Fight­ing Cock­er­ill

He nearly lost his job but now no fund can af­ford to ig­nore him

Finweek English Edition - - Front page - DAVID MCKAY davidm@fin­

IT’S JUST POS­SI­BLE that Ian Cock­er­ill, the 52-year-old CEO of Gold Fields, is hav­ing the time of his life. In a lit­tle over 12 months, the Gold Fields board has bought two com­pa­nies, started two new mines in South Amer­ica and won min­ing per­mits for its SA mines. Add to this the gi­gan­tic South Deep mine that Gold Fields whipped from un­der the nose of ri­val Bernard Swanepoel, CEO of Har­mony Gold. If ever an event proved Cock­er­ill had learned to street fight, the out­ma­noeu­vring of Har­mony over South Deep was it. He wooed Bar­rick, won the ear of West­ern Ar­eas and tamed all the pos­si­ble mov­ing parts that made own­er­ship of that mine the im­pon­der­able it be­came. In the end, Cock­er­ill was

just quicker to the punch.

All the while, a tide of con­fi­dence had been ris­ing in the gold mar­ket, push­ing the price of gold higher in nearly all cur­ren­cies; in fact, nearly three­fold in dol­lars since its low in 2000. The re­sult has been to send Gold Fields’ share price up 50% in two years, helped by record quar­terly earn­ings and pro­duc­tion and bil­lions of rand in cash gen­er­a­tion.

Says Cock­er­ill: “We don’t call this the min­ing busi­ness. We call this the ‘shit hap­pens’ busi­ness.” It’s a good joke and isn’t un­true for the most part of the min­ing in­dus­try’s hurly burly. But since sur­viv­ing the hos­tile takeover bid from Har­mony in 2004, Cock­er­ill and his board have cut a wide swathe.

“I think the per­cep­tion of Cock­er­ill when he started was of a lit­tle, grey man,” said Lis­ton Mein­tjies, chief in­vest­ment of­fi­cer for Metropoli­tan As­set Man­agers. “But you now get the feel­ing that what he would like to hap­pen can be made to hap­pen.”

Per­haps the Har­mony hos­tile takeover at­tempt in 2004 helped gal­vanise Cock­er­ill and his team. Af­ter all, they very nearly lost their jobs. Cer­tainly, Cock­er­ill and his team didn’t see it com­ing. Per­haps in a mir­ror-star­ing mo­ment, he de­cided never to al­low that to hap­pen again. In money terms, Cock­er­ill has over­seen growthre­lated spend of R24bn ($3,3bn). And there are other plans. Gold Fields wants to spend a fur­ther R9,7bn deep­en­ing its SA mines and to start an­other mine in Peru. There’s also some R3bn that


be spent by 2010 up­grad­ing the South Deep mine if a fea­si­bil­ity study is fully adopted. And to think Cock­er­ill was once likened to a green­gro­cer be­cause of his pedes­trian man­age­ment style.

Not all are so con­vinced. Piet Viljoen, who runs RE:CM, a fund-man­age­ment firm, be­lieves Cock­er­ill lis­tens to his share­hold­ers – to his detri­ment. “Let’s be hon­est, gold in­dus­try share­hold­ers are not the most ra­tio­nal,” says Viljoen. As with any typ­i­cal gold com­pany, Gold Fields is value de­struc­tive over the long term, he says.

“Cock­er­ill’s not wor­ried about cap­i­tal costs and re­turn on cap­i­tal. It’s all about get­ting pro­duc­tion up as high as pos­si­ble. For us, it’s not a core in­vest­ment hold­ing,” says Viljoen.

To­day, how­ever, it’s 8am on a Satur­day morn­ing and all is well with the world. The sun has al­ready climbed above the trees and the day is shap­ing into a typ­i­cal High­veld scorcher.

Clearly not con­tent with hec­tic cor­po­rate life, Cock­er­ill is re­build­ing at home, hav­ing shifted a few streets in the plush set­ting of Sand­ton’s Morn­ing­side. It’s ex­actly what you’d ex­pect of an ex­ec­u­tive home. “What do you think of the view?” he says, wav­ing an arm at the new gar­den.

It’s mo­men­tar­ily dif­fi­cult to con­nect gar­den bird­song and Cock­er­ill’s praise for some an­cient oak tree – the genus of which he for­gets – with the manic scenes two days ear­lier when Gold Fields was un­leash­ing its latest cor­po­rate ma­noeu­vre. Hav­ing racked up more than $2bn in net debt, the com­pany an­nounced it would em­bark on SA’s largest sin­gle book build­ing, rais­ing $1,2bn.

Five days later, the share is­sue was com­plete. In a fur­ther an­nounce­ment that sur­prised an­a­lysts, Gold Fields said $528m had been

spent clos­ing the hedge book in West­ern Ar­eas.

“I guess we were ex­pect­ing the hedge book to be re­moved but not as rapidly as it was,” says Mandla Mapon­dera, a fund man­ager for Omigsa. “Gen­er­ally, that was a pos­i­tive thing, meet­ing the is­sues fairly early in the process.”

Im­posed by the late Brett Keb­ble while CEO of West­ern Ar­eas, the hedge book was noth­ing but trou­ble.

“Ev­ery $1/oz move in the gold price added $1m in li­a­bil­ity to the com­pany,” says Cock­er­ill. Weighed un­der by crip­pling debt else­where, Keb­ble used South Deep, a 28-mil­lion-oz gold mine on the West Rand, to raise fi­nance. He sold gold for­ward at prices well be­low the ac­cel­er­at­ing spot price, com­pletely un­der­es­ti­mat­ing the enor­mous groundswell of sup­port for a higher gold price.

Gold Fields val­ued the hedge book in De­cem­ber at a neg­a­tive $600m. This was when its chief fi­nan­cial of­fi­cer, Nick Hol­land, had started sell­ing it down. “To have re­moved it at $530m puts us $70m ahead of our own bud­get,” says Cock­er­ill.

“This is a very pos­i­tive de­vel­op­ment,” says Ge­orges Le­quime, an an­a­lyst for RBC Cap­i­tal Mar­kets in Lon­don. “From a morale point of view, the re­moval of the hedge book losses should be a huge psy­cho­log­i­cal boost.” Cock­er­ill agrees with that: “It was a fi­nan­cial mill­stone at the mine [South Deep]. When they heard it was re­moved, there was eu­pho­ria.”

There’ll be much fo­cus on South Deep now. The mine was never well op­er­ated, a fact put down to a frac­tious and de­ci­sion-con­found­ing joint ven­ture that ran it. Un­der one man­age­ment, hopes are high for a re­nais­sance.

But how? At the out­set, Gold Fields planned to dig less ex­pen­sively. A fea­si­bil­ity study com­piled by West­ern Ar­eas showed that some R1,1bn could be taken off the ex­penses sheet over the life of the mine with bet­ter plan­ning.

An­other idea is to use in­fra­struc­ture that Gold Fields de­vel­oped at its Kloof mine, which neigh­bours South Deep. That way it’ll be quicker and cheaper to mine South Deep’s more deeply stowed gold.

But there’s a ge­o­log­i­cal fault be­tween the two prop­er­ties, a fea­ture that has led to di­vided views on South Deep’s worth

among Gold Fields se­nior man­age­ment in the past, and which might raise the hack­les again in the fu­ture. The chal­lenge of com­bin­ing South Deep with Kloof had de­layed Gold Fields’ plans re­gard­ing the South Deep mine, but the in­ter­est has al­ways been there.

Cock­er­ill con­firms the group had been kick­ing around the South Deep co­nun­drum since the Nineties, soon af­ter Jay Tay­lor, then CEO of Cana­dian min­ing com­pany, Placer Dome, took man­age­ment con­trol. Then the plan was co-op­er­a­tion, but the death of Keb­ble and the in­ter­est in the mine showed by Swanepoel, forced Gold Fields’ hand.

Now, with the mine fi­nally un­der its con­trol, Gold Fields hopes pro­duc­tion can be taken higher. There’s also a tax shield from ac­cu­mu­lated as­sessed tax losses and unre­deemed cap­i­tal ex­pen­di­ture of some R3bn to R4bn un­der which the mine can op­er­ate un­til 2014.

Fi­nally, there’s the re­moval of the hedge book, a short-term bon­sella that en­ables South Deep to be paid a full price – cur­rently some R151 000/kg – for the gold it pro­duces. Com­pare this with the con­straints im­posed by the hedge book that kept rev­enue at R80 000/kg. NICK HOL­LAND, Gold Fields’ mild-man­nered, al­most de­mur­ring bean counter, said he wouldn’t be kept awake by the com­pany’s bal­ance sheet. That was in De­cem­ber when Gold Fields had bridg­ing fi­nance of

$1,2bn and to­tal net debt of $1,9bn. Bold state­ments in­deed from Hol­land who, the mar­ket has long sus­pected, doesn’t love debt much. In Novem­ber, for in­stance, the group’s net debt to­talled $130m. It’s no ex­ag­ger­a­tion to say that that was a fairly typ­i­cal num­ber for Gold Fields to be car­ry­ing on its bal­ance sheet.

Clearly, the sud­den de­ci­sion to close the West­ern Ar­eas hedge book, at a cost of $528m, was a step be­yond. “At $2,5bn, debt would have been at 2,8 x EBITDA,” says Cock­er­ill. Banks lend when you don’t need it. But what if the gold price fell out of bed? What if mines fell on some dif­fi­cult times? Cock­er­ill’s “shit hap­pens” ax­iom was pressed into ac­tion.

Amid the high-fly­ing cor­po­rate ac­tion, there are present fears. Cock­er­ill, fo­cused tightly on cor­po­rate mat­ters, has lost his grip on the mines, par­tic­u­larly in SA. The De­cem­ber quar­ter op­er­at­ing re­sults, an­nounced si­mul­ta­ne­ously with the share place­ment and hedge book clo­sure, were dis­ap­point­ing, with costs spi­ralling dis­turbingly high. An­a­lysts even spoke of de­lib­er­ate cloak­ing of re­sults with cor­po­rate mat­ters. “How stretched is the guy [Cock­er­ill]? I don’t know,” says Peter Ma­jor of stock­broking firm, Cadiz. “The mines didn’t have a good [De­cem­ber] quar­ter.”

Pre­dictably, Cock­er­ill doesn’t think he’s lost con­trol of the com­pany’s daily ac­tiv­i­ties, but con­cedes what few man­agers have ac­knowl­edged in the past: “The SA mines are old, tired, dif­fi­cult mines. It’s like run­ning those old Alfa Romeos. If the tol­er­ances are out of whack, it all goes wrong. If they are right, ev­ery­thing runs beau­ti­fully.”

He also raises a com­plaint grow­ing in the min­ing in­dus­try that skills are thinly spread. The gold in­dus­try loses too many peo­ple to plat­inum, he says. “Over the past few years, the per­cep­tion is that plat­inum is the much sex­ier metal,” says Cock­er­ill. And while the se­nior team is rel­a­tively in­tact, salaries for ar­ti­sans are “bal­loon­ing”, he says.

Plat­inum is a sub­ject close to Cock­er­ill’s heart. It’s thought his com­pany de­sires adding plat­inum as­sets as mir­rored in the R650m ($90m) it spent try­ing to de­velop a plat­inum/ pal­la­dium mine – known as Arc­tic Plat­inum – in the north­ern reaches of Fin­land. When you go that far for as­sets, you know man­age­ment has a yen for it.

The R3,65bn ($500m) project has since been farmed out to North Amer­i­can Pal­la­dium be­cause it wasn’t fea­si­ble for Gold Fields. The time spent as­sess­ing the prop­erty – and the money – proves even the best cor-

po­rate teams can have a dud. Still, the white metal is part of the strat­egy. “We re­main very in­ter­ested in do­ing some­thing in that sec­tor,” says Cock­er­ill. The prob­lem is that Gold Fields must pro­duce enough metal or it sim­ply be­comes a min­ing con­trac­tor to “the big boys”, by which Cock­er­ill means An­glo Plat­inum, Im­pala Plat­inum and Lon­min.

Talk­ing of the big boys in plat­inum, there was spec­u­la­tion in Fe­bru­ary 2006 that Gold Fields and Lon­min had dis­cussed a merger. Cock­er­ill ac­knowl­edges that meet­ings took place with Brad Mills, Lon­min CEO. “We struck up a re­la­tion­ship, but I don’t know how the story cir­cu­lated that there was a merger,” says Cock­er­ill. Ac­tu­ally, it was Lon­min that gen­er­ated that story.

Fol­low­ing in­ter­est­ing (but not mind-blow­ing) morn­ing gains in its share price, Lon­min made a sur­pris­ing an­nounce­ment to the Lon­don Stock Ex­change on 17 Fe­bru­ary, that it was en­gaged in talks that could lead to an of­fer for the com­pany. (Pre­dictably, Lon­min’s stock then went bal­lis­tic, notch­ing up an in­tra­day gain of 34%.)

“Yes, I asked Brad about that,” says Cock­er­ill. “He said: ‘Oh, it’s got noth­ing to do with you guys’.” What­ever talks took place were firmly dis­placed by the LSE an­nounce­ment. A week later, Lon­min said talks sur­round­ing the com­pany had been ter­mi­nated. How­ever, it re­mains to be seen whether Cock­er­ill’s plat­inum in­ter­ests are over. VENEZUELA IS NOT the eas­i­est place to do busi­ness. Yet Cock­er­ill au­tho­rised the R2,4bn ($330m) takeover of the Toronto-listed Boli- var Gold, which owned the Choco 10 prospect there. South Amer­ica has been hit by a wave of in­dige­nous na­tion­al­ism. In Venezuela it re­sulted in the re-elec­tion of pres­i­dent Hugo Chavez, who said re­cently his gov­ern­ment would seek con­trol of as­sets owned by for­eign busi­nesses, a move rem­i­nis­cent of early drafts of SA’s own min­ing char­ter.

Gold Fields has a min­ing li­cence that su­percedes Chavez’s more re­cent prom­ises to bring for­eign busi­nesses to heel, but the risk of los­ing this li­cence is high, says Ter­ence Goodlace, Gold Fields’ for­mer in­ter­na­tional mines head. Con­tra­ven­ing a law, any law, can end with Gold Fields los­ing its right to mine un­der the old dis­pen­sa­tion. As a con­se­quence, fund man­agers in the US credit no value to the Venezue­lan as­set in Gold Fields’ books.

Cock­er­ill can see it’s a risky as­set. “There’s a lot we un­der­es­ti­mated in Venezuela,” he says. Lo­gis­ti­cal is­sues are one, mainly due to gov­ern­ment bu­reau­cracy.

As for Gold Fields’ in­ter­na­tional strat­egy, Cock­er­ill says it re­mains on track. In 2005, he un­veiled a plan to source 1,5m oz/year from mines in off­shore (non-SA) lo­ca­tions.

There’s some 600 000oz still out­stand­ing but the mas­sive South Deep shifts to­tal un­mined gold re­sources – a com­mon bench­mark used to value min­ing firms – to 80% South African. This has led some an­a­lysts to ob­serve that div­ing for South Deep, per­plex­ing Swanepoel, and weigh­ing down the bal­ance sheet have only turned Gold Fields into a parochial SA en­tity.

“It’s far from a re­ver­sal of in­ter­na­tional strat­egy,” says Cock­er­ill. “South Deep pro­vides a fan­tas­tic plat­form in SA from which the group can grow in­ter­na­tion­ally.”

But find­ing an­other 600 000oz of gold a year won’t be easy. It’s mad­ness in the world of gold in­dus­try merger and ac­qui­si­tion ac­tiv­ity. Ac­cord­ing to Bloomberg News, about $186bn of min­ing deals were con­cluded in 2006, many of them at mas­sive pre­mi­ums.

In one deal alone, the North Amer­i­can gold firm Gold­corp paid $8,7bn for Glamis Gold, which iron­i­cally had 600 000oz – Gold Fields’ magic num­ber – tar­geted for 2006. The pres­sure is squarely on f in­d­ing new gold re­serves, which makes South Deep valu­able to Gold Fields.

Com­ple­tion of the share place­ment must sound a note of vin­di­ca­tion for Cock­er­ill’s bold­ness of late. About 79m shares were placed with a 60% over­sub­scrip­tion and a rel­a­tively mod­est 2,9% dis­count. The new shares are a 14% en­large­ment in Gold Fields’ share cap­i­tal to fol­low the 13% di­lu­tion in 2006 when it is­sued 64m shares to part pay for Bar­rick’s 50% stake in South Deep and West­ern Ar­eas.

The suc­cess of the share is­sue is also a re­sound­ing vote of con­fi­dence in South African shares as well as Gold Fields. “It shows the com­pany is pretty ro­bust,” says David Davis, a gold an­a­lyst for Credit Suisse Stan­dard Se­cu­ri­ties in Jo­han­nes­burg. “The share over­hang was the only thing pulling Gold Fields down. The rest looks pretty good,” he says.


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