Is it time for Gold Fields and AngloGold to tie the knot?
One of the most abiding merger ideas in the South African mining sector must be the mother of all gold tie-ups: the marriage of AngloGold Ashanti with its once fierce rival Gold Fields; once fierce because gold companies the world over are less about raking ambition than survival.
In their heyday, AngloGold and Gold Fields were the two largest gold producers in SA, with the former representing the progeny of the ubiquitous Anglo American, while the latter represented the ambitions of Gencor.
These days, both companies have SA as a part of their operations; in fact, Harmony Gold and Sibanye Gold have a larger footprint in SA than either Gold Fields or AngloGold Ashanti.
Yet the notion of combining the two companies has won some favour again, and while there are heavy doubts that the two companies will ever combine, it does make for rather interesting and entertaining reading.
“We believe the time has come to merge AngloGold and Gold Fields,” said Leon Esterhuizen, an analyst for CIBC Capital Markets, in a report dated 20 May. He adds that there has been “a significant deterioration” in the South African risk premium, which sees gold companies operating outside SA trade at much better premiums.
His strategy would be to merge the companies, split the merged entity into SA and international assets and then sell or list the SA asset base in SA for an estimated $1.2bn (R14.4bn). This would leave the international group, which would still be domiciled in SA, producing 4.3m ounces of gold a year at a cost of $870 (R10 475)/oz and valued at some $5bn (R60bn).
Assuming sales of non-core assets for $800m (R9.6bn), the international company would heavily cut into the combined net debt levels and even allow raising of some $1bn (R12bn) in equity now that the company’s paper is more highly rated.
“This would leave the new international company with much lower debt and with cash f low that would easily service this debt,” said Esterhuizen.
One of the last times a combination of the two companies was seriously mooted, in 2006, it was thought only value destruction would follow: firstly, because the leviathan that would have been created then – with 11m oz/year in gold production – would be too large to manage; and secondly, the company would be immediately cast as ex-growth.
There were also questions about whether then leaders Bobby Godsell and Ian Cockerill could actually get on: an observation that might be feasibly raised of the firm’s current leaders, Srinivasan “THE KEY QUESTION IS WHETHER SOUTH AFRICA IS STILL A PREFERRED MINING INVESTMENT DESTINATION GLOBALLY AND IN AFRICA, OR WHETHER OTHER JURISDICTIONS ARE TAKING PREFERENCE?” Venkatakrishnan of AngloGold and Gold Fields’ Nick Holland.
What’s perhaps most interesting about Esterhuizen’s thesis, however, is that it ref lects a growing scepticism that SA is a place for international capital given the country’s regulatory, infrastructural and labour challenges – a growing view articulated by Mike Teke, president of the Chamber of Mines.
Speaking at the Chamber’s annual general meeting in May, he asked: “The key question is whether South Africa is still a preferred mining investment destination globally and in Africa, or whether other jurisdictions are taking preference?”
BHP Billiton recently washed its hands of SA by demerging non-core assets into South32, a third of which are in the country, while Anglo American, so consistently penalised for its SA exposure, was reported by the UK’s The Times to be considering a listing of its controlling stake in listed subsidiary Anglo American Platinum ( Amplats), which would considerably lessen its local exposure.
Is it possible that after years of warning by the private sector that SA’s regulatory environment was making the country’s mining sector unplayable for international investors, it is actually coming to pass?