GOLD Fields’ unbundling of a large portion of its local assets could start a wave of similar actions by mining companies in a bid to ring fence their local operations and keep investors happy.
It will spin off two old mines into a new gold company called Sibanye Gold, which will see its exposure reduced to about 30% in 2016 when South Deep achieves full production.
Even if it was not touted as such, the decision this week by Gold Fields to hive off its “mature” South African assets is one of the strongest votes of no-confidence in domestic investment to date.
Its share price jumped 7% after Thursday’s announcement and another 1.5% on Friday. The Gold Fields share price has gained only 6% over the past year.
The move will allow Gold Fields to focus on lower-cost, lower-risk operations.
Rating agency Moody’s, however, was not as pleased and placed Gold Fields on review for a credit downgrade shortly after the JSE closed on Friday.
It said the review reflects the potential negative effect of the proposed unbundling on Gold Fields’ business risk profile, cash flows and strategies, which could subsequently affect bondholders.
Gold Fields CEO Nick Holland said the company would separate its old deep-level, narrow-vein underground operations Beatrix and KDC in South Africa from its early-stage open-pit offshore operations.
It will keep its new fully mechanised South Deep mine near Johannesburg. This is expected to be finalised in February, depending on various approvals.
The price-to-earnings ratios of South African gold companies are 60% lower than those of international senior gold producers and achieve half the price-to-cash-flow values of their global counterparts.
“It is no secret that South African miners trade at significant discounts to their international peers as most investors take a dim view of the country’s socio-political issues and black empowerment,” said CIBC analyst Leon Esterhuizen.
Most of South Africa’s gold mines are old, deep and difficult to mine, taking the glitter out of the country’s gold for investors.
“Investors have been unhappy at the level of competitiveness and policy uncertainty which has caused South Africa to be totally overtaken in gold production. As such, there has been minimal buying of South African mining stock, especially by foreign investors this year,” said UK-based Nomura analyst Peter Attard Montalto.
“However, they like this deal because it shows reduced labour risks with labour-intensive mines being ditched and only the mechanised one maintained, which is therefore less strike-prone and less prone to wage cost inflation.”
“I love this deal,” said Cadiz fund manager Peter Major. “Our gold shares are trading at 20- to 25-year-low ratings. And they are more diversified than ever. They must unbundle. All of them. That will unlock value,” he said.
Mr Holland said the deal could be a catalyst for the whole gold industry in South Africa. “It could help us tear down boundary fences and I would like to think that the other gold companies are thinking about the effect it might have,” he said.
Despite speculation that they would quickly follow suit, the two other big local gold companies, AngloGold Ashanti and Harmony Gold, did not share the enthusiasm to unbundle.
Harmony spokeswoman Marian van der Walt said the company would not split its assets as it did not believe it would generate further value for shareholders.
“Harmony has spent the last couple of years restructuring its portfolio and we are pleased with the world-class mines we have, with a small amount of short-life mines in the group,” she said.
AngloGold CEO Mark Cutifani commented to Bloomberg in Geneva last week that the company did not have plans to split the business, but added that all options had to remain open.
Mr Holland believed that this was the right move for Gold Fields as investors had been concerned over its exposure to South Africa. “They thought we have been overweight in South Africa.
“The company has seen a continued decline in production, as have the rest of South Africa’s gold companies, and investors would like us to have production that is either stable or growing. They have been looking for different investment choices and this is what we are trying to give them with this deal,” he said.
Gold Fields’ European investors declined from 23.51% in September 2010 to 15.6% in September this year.
Mr Holland said the deal was not about “repackaging assets and saying voilà”. It was about creating value and creating two “fit-for-purpose” companies.
Neal Froneman has been tasked with turning around the older South African assets that have suffered from declining production and rising costs over the past five years. KDC and Beatrix face large-scale rationalisation in 2013 to turn this poor trajectory around, according to Mr Esterhuizen.
Mr Froneman is known for turning marginal assets around. He helped bring unloved assets of South Africa into account when Bernard Swanepoel was building up Harmony Gold.
He took a similar approach in building up his own company, Gold One, which will now consolidate under the “new baby with an old soul”, Sibanye Gold.
“Now South African mine managers get to keep all the money they make instead of sending it overseas,” said Mr Major. “That money will now be used to modernise and expand our South African deep-level mines.
South African mines still have the largest, richest reserves in the world. Now they get to keep their excess profits to add life to these mines,” he added.
* This article was first published in Sunday Times: Business Times
