Shares of Gold Fields (NYSE: GFI) fell nearly 11% today after the company reported first-half 2019 operating results. The results were actually pretty solid; the gold miner returned to profitability and turned cash flow positive. It maintained its full-year 2019 outlook for production of 2.13 to 2.18 million gold equivalent ounces (GEO).
Despite the signs of progress, investors are maintaining their cautious stance. That's likely due to the company's announcement that it will double down on the beleaguered South Deep mine in South Africa following an improvement in operations at the asset. Investors were previously hoping that the mine would be unloaded in a bid to boost operating margins for the overall portfolio.
As of 12:51 p.m. EDT, the stock had settled to a 7.1% loss. The gold stock is up 82% in the last year.
Image source: Getty Images.
Both investors and Gold Fields have reasonable arguments regarding South Deep. On the one hand, the mine has heavily weighed on the income statement and balance sheet for more than a decade. In the second quarter of 2018, the mine reported all-in costs (AIC) of $1,992 per ounce -- higher than the selling price of gold. It consumed $54 million in cash in the first half of 2018.
On the other hand, South Deep may finally be on the path to improvement. Gold Fields reported that AIC dropped to $1,275 per ounce in Q2 2019 and that the asset consumed just $17 million in cash in the first half of this year. Those beneficial trends could continue if gold production increases as expected.
South Deep still boasts relatively high AICs, and its efficiency efforts are partially constrained by South African labor laws, but it's one of the largest gold mines in the world. Of course, there's a long way to go before it lives up to its potential. The asset produced just 8.5% of total output for the company in the first half of 2019 and was the only cash-consuming mine in the portfolio.
If Gold Fields can continue to nudge South Deep closer to its potential, then the business should be able to lean on it as a sustainable source of cash flow for the long haul. Investors will want to see several more quarters of improvements before getting too excited, especially given the costs of ramping up a major project in Australia.
This article was originally published on Fool.com