Sibanye goes for more than gold
The proposed R4.5bn takeover of Anglo American Platinum’s (Amplats’s) Rustenburg mines by Sibanye Gold means that the gold producer is actually transforming into a multicommodity mining house.
In addition to the 800 000 ounces of platinum group metals (PGMs) that come with Rustenburg, Sibanye Gold is also considering the pros and cons of buying its own coal in order to satisfy its energy requirements.
Add that to the uranium by-product from its 1.2m ounces a year of gold production and you’ll quickly see why it has fallen far from the Gold Fields tree, from which it was unbundled in 2012.
Neal Froneman, CEO of Sibanye Gold, explained to Finweek that the intention was always to diversify but not in order to create a mining house of old. “It was not a strategy to diversify by commodity, but about becoming a sustainable benchmark dividend payer. What we are doing is taking the shackles off gold.”
That’s an implicit admission that the gold business cannot, on its own, comfortably drive the R1bn-a-year dividend prediction to 2028 it made in August last year. Already, there are doubts that a dividend of that size will be paid in the current financial year.
Froneman said t here had to be consolidation in the platinum sector, as there has to be similar activity in the gold industry, but it’s not clear how Sibanye will embark upon this.
It didn’t opt for Amplats’s Union section, which was also for sale, as the company wanted to make a bite-size acquisition before moving on to other targets. Yet Froneman seemed a bit sniffy with the suggestion of a Lonmin takeover.
“Something like Lonmin is cheap at the moment, but it’s like considering a bid for Harmony,” he said. “These companies are losing a lot of money It’s hard to find a company on the JSE that busies itself solely with the task of discovering gold; Goliath Gold is one, but there aren’t many others – a trend that is mirrored throughout the world. The reasons for this are obvious – the slump in the gold price since 2013 – but the implications are surprising, according to a report by Standard Bank Group Securities analyst, Adrian Hammond. He calculates that gold exploration spend will decline to about R4bn this year from some R10bn in 2010.
Perhaps more alarmingly, the success rate in finding new sources of gold has slumped spectacularly – from 200m ounces in 2005 to 10m ounces in 2010.
This means gold miners’ ability to maintain production will be compromised, since levels of output have to be underpinned by a certain amount of available reserves and resources.
Standard Bank estimates that for every million ounces of steady-state production, some 23m ounces of reserves and 46m ounces of resources are required – the latter roughly defined as gold, which producers have less economic certainty about. Since 2012, the reserves of the top 15 gold mining companies have declined by about a fifth.
This number-crunching suggests and buying them doesn’t work without synergies. They need a lot of capital, they have got heavy debt and then you’d probably have to pay a premium for control of the companies.”
Yet platinum consolidation does seem to be the plan.
“As much as we believe there is consolidation necessary in the gold sector, it really is a view based on enhancements from rationalising infrastructure and we have a similar view on platinum,” he said in a media call following announcement of the Rustenburg bid. “We did not anticipate Rustenburg being only one step.
“I wouldn’t l i ke to c reate t he impression that there will be [many] more steps, but we are certainly openminded regarding further consolidation in efficiency enhancement,” he said. the world’s gold industry will reach a state of ‘peak gold’ by 2020, a milestone moment that marks the decline in global annual gold production. Presumably, this will be when gold prices start to rise and, usually before that, the equities that are involved in producing it.
“We believe gold production could peak within the next five years if gold prices do not increase materially,” said Hammond.
“At spot gold prices, we think that 2020 could be the year for peak gold production, or what could be the ‘fifth production cycle’ dating back to the last 120 years,” he said.