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Gold Fields flags potential inflationary cost overrun at Salares Norte

The Salares Norte gold project is located in the Atacama region of northern Chile. (Image courtesy of Gold Fields Chile.)

Gold Fields Limited (NYSE: GFI; JSE: GFI) says higher-than-expected inflation levels have started eroding the contingency built into the $860 million capital expenditure (capex) budget for its 100%-owned Salares Norte development project in Chile.

CEO Chris Griffith said in Gold Fields’s March-quarter production report on May 5 that the cost overrun could hit up to 7% compared with the company’s February inflation estimates.

“Given the elevated level of inflation, the contingency that was built into the capex forecast has started to be eroded,” said Griffith. “Should inflation continue at current levels, we expect the overall project capex to be 5-7% higher than expected,” he said.

Gold Fields has earmarked $860 million for the project, but Griffith warned should the company’s inflation concerns materialize, the capex could swell to a range of $903 to $920 million.

Total project progress at the end of March was 70%, compared with 63% at the end of the fourth quarter of 2021. Once completed, the Salares Norte operation is expected to produce, on average, 450,000 oz. gold-equivalent per annum over the first seven years.

The project is said to remain on track to produce the first gold at the end of the March quarter in 2023.

Inflation prompts Gold Fields to flag potential Salares Norte cost overrun
Source: Gold Fields Q1 production report.

Gold Fields also flagged inflationary concerns in other regions, including Peru, where inflation in April was forecast to be 10.5% compared to a previous forecast of 6.8%. For Ghana, inflation is now forecast at 12.2% compared to 10.9% in February.

“As we finally seemed to have overcome the worst of covid-19 around the world, the invasion of Ukraine by Russia has had a material impact,” said Griffith. “Despite the devastation caused by any form of war, the world is being plagued with heightened inflation, driven by high oil and gas prices and, more broadly, higher commodity prices.”

“While we expected the mining sector to be challenged by high inflation at the start of the year, the impact has been worse than initially expected,” said Griffith. “High commodity prices have driven inflation in energy costs; logistics and consumables.”

The company’s inflationary concerns were borne out in its consolidated first-quarter all-in sustaining cost (AISC) figure at $1,150 per oz., which was about 9% higher sequentially.

Gold Fields reported a 7% year-on-year higher output during the first three months of 2022 at 580,000 oz. gold, but the figure was 9% lower than the prior quarter.

Gold Fields said a higher-than-expected copper by-production credit had partially offset the cost inflation. “Consequently, we leave our cost guidance for the year unchanged,” said Griffith.

Gold Fields has forecast AISC of between $1,140 to $1,180 per oz.

For 2022, attributable gold equivalent production – excluding the Asanko Gold Mines joint venture in Ghana with Galiano Gold (TSX: GAU; NYSE: GAU) – is expected to be between 2.25 to 2.29 million oz., which is broadly in line with the 2022 output of 2.25 million oz. Including Asanko production, attributable gold equivalent production is expected to range between 2.29 and 2.34 million oz.

Gold Fields has attributable gold-equivalent mineral reserves of 52.1 million oz. gold and 116 million oz across all resources.

Despite having come off recent highs, at $13.67 a share, the company’s New York-quoted equity is up more than 42% over the past 12 months, giving it a market capitalization of $12.38 billion.