Gold Fields’ CEO on the company’s $6.7-billion Yamana Gold deal and the problem with exploration

(Kitco News) – This spring Gold Fields announced a plan to acquire Yamana Gold for $6.7 billion.

On Wednesday CEO Chris Griffith spoke to Kitco.

Griffith said the two miners’ operations are complementary, and the combined companies will save operational costs, as well as give Gold Fields a higher profile in the North American market. The deal gets voted on in the fall by shareholders.

The deal has critics. In June Gold Fields’ shareholder, Redwheel, wrote a letter to the Gold Fields’ board opposing the acquisition stating that the deal is “…too expensive and not guaranteed to deliver production growth and profitability.”

Redwheel said Gold Fields should stick to its own development pipeline and grow organically.

“We believe the company has ample time to be opportunistic over the next few years rather than rushing into a significantly dilutive acquisition today. Based on a spot gold price of $1,850/oz, we would expect GFI’s brownfield growth to drive a strong increase in free cash flow which the market could reward over time,” writes Redwheel.

Year-to-date the Van Eck Gold Miners index is down 14%. Gold Fields is off 9%.

Griffith said the precious metal sector is approaching a shortfall, and Gold Fields should get ahead of it.

“[It] is a relatively good time before the competition for assets really, really hots up. We are stealing a march on a number of our competitors out there,” said Griffith.

Over the past five years, Griffith warned that the return on exploration dollars has been “rapidly diminishing.”

“We are not seeing a return for those expiration dollars. What we are seeing is a reduction in the return for those exploration dollars,” said Griffith.

“Where we are seeing the discoveries, they’re coming in at lower grades and they’re coming in at less favorable jurisdictions. The bigger gold companies no longer have the ability to replace their declining reserve and resource base internally. And the competition for those external options is becoming really intense.”