG activities

Asset Manager 2014/2015 2017 BlackRock 20 33 Vanguard 10 21 Legal & General 9 11 State Street 8 11 UBS Asset Management 4 11 Amundi 5 5 Deutsche Asset Management 3

Source: Morningstar Index Manager Stewardship Study

Number of stewardship team members

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AusIMM Conference | September 2018

Has the pool of capital been impacted?

• Equity funding does not appear to be as readily accessible as it used to be

̵ Despite gold equities appreciating markedly in 2016, the majority of funding used by the producers in 2017 and 2018 has been debt

• Is this an indication that the pool of capital available to gold companies is drying up or at least

becoming smaller?

• Index funds will not provide funding but will look to impact how a company is run through voting

and engagement

• With equity funding proving harder to access, where will producers source capital to fund projects?

̵ Debt has been the funding source of choice for gold producers over the past 18 months but this is starting to become more costly – US interest rates have increased 1.5% over the past two years ̵ Some producers have ventured into non-traditional funding sources such as streaming deals

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How have producers funded recent capital expenditure?

2 000 4 000 6 000 8 000 10 000 12 000 2012 2013 2014 2015 2016 2017 2018 YTD

US$m

Total capital raised (debt and equity)

Rights issue Bought deal Accelerated bookbuild Placing Convertible debt Non-investment grade debt Investment grade debt

Period of balance sheet deleveraging

2 000 4 000 6 000 8 000 10 000 12 000 0% 20% 40% 60% 80% 100% 2012 2013 2014 2015 2016 2017 2018 YTD

US$m

Funding breakdown

Equity Convertible debt debt Total funding (rhs)

Source: Dealogic, Bank of America Merrill Lynch

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Is capital available?

10 20 30 40 50 60 70 80 90 100 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18

XAU Index

Majority debt funding Majority equity funding Majority debt funding

• Counterintuitively, Gold producers have tended to use equity financing after recent periods
• f share price depreciation, and debt financing after recent periods of share price

appreciation

• Is this a sign of the changing market conditions and shareholder profiles?
• What does this mean for how producers meet funding requirements in the future?

Source: Bloomberg

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AusIMM Conference | September 2018

Hedging to manage near term risk

• With gold price volatility and the tighter funding landscape, should judicious hedging be back on

the table as a means of managing risk and enhancing risk adjusted returns?

• Given the decreasing availability of equity funding together with the reluctance to take on too

much debt, producers are employing short term hedging in order to protect cash flows

250 500 750 1 000 1 250 1 500 1 750 2 000 2 250 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018

koz

Gold producer hedging

Collar options Forwards Put/call options Other Source: Metals Focus

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AusIMM Conference | September 2018

Concluding remarks

Capital is not as easily available to gold producers as it used to be ̵ The sector is competing with other sectors and gold-linked alternatives for investment and capital Gold producers can no longer rely on equity as a guaranteed means of financing projects or addressing balance sheet gearing ̵ Share registers of gold companies have evolved. Passive/index funds that do not provide equity funding make up a bigger proportion of share registers and traditional gold investors have sharpened their focus on where they invest ̵ Internal or debt funding has far outweighed equity funding in the past 2 years ̵ Producers will have to consider non-traditional funding sources (eg: streaming deals) Gold companies have had to adjust their approach to growth: ̵ Producers are embarking on smaller, more affordable projects that are scalable ̵ There has been an increase in collaboration (JVs) – this trend is set to continue Do gold equities need to become high dividend yield stocks, do we need to change our dividend policies? ̵ Alternative gold investments such as ETFs continue to grow in popularity. Gold equities need to

• ffer attractive risk-adjusted returns in order to remain a competitive investment proposition

Index funds will have an impact on how companies are managed by focusing on the ESG side of the business ̵ Companies need to have a fully integrated approach to managing the business Gold companies need to balance near term cash flow and long term sustainability

Thank you

Questions