Is it time for Gold Fields and An­gloGold to tie the knot?

Finweek English Edition - - IN THE NEWS - BY DAVID MCKAY

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?

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