May 2, 2006
Executives
Ian Cockerill - Chief Executive Officer Nick Holland - Chief Financial Officer Brendan Walker - Executive Vice President, Head of South African Operations Terence Goodlace - Senior Vice President, Head of International Operations Willie Jacobsz - Senior Vice President, Investor Relations and Corporate Affairs
Analysts
Alan Cook - Nedcor Securities Victor Flores - HSBC Muneer Ismail - Deutsche Securities Joachim Berlenbach - Craton Capital Peter Townsend - Bernard Jacobs Sam Robbins - Robbins Planning Company Barry Cooper - CIBC World Markets
Operator
Welcome to the Gold Fields Third Quarter Fiscal 2006 Conference Call. My name is Gregory and I’ll be your coordinator for today.
(Operator Instructions) I would now like to turn the call over to Mr. Willie Jacobsz.
Please proceed, sir.
Willie Jacobsz
Thank you very much. Ladies and gentlemen, thank you for joining us for this third quarter results teleconference call.
Ian Cockerill is going to give some introductory remarks, after which Nick Holland will take us through the financials, and then the rest of the lineup will be Brendan Walker, who joins us today for the first time to talk about the South African operations. After which Terence Goodlace will talk about the international operations.
Ian Cockerill will then wrap up again. I’ll hand it over to Ian now.
Ian Cockerill
Thank you very much indeed. Let me also welcome Brendan here to his first teleconference call.
I think it’s fair to say that if his previous performance in Ghana is anything to go by, I think we can all look forward to some positive local results in the not-too-distant future. Now, it’s said that the gold industry is never a dull place to be in, and certainly I think that would characterize this past quarter.
We saw the gold price rise to some of the highest dollar levels seen in years and, despite a strengthening Rand, we saw Rand denominated gold prices also reaching new recent highs. Naturally, these all assisted with the results we’re going to be presenting here today, but I think it would also be fair to say that would mask what has been a very good overall performance for the group as we build up the platform that we’ve established these past few years.
Certainly we’re currently benefiting from a confluence of positive factors -- a high dollar price, a good Rand price, a diversified and growing production base, and the business model that has the make-up to benefit from those features. But what were the highlights for the quarter?
Well, net earnings were up 90% in U.S. dollar terms to $76 million.
Gold production was down marginally 2% to 1.023 million ounces, on the back of good performances from the international operations in Driefontein and Beatrix. Along with the previous guidance that we gave last quarter, Kloof did have a poor quarter that showed signs of improvement in the last month of the March quarter.
Once again, our total cash expenditure was well contained, and this certainly helped on the back of slightly lower production limits, the cost drivers to $372 per ounce. Pleasingly, our operating margin is up from 28% to 32%.
We also conclude the Bolivar transaction in the last quarter, and we’re now commencing the bedding down period of this acquisition. Terence will go into a little bit more detail on that later on in this call.
Finally, and probably the most significant event in the quarter, was the sale by Norilsk of their 20% stake in Gold Fields. This was a record setting sale of over $2 billion, the largest ever placement of gold stock, and all completed within 48 hours into a fairly restricted market.
Proof I’m sure that you’ll all agree that Gold Fields is a highly sought after counter in what is a very, very exciting gold market that we have at the moment. With those brief introductory remarks, let me hand you over to Nick who will go through the financials.
Nick Holland
Thank you, Ian. As Ian mentioned, operating profit has increased substantially from the previous quarter.
In this quarter, we had operating profit of $190 million, that’s against $46 million in the previous quarter. As mentioned, that’s on the back of the higher prices achieved for the quarter.
$550 an ounce compared to $482 an ounce. Interestingly enough, if you look at where we are today, we’re roughly $100 an ounce higher than the average price achieved in the last quarter, and I’m sure you can re-work the numbers yourself on the basis of today’s price, assuming that all other parameters and production steps and costs are the same.
No doubt you’ll see substantial upside potential in these earnings for the forthcoming quarter. Net earnings for the quarter being $76 million, and in terms of cost initiatives, I think it’s fair to say that we continue to deliver on those cost initiatives.
The main cost initiative is the supply chain project, so-called Project Beyond at the South African operations. Pleasingly, I think that by the middle of next financial year, we will have largely achieved our objectives at the local operations.
Also, we’re rolling out these initiatives to the international operations, and we’re looking for similarities where possible across our operations to take this forward. I think the one thing that is becoming clear in this industry as well as other industries, however, is that the cost of inputs are going up all over the place.
We’re seeing oil going up, we’re seeing steel going up, we’re seeing things like cement and timber going up locally, and also the cost of labor is going up. Scarce resources are becoming more expensive.
So certainly these initiatives are important, just to make sure that we can maintain these operations where they are, and they are very helpful in mitigating some of these increases. Turning to the cash flow, cash flow from operations more than doubled in the quarter to $190 million.
Again, if you rework the cash flow based on $100 an ounce higher price, you can work out yourself that that will result in much higher cash flow. Over the last quarter, as Ian mentioned, we have spent $400 million on acquisitions.
We bought the Cerro Corona project for $40 million. That gave us an 80% economic interest in that project.
We also bought the Bolivar company, which had the Choco 10 mine for $360 million. But also, the surrounding land package of about 25,000 hectares now exclusively belongs to Gold Fields.
Terence will talk more about the plans going forward to take this operation to the next level. As a consequence of these acquisitions, our cash has reduced from $461 million last quarter to $239 million this quarter, and for the first time, we’re now showing a net debt figure of $105 million, and gross debt of $344 million.
We do have other commitments going forward that we need to fund. The Cerro Corona project has commenced in Peru, and there’s $277 million of capital expenditure to be spent over the next 15 or 16 months or so.
That’s a commitment. We stepped up the exploration at Choco 10 mine in Venezuela, and we’re probably going to be spending about $20 million over the next 6 to 8 months.
There’s likely further funding requirements in terms of a potential expansion of Bolivar. There’s a talk of expansion which Terence will tell you more about, and the Essakane pre-feasibility study, which is moving into full feasibility and is expected to be completed during the course of 2007.
So there’s certainly some substantial funding that’s going to be required to perform the growth strategy of the company. With that synopsis, I’ll hand you over to Brendan.
Brendan Walker
Thanks, Nick. Good afternoon, ladies and gentlemen.
At the selected operations, both in Driefontein and Beatrix saw production similar to the previous quarter. The Christmas break having had little impact at both these operations.
At Kloof, gold production decreased, resulting in an overall decrease of 7% and a total production of 646,000 ounces for the South African operation for the quarter. Operating costs increased by $10 million to $276 million as a result of the Rand strengthening during the quarter.
Total cash costs increased by 13% to $415 dollars per ounce. As a result of the 7% lower gold production and the 6% increase in the strength of the Rand.
Operating margins increased from 21% to 22%. Capital expenditure for the quarter was at $27 million, and forecast to go to $33 million in the next quarter.
Driefontein gold production of 284,000 ounces was nicely in line with the previous quarter. The reduced underground gold production as a result of the Christmas break was supplemented by 25,500 ounces from the final gold clean-up of the No.
1 gold plant, and additional surface tonnages milled. Operating costs increased by 6% to $110 million, and total cash costs increased by 10% to $376 per ounce.
The operating margin was at 29%. Gold production at Driefontein for the June quarter is forecast to be between 5% to 10% lower than the March quarter, as a result of lower than anticipated underground grabs at No.
1 and No. 4 shafts, while surface gold production will also reduce as the final clean-up at the No.
1 gold plant was essentially completed during the March quarter. Addition focus will be placed on the underground clean-up of old gold to reduce impact of the lower grade.
Gold production at Kloof decreased by 18% to 207,000 ounces. Underground tonnage’s mold reduced by 17% quarter on quarter, with a small reduction in the underground yield.
The drop-off in tonnages was as a result of Kloof having no stockpiled ore going into the Christmas break, and a slow start-up in January after the break as a result of a labor dispute which has subsequently been settled. Although operating costs for the quarter were flat at $100 million, as a result of the reduced gold output, the total cash cost increased by 24% to $457 per ounce.
The operating margin was 40% lower at 12%. Gold production is expected to increase at Kloof by 10% in the next quarter, and will remain at approximately 235,000 ounces going forward, until Kloof develops additional mining flexibility to enable it to better manage the grade variability.
Gold production at Beatrix was constant quarter on quarter at 155,000 ounces, a 4% increase in average value mined, coupled with improved sweepings and having a restock pile going into the Christmas break ensured a constant gold output. Total cash costs increased by 6% to $415 an ounce, in line with strengthening of the Rand.
Beatrix’s operating margin increased by 47% to 22%. Gold production and costs for the June quarter at Beatrix are forecast to be similar to those of the March quarter.
In conclusion, the output for the June quarter’s gold production will be similar to the March quarter, with the increased output at Kloof making up for the forecasted decrease at Driefontein, a result of the clean-up of gold coming to an end. Developing meters are also expected to increase by 7% to 28,000 million.
To summarize then, going into the future, Driefontein is expected to be a lower 8.5 ton per quarter producer, mainly as a result of the depletion of the surface clean-up gold, and we expect Kloof to be a 7.5 tons per quarter mine, and reaching these levels in the September quarter. Unfortunately, in the current quarter, we had a fire which started in the middle of last week in our low-grade main reef area, and at this stage, the effects of the extent of that fire is difficult to determine, but could be between 100 and 200 kilograms of gold.
We anticipate Beatrix to remain at the current level of 4.8 tons per quarter. Thank you.
I will now hand it over to Terence.
Terence Goodlace
Thank you, Brendan, and good afternoon all. The international operations improved for the quarter with attributable gold production at 376,000 ounces, up from the 342,000 ounces of the previous quarter.
Managed gold production across the operations increased to 450,000 ounces from 407,000 ounces. Costs for the quarter were $11 per ounce higher at $310 an ounce.
The primary drivers for these cost increases were increased volumes at Tarkwa and St. Ives, and the inclusion of the newly acquired Choco 10 mine in Venezuela.
The increased gold production, along with the increase in the gold price to $555 an ounce reflected in an operating profit increase of 48% to $112 million. Operating margins increased to 45% from 39% reported previously.
Capital for the quarter across the operations was $41 million as against the $34 million reported in the December quarter. Tarkwa delivered record throughput at the C.I.L.
plant and the Heap leach facilities, and this ensured an increase in gold production of 15% to 192,000 ounces, an operating profit of $51 million and an operating margin of 48%. Operating cost increased to $55 million, and total cash costs increased to $290 an ounce.
The cost increases reflect increased mining and stripping volumes. Capital amounted to $16 million, with spend primarily on the Teberebi pre-strip, heap leach pad construction, and the purchase of various bits of mining equipment.
Tarkwa has commenced with a full feasibility study to currently optimize the life of mine plan at a gold price of now $450 an ounce. This includes increasing throughput at the CIL plants.
This study is expected to be completed by calendar year end. The prime focus of the study is to maintain production levels at Tarkwa at 700,000 ounces per year.
For the June quarter, Tarkwa will reflect a marginal decrease in gold production, along with slightly higher unit costs, as compared to that achieved in the current reporting period. Damang again performed ahead of expectations, as seen with a 3% increase in gold production to 62,000 ounces.
This gold production improved through consistent open-pits and stockpile grade, along with a slight increased in mold throughput. Operating costs increased by 6% to $20 million, and the net effect of increased gold and the increased costs was the 4% increase in total cash costs to $340 an ounce.
The operating profit was $13 million and the margin 40%. The primary cost increase came about through increased re-handling of stockpiles.
Good progress continues to be made on the Damang pit cutback, and this project comprises 75% of the $8.1 million in capital spend for the quarter. During the coming quarter, it is expected that gold production levels will reduce by some 10%, while costs remain at current levels.
St. Ives improved quarter on quarter, and the gold production was 7% higher through a 40% improvement in gold mined from the open pits and similar underground production.
Heap Leach performance was consistent at 8,500 ounces. Operating costs increased by 16% to $63 million before non-cash items, and these costs reflect a 12% increase in open-pit ore volumes mined, increased waste normalization charges of $3.7 million, and a price participation royalty of $1.8 million paid to Morgan Stanley.
Total cash costs increased by 4% and are currently at $334 an ounce. The operating margin at the mine is currently 42%.
Capital expenditure was $17.4 million Australian dollars, and this was driven largely by the pre-stripping of the new Thunderer open pit, which constitutes 65% of the spend. A five-day planned mill realigning shutdown has affected production during the current quarter, or in the month of April, but gold production and costs are planned to similar levels as entertained in the current quarter.
Agnew continues to perform in line with plan, with gold production at 55,900 ounces, and that came along the back of underground grades, which improved to 12.2 grams per ton, or be it that the open-pit grades decreased to 1.86 from 1.96 in the previous quarter. The Songvang open pit, which is the primary source of surface material, continues to struggle, with lower volumes and grade than planned, driven by hard ground conditions and complex ore structures.
Operating costs overall are well-controlled at $20.5 million Australian dollars, and the higher gold price has ensured an improved operating profit of $20.9 million Australian dollars. The margin at this mine is 50%.
Total cash costs for the quarter are $281 an ounce. Capital expenditure for the quarter was $5.3 million, and is driven largely by the development of the Kim and Main Lode underground mines.
We are forecasting similar gold production levels for the June quarter, and an increase in unit costs as a result of changes to the mining mix, with more lower grade main load ore being mined. The Choco 10 mine in Venezuela was added to the fold with effect 1 March 2006, and it is important to note that in our quarterly results, we only have a month of results.
That is not a quarter’s results. The mine has been acquired on the basis of prospectivity, and I must say that every hole we drill in this ore body there’s testimony to that.
Our prime focus in the medium term is to build and position this mine for the future. Our approach as far as Choco 10 mine is concerned, has been one of a deliberate and systematic approach to safety, health, environmental, community affairs, mining and the processing plant.
We started at the front-end and worked our way through it with a measure of specialists that come out of the corporate office here in Johannesburg, as well as other people. To this end, we’ve also commenced with a detailed exploration program, with the express aim of increasing the resource and reserve base, such that we can determine an optimum mine site.
A study in parallel, due for completion by the calendar year end, has been commissioned to examine plant and tailing expansion opportunity. We are also currently busy with a two-year plan, and we will be in a much better position to report on future costs and production levels during the June quarter.
In the short term, we are setting up and investing in the processing and mining facilities to deliver on current design. The primary focus is related to ensuring that the CIP plant can consistently deliver 5,400 tons per day, and I must say at this point that the group metallurgist has just returned from Venezuela, and in his last two visits has said that there has been a dramatic improvement in the improvement at the plant.
It’s not that we didn’t know about it during the due diligence, but we wanted to get it to the standards that Gold Fields operates at. For the upcoming quarter, we have planned to deliver 20,000 ounces.
Overall, the international operation should deliver a similar performance to that achieved in the March quarter. Margins and cash flow will continue to be robust, with the current production levels, the current high U.S.
dollar gold price, and Australian dollar gold price, as well as what we are doing as far as costs are concerned. Thank you, and I’ll hand it over to Ian.
Ian Cockerill
Thank you, Terence. Now normally at this stage in the conference call, John would give you some feedback on the projects.
John is currently on leave, so I will just give you a brief update as to where we are on Cerro Corona. During the quarter, we received all the remaining permits that were required for this mine -- that’s the environmental permits, the mining permits, as well as the construction permits.
The construction in this project is now underway. Certain of the contracts have been awarded already, several to local operators, as well as international operators.
And as things stand at the moment, and bearing in mind any unforeseen mishaps, we are still online to be producing concentrate from this operation before the end of calendar 2007. Back home in South Africa, we continue to evaluate the drop-down projects, both in Driefontein and Kloof, and we’ll be presenting our latest findings to the board later this month.
So far, the reviews show that prospects look good for a positive decision, which will be made over the next four to five months, once final design and costings have been completed. Terence mentioned that we’re looking at further expansion at the new Tarkwa mill.
This will be to facilitate the treatment at greater quantities of ore, particularly from the southern end of the lease. This area, the heap leach pads will be reaching their final capacity in a few years time, and when one bears in mind the higher prices we’re currently receiving, we’re now forecasting the higher prices that we’re forecasting.
This makes no treatment for this ore together with the better recoveries through the mill process rather than heap leaching, albeit at higher unit costs, a much more attractive option. It’s unlikely it leads into any significant increase in output from Tarkwa, but certainly won’t prolong the period of maximum output for many years into the future.
On our corporate development activities side, these continue, but as you’ll appreciate, the ability for Gold Fields to discover value in these markets, while it’s not impossible, is becoming increasingly difficult. Several opportunities have been identified across the globe, and when we’re in a position to discuss these more fully, than obviously we will do so.
We will also see from the quarterly reports we go into a lot of detail about current expiration activity, and we are certainly focusing our expiration activity on those parts of the world that we have identified as being quite positive for the discovery of gold, and we’re making good progress in several of those areas. You see we published an updated resource statement for Essakane as well.
I think one thing about this quarter that needs to be spoken about is clearly the gold market itself. For some time, I believe that we’re experiencing something that some of the older listeners on this call may remember happened last in the late 70’s.
For several years, Gold Fields has espoused the opinion that the price of gold will rise for a variety of sound, economic, as well as emotional reasons, be they the realization that simple supply and demand can play a part in the sector, increasing concerns about the stability of the U.S. dollar, the subtle re-emergence of inflation, the surge of petrol dollars sloshing around in the Middle East, ever escalating energy costs, which have resulted in those petrol dollars surplus, and last but by no means least, a factor that is relatively new today, and that’s the creation of the Gold ETF.
I think that many observers have failed to recognize the significance of this event. Bearing in mind today that just under 500 tons of gold is being absorbed into the GETF in a very, very short period of time.
It’s quite clear to me that the gross in global Gold ETF has played a significant role in the recent run-up in the gold price. Yes, jewelry demand has dropped in the December quarter, and that decline in demand for gold jewelry spilled over into this March quarter, but the demand for gold as an investment medium has never been better.
You may recall that several years ago, some people were saying that as the gold price went through $325 an ounce, then the jewelry market would dry up. It did surpass that price, and jewelry demand actually increased, particularly in those areas where the World Gold Council actively promoted the product.
Bottom line is you show faith in your product, then so will others. Now I’m not going to attempt to predict the price of gold into the future.
All I will say is the gold fields were very positive on the upwards secular trend. We see higher prices over the next 12 to 24 months, driven as much by positive investor sentiment, but to regain the jewelry demand side of this business, which is very fundamental to underpinning the price of gold, I do believe that we’ll have to see some price stability, and then wherever the price decides to settle, I feel reasonably confident that jewelry demand will return.
Jewelry demand appears to be affected as much by severe price volatility, and you see buyers standing on the sidelines waiting for stability. I feel that once that stability comes back, then we will see some increased jewelry demand.
After all, gold is a very precious metal. It’s been prized for thousands of years, and I don’t see that sentiment changing too soon.
Thank you, and with that, Willie, let me hand over to you for any questions that listeners may have.
Willie Jacobsz
Greg, we are ready for questions now.
Operator
Okay, sir. (Operator Instructions) Your first question comes from the line of Alan Cook with Nedcor Securities.
Please proceed.
Alan Cook - Nedcor Securities
Good afternoon. Just a quick question, in the booklet that we received today, you mentioned that maintenance costs at Tarkwa will increase as the mining fleet moves to higher maintenance rates based on increased usage, and you’ve given us some pieces this quarter, your mining costs went from $0.96 U.S.
to $1.03. Could you indicate what kind of increase in your mining costs at Tarkwa you’re anticipating there?
Terence Goodlace
I think unfortunately, the fleet is now reaching the 12,000 hour mark, and that is the time when we most need maintenance. Based upon that, we thought it was apt to reflect that in the book.
As far as what’s going to happen with the unit costs, as far as the unit costs are concerned, our aim is to try to keep them at $1.03 and not increase them, and the way to do that is to increase productivity and to increase volumes mined. That’s what we are aiming to do.
Alan Cook - Nedcor Securities
Thank you. Just a last one, something else I picked up in the booklet, you mentioned that you guys have withdrawn from the Shandong JV in China.
Anymore detail on that? Should we find that Sino Gold still there?
Or is China essentially an area that you’ve gone cool on.
Terence Goodlace
Not at all, Alan. You see that we actually increased our stake in Sino Gold.
The Shandong joint venture was really one of pure exploration play. But we’ve increased exposure to the Sino certainly with the forthcoming commissioning of the [Jantung] mine.
We think that’s very interesting, and also you will note that exploration activity has increased in the Fujian Province, along with Zijin Mining. So we’re certainly not cool on China.
I think the withdrawal from the Shandong JV reflects the inevitable consequence of not coming up with some of the positive results from that area that we hope there will be, and it is simply a question if we set walk-away criteria for our exploration crews, if they don’t match up to that criteria, then we stop and we move on to somewhere else.
Alan Cook - Nedcor Securities
Thank you.
Operator
Your next question comes from the line of Victor Flores with HSBC.
Victor Flores - HSBC
Thank you. Good morning.
I was hoping that for some of the costs at the South African operations, can you give us a sense of how much of the increase from the December quarter to the March quarter is due to the lower production as a result of the holiday season. How much of that is due to ongoing cost pressures, inflation that is outside South Africa?
How much of it is due to South African inflation, and how much of it is a positive impact of whatever cost-cutting initiatives are ongoing?
Brendan Walker
In Rand terms, our title costs for the quarter actually decreased by 27 million Rand. That was largely offset by Kloof’s drop in production.
On absolute terms, Rand terms, they did drop, but with the Rand strengthening to the dollar of about 6%, that put pressure on the dollar side, and then with our production being down 7%, and if you add those two, that basically gives you the effects. But in absolute terms, we kept the costs level with sizing due to production.
Ian Cockerill
I think the other thing, and Nick mentioned it this morning in our discussion with journalists down here, if you look at consumables in South Africa, over the past three years, taking our consumable expenditure and measuring that against area broken, our cross selection remains flat for three years. So what you’re seeing is a high unit cost expressed in gold produced, bearing in mind that the expenditure for area broken is constant.
I think that’s simply a reflection of the natural declining grades in our ore body.
Victor Flores - HSBC
Great, thanks. Second question goes to Choco.
You mentioned that the production you reported was only for one quarter. Could you give us a sense of what the assets produced for the entire quarter and what the cash costs were?
Terence Goodlace
Yes, this is just for the one month. I don’t have what it was for the full quarter, but it was probably something like 20,000 ounces, and that probably freed some of the cash costs.
Victor Flores - HSBC
Great. Could you give us a sense of what the ramp-up is going to be throughout the year, because I saw what I thought was a quote attributed to Ian saying that the production this year at Choco would be 120,000 ounces.
Terence Goodlace
Yes, the ramp-up, once we have everything in place and once we’re happy with the factory in and about the processing plants, and once we’re happy with the actual plant itself, I don’t foresee any problem with getting to that trigger that Ian has actually mentioned. As I said a little earlier, we are currently busy with the two-year plan, and that is only being presented to me next week, so it’s a bit premature for me to actually say what’s happening.
I do expect that we should easily be able to get to those 120,000 ounces.
Ian Cockerill
Just before Terence goes off that point, I think what is important is to clarify. There seems to be some confusion in the marketplace.
Some commentators have been saying that there was supposed to be 190,000 ounces this year. You have quite correctly picked up that I had flagged that it wouldn’t be 190.
190 was a number that we published on the back of information that was in the public domain by the previous owners, and until such time as we had done the review, we felt it inappropriate to put out any other number until we had a chance to review the process. When we had our first full review on the mine, post the due diligence, management at the mine indicated that 190 was not possible, 120 was closer, and we concurred with that.
Also important to remember that we never factored in 190,000 ounces in the first year of production, unlike some people have suggested well have you not overpaid for this effort -- far from it. We didn’t even assume we would get those levels of production in the first year.
But the most important thing about this asset is that it’s a very, very prospective area. We have two choices.
We can either push production in the short term and not sort out some of the bottlenecks, some of the issues that need to be sorted at this mine, and create an ever longer unstable performance in the operation, or take a short-term hair-cut and provide a solid platform to build off in the future. This is Terence’s desire, what he wants to do, and I fully support him in doing that.
I suspect that once he had a chance to have that review, we’ll be able to put out a much fuller statement on that build up. But the build-up will come and I think people, over the next couple of quarters, listeners will be able to see just how well Choco 10 has performed, and in fact, it was a very good acquisition.
Victor Flores - HSBC
Thanks, Ian. I think part of the confusion may have stemmed from comments attributed to the company back in November, where they did quote that 190, but I understand that that’s not a number that you put into the market.
Ian Cockerill
That is a number clearly put out for promotional purposes.
Victor Flores - HSBC
I can’t believe they would do that. Thank you very much.
Operator
Your next question comes from the line of Muneer Ismail with Deutsche Securities. Please proceed.
Muneer Ismail - Deutsche Securities
Good afternoon, guys. Two questions.
Sorry to harp in about this Choco 10 thing, but it did kind of catch us by surprise, 5,000 ounces coming through. I fully understand that it’s only one month of production, but just looking forward, it’s 20,000 ounces what you’re projecting for June.
Now, it’s all good and well saying it’s premature to sort of release what sort of numbers we get, or whether this mine can get up to 190,000 ounces, but if you could just give us an idea of the timing of that. As we put our numbers into our model, we sort of need to project forward and we might deny you the value by looking at it as prospective of the total value required under the model.
Can you not give us some indication of for how long you’ll run 20,000 ounces?
Terence Goodlace
I think the key thing for us is that we’ve got 19 projects on the go right now, just looking at the processing plant. All of that is being timed, all of it we need to procure everything in terms of refitting the plant and recapitalizing the plant to our standard, and that is on the go right now.
The engineers and company have only just returned from Venezuela and from that basis, as I say, it’s premature to give you guidance on something that we haven’t fully timed ourselves yet. But my expectation is certainly towards the end of the year, we are certainly going to be above the 20,000 ounces.
But if you look from beyond June, I expect, and based upon what I’ve been told so far and what actually is happening at the plant, I expect that we will quite comfortably be able to beat the low number of 20,000 ounces. All I ask is that you give us a bit of time.
We are going through the process. We’ve had the operation for a very short period of time, and we will give you guidance in the June quarter.
Muneer Ismail - Deutsche Securities
Fair enough. On Kloof, I’m not sure if this is for Brendan or for Ian, but look at Kloof, 7.5 tons per quarter, I’m okay with that, but just tell us what sort of grade are we looking at, or what sort of volumes?
Is the problem with the volumes or is the problem on the grade side? Can you give us an indication of that?
And when would we look to sort of benefit from a higher production number going forward, once again for modeling purposes.
Brendan Walker
In the shorter term, the issue will be grade. We see a slight decrease in grade going forward, until we can bring the number one short pillar into play, which is between 18 and 24 months away.
So that’s really what’s going to make the difference. But in the shorter term, there will be a slight drop-off in grade, but volumes will be the same.
Muneer Ismail - Deutsche Securities
Thank you very much.
Operator
Your next question comes from the line of Joachim Berlenbach with Craton Capital. Please proceed.
Joachim Berlenbach - Craton Capital
Good afternoon. Could you give us some guidance regarding the re-etching at Essakane?
Firstly, when will it be finished, and secondly, which direction do you see the grade going at Essakane?
Ian Cockerill
Joachim, I think we said previous quarter, that whole re-etching probably will be complete first that we can publish a final bankable resource statement, I think it was by September. We’re still online to be able to do that.
My sense is that what will eventuate is a number that will give a slightly lower grade overall, that’s spread over more tons for more ounces in totality -- rough guidance.
Joachim Berlenbach - Craton Capital
Thank you.
Operator
Your next question comes from the line of Peter Townsend with Bernard Jacobs. Please proceed.
Peter Townsend - Bernard Jacobs
Good afternoon. Just to follow-up on what Joachim was asking.
On Essakane, even if you do get a slight increase in your tonnages and overall goals, at somewhere between 3 million and 4 million ounces, if you presume some of that inferred and move them to a mine-able category, is that enough for Gold Fields at the moment? Your old rule of two’s I’m guessing probably no longer strictly applies, but does this project still look like one that is a Gold Fields size project?
Ian Cockerill
Peter, the rule of two’s is an aspirational entry level for project size. Clearly we would like to acquire assets which are larger than that.
I think the numbers that you’re looking at really go around the Essakane main zone. There are other satellite deposits in this district, all within relatively easy trucking distance, that have not been factored into these numbers as yet.
We don’t know what that is going to come out at. To be honest with you, it will be nice to have something which is larger than 4 million ounces.
However, what is more important to us is the size of the margin on those ounces, because we could find a 10 million ounce deposit and it has $2 an ounce of margin. That’s not of any interest to us.
But if it’s a 3 million or a 2 million ounce deposit, it’s got $200 - $300 an ounce, I know which one I’d rather go for. So I am not fixated on the size of the deposit.
I’m more fixated on the size of the margin that that deposit can deliver.
Peter Townsend - Bernard Jacobs
Thanks, Ian. Then just on one of your other projects, your developing project, Cerro Corona, is there anything you will or can do in the next 12 months in Peru as a caution against political changes there, or are you still comfortable with the political environment and we’ll just proceed with the mine construction as you originally envisaged?
Ian Cockerill
We have some excellent people on the ground in Peru, people who are I believe politically very adept. They’re very good at reading the political straws in the wind.
They interact on a regular basis with the authorities in the country, and they keep us abreast of what is happening. We are not hearing anything at this stage that is giving us major cause for concern.
Clearly there is a degree of instability. We don’t know what the final outcome of the elections is going to be.
We don’t even fully understand what is going to be the political direction of the country. We monitor it.
We keep abreast of those situations. I think possibly the best indicator I can give you is that we raise project finance on this particular project and the banks didn’t insist on us taking out political risk insurance.
You know about banks when they give you an umbrella, they ask for it when it rains. So if they’re reasonably comfortable that we didn’t need political risk insurance, I think that speaks volumes.
But that’s not to say that we aren’t keeping a very, very careful eye on the situation, but as things stand at the moment, the project is continuing on pace, and as I said, we still stick by our ability to deliver concentrate by the end of 2007.
Peter Townsend - Bernard Jacobs
Thank you.
Operator
Your next question comes from the line of Sam Robins with Robins Planning Company. Please proceed.
Sam Robbins - Robbins Planning Company
Congratulations on the superb job. I have a couple of questions, but the first question is assuming that the gold price increased say 20% in that quarter, does that mean that 80% of your earnings improvement came from your own cost controls and management?
Ian Cockerill
Are you talking about the 20% improvement in the revenue in the March quarter, Sam?
Sam Robbins - Robbins Planning Company
I’m putting it this way. I guess my question is how much of the increased earnings is due to the increase in the gold price, how much is due to your increased efficiency despite the fact of that declining stock option.
Nick Holland
Bear in mind that the production for the quarter dropped by 2% overall compared to the previous quarter, and as we mentioned, that is mainly because of the seasonal Christmas break in South Africa, which has impacted the operations. In fact, the international operations, as you heard earlier, in fact increased.
Our costs at the local operations in total Rand millions, it’s actually reduced quarter on quarter. So we’d like to believe that some of the cost initiatives have impacted the bottom line.
The unit costs did go up, mainly because of Kloof’s drop in production. You’ve got to remember that 70% roughly of the costs at the slack in operations don’t vary with production, so if your production comes down, you often can sit with a lot of those costs, and that’s why you’re seeing the unit costs impact having gone up.
But in total cost terms, the costs have been very well controlled over the quarter, and the price increase, as you heard earlier, has gone from $482 an ounce to $555, so I think a significant part of the earning increase we have to accept is due to the price increase, with production having gone down. I hope that’s clarified the situation for you, Sam.
Sam Robbins - Robbins Planning Company
Yes. My next question is, it’s been mentioned already of the political risks in Peru.
Can you talk about the political risks that are going on perhaps in Venezuela?
Ian Cockerill
Well, Sam, I think it’s fair to say that we went into Venezuela with our eyes open. We knew what we were letting ourselves in for.
When we looked at the type of asset that Choco 10 was, we came to the conclusion that the risks of mining in the country was certainly worth the potential reward. I think the way that Gold Fields deals with political risk is by falling a sample folio management approach.
Don’t have too much exposure to any one particular area, spread your eggs, don’t put them all in one basket, and in the event that something does go wrong in one particular area, then it’s disappointing, but it’s not a complete train smashing. It doesn’t jeopardize the future of the company.
And that’s what we’ve done. I do believe that there are challenges about mining in Venezuela, but I do think it’s a very, very positive place to mine gold and to make some money.
I think that once we stabilized the ship at Choco 10, I think people will realize that that’s exactly what we’ve done.
Sam Robbins - Robbins Planning Company
My final question is you’ve got some kind of an operation that you’re going to earn your way into in Mali, and I wonder if you could spell out the potential of that operation.
Ian Cockerill
Are you talking about the joint venture, or the exploration on the Glencar, Sam?
Sam Robbins - Robbins Planning Company
Yes, where you are earning in your ownership as you develop and explore there.
Ian Cockerill
Yes, that’s the one in Guinea, Sam, it’s in the Sankarani project in southwestern Mali. Basically it’s a typical gold field exploration earning, where we partly fund the exploration activity and for that, we get ourselves an interest in the project.
At this stage, all I can say to you is that on a geological rating system, that part of the world features very highly. We do know that Mali over the last decade has grown in importance as a gold province, and from a real estate and an address perspective, this particular area is a very interesting area.
But it’s still very, very early days, and there’s nothing that we can report on substantially. One’s hopeful that with a good address and with some good crews drilling there, we could come up with something fairly interesting.
Sam Robbins - Robbins Planning Company
Thank you.
Willie Jacobsz
Greg, we’ve got time for one more question.
Operator
Okay, sir. Your next question comes from the line of Barry Cooper with CIBC World Markets.
Please proceed.
Barry Cooper - CIBC World Markets
Just to follow-up on some of your other commentary and questions that have been laid out so far. One of the key components of the issues at Kloof seems to be the great variability.
Can you just flesh out a little bit more what it is that you’re seeing on that great variability? Is it an interpretation that’s changing, or how are the reserves behaving, or just what’s causing this variability?
Brendan Walker
One of the problems at Kloof is that while we have grade variability, we don’t have a lot of flexibility, and that’s what we need to do, is plan more flexibility so that we can better manage the grade. In other words, when we hit areas where we hit a fault or something, we don’t have the flexibility to move those crews elsewhere while we negotiate the geological fault, or whatever, we’ve got a low grade.
So that is our focus, is in increased development to improve our mining flexibility. But no, I don’t think from a grade variability point of view that it’s any different to what we’ve been talking about in the last year.
Ian Cockerill
I think it’s also fair to say that one particular shaft that has not delivered be opening up a reserves to the extent they should have done, is the Kloof 4 subvertical. Certainly that’s an area Brendan mentioned an increase in development meterage in the upcoming quarter.
That has been some improvement, but we need to increase it even more. That will open up the reserve and, as Brendan says, will give us the flexibility.
But we know the VCR at Kloof is highly variable, so there’s no real, at this stage, major changes in our interpretation. As Brendan said, it’s simply a question of having the ability to move crews from un-pay to pay, and having that reserve available.
Barry Cooper - CIBC World Markets
Thanks. On Choco 10 again, how significant is the fact that you don’t have your blasting permit there?
Is that something that we should be overly concerned about?
Terence Goodlace
Yes, while it is something of concern, but we have got our way around it. We do have access to contractors who have blasting certificates or licenses, so we are conducting blasts using their licenses.
So all in all, we do know that the explosive permit is actually sitting in the halls of Caracas, and it’s waiting to be signed. It’s gone through all of the hurdles as far as meeting the hurdles for the department’s concerns, and we’re just waiting for it to be signed, so we do have a way around it.
Barry Cooper - CIBC World Markets
Right, do I sense though that there’s any kind of ransom being held here, that they’re not signing it for a reason?
Terence Goodlace
No, not that I’m aware of, no.
Barry Cooper - CIBC World Markets
Okay, good enough, then. The final question is one dealing with Essakane.
I’m going to read a statement there, maybe you could clarify something for me, because I’m not sure exactly what it means. On the top of your page 9, it says “The resource calculation represents a recoverable resource after applying change of support by uniform conditioning.”
Now, I’m not sure what that last portion, applying change of support by uniform conditioning, what does that exactly mean?
Ian Cockerill
Barry, when you apply geo-statistics to a the drill results, as you know, the change in support refers to the spacing between values, and if you have a 100 by 100, and then you go to 50 by 50, that is a change of support. It gives you a more accurate, unless you went the other way, potentially a less accurate or less level of confidence about the numbers.
What you’re seeing there is really just a statement that we’ve applied uniform conditioning using proven methods. We have gone to what we believe is a more appropriate level of support, and don’t ask me what that is because at the moment, for the life of me, I can’t remember what it is now, but that’s exactly what it means.
So it’s really just giving an indication of the process that we have applied to calculations of reserves using geostats.
Barry Cooper - CIBC World Markets
Okay, when I went and took my geostats course, that may have been summed up in the word precision?
Ian Cockerill
Well, not necessarily precision, but increased levels of confidence I think is the correct terminology to use in geostats.
Barry Cooper - CIBC World Markets
Right, okay, thanks a lot, that clarifies that. Thank you.
Ian Cockerill
Okay, well, Greg, ladies and gentlemen, thank you very much indeed for joining us today. I think what you’ve heard is a company that has had in this last quarter, has had some up’s, it’s had some down’s, and certainly in the upcoming quarter, we’ve indicated where we think the improvements are coming.
Certainly we’re expecting some improvements at Kloof. We’re very pleased with what we’re starting to see is settling down of the Choco 10 mine in Venezuela.
I think just to summarize, if one looks at the upcoming quarter, Nick did allude to this earlier, we currently sit at a received price, which is $100 per ounce higher than the received price for the average of the March quarter. And on the assumption that those prices hold, then I think we should be looking forward to a very interesting final quarter in the year.
We look forward to meeting up with you again after the June quarter, where we can actually talk about the strong finish to the year. With that, I would like to thank you for listening, and cheerio to everybody.
Operator
Ladies and gentlemen, thank you for your participation in today’s event. This does conclude the presentation and you may now disconnect.
Have a great day.