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Harmony should take cash, and run Posted: Mon, 18 Sep 2006 [miningmx.com] -- IT's not that long ago - little more than a year, indeed - that Gold Fields seemed, if not the lame duck, certainly the least impressive of the three major gold miners. But the effort needed to fight off the hostile bid from Harmony galvanised its management into new life, while Harmony, in particular, has fallen back, reporting quarterly loss after quarterly loss despite the firm gold price. What Harmony's Bernard Swanepoel used, at quarterly briefings, to call his favourite graph - the one showing how long (or, rather, how little time) it took Harmony to earn in working profits the cost of the properties it bought - has been consigned to limbo. And the depth of Harmony's need to acquire Gold Fields to provide a steady profit stream has become progressively more obvious. Still, fighting off Harmony was one thing: showing that Gold Fields could do better on its own was another. There were two aspects to that, and CEO Ian Cockerill and his management team have now addressed both. Firstly, internationally, Gold Fields had to replace the collapse of its relationship with Norilsk and the abortive Iamgold deal. It did that with the $350m Bolivar transaction and the Cerro Corona project, which in terms of corporate and capital spending could run up about another $320m. Cleaning home act Now it's moved to shore up its position at home. A R4.7bn capital project at Driefontein and Kloof is designed mainly to extend the former's production life by at least 13 years, to 2035, though there will be some incremental production at Kloof from 2011 to 2021, with the further potential for extensions beyond that mine's 48 level. But the real coup is to position itself as the key player in the South Deep project, long bedevilled by its association with Brett Kebble's corporate adventures. (Chatting to Investec's Stephen Koseff after this week's Investec trading briefing, it was interesting to hear that Koseff thinks the increase in Randgold & Exploration's claim on JCI to R5bn is totally unwarranted, and that even JCI's original R1.1bn provision is generous. Less surprisingly, he's adamant that Investec's well-rewarded intervention at JCI has paid off for that company, and that as long as the mediation and arbitration processes continue, the interconnection of the two companies' business requires a single management and outweighs any conflict of interests.) Squashing Harmony's ambitions Gold Fields' approach to South Deep has three parts: it's buying Barrick's direct 50% stake for $1.525bn, of which $1.2bn is in cash and the rest in shares. The other 50% is held by the former Kebble company Western Areas, of which Gold Fields already owns 18%. It's agreed to buy a further 16.7% of Western Areas from JCI, with an option on another 6.3%, and has gained approval for this from holders of about 50% of Western Areas' equity; and it's making an offer to other Western Areas shareholders. Both these offers are in shares: 35 Gold Fields for 100 Western Areas, at the time valuing Western Areas at R52.57, a 16.8% premium to the then market price. The JCI deals alone assure Gold Fields of 41% of Western Areas, so it won't need a high level of acceptances to take the stake over 50%. But the ultimate position depends on one man: ironically, that same Bernard Swanepoel, as Harmony has built up a stake of about 29% in Western Areas. Now that 29% is significant. Gold Fields has certainly put itself in a position to squash any of Harmony's ambitions for South Deep. And South Deep is worth more to Gold Fields than to anybody else, as huge savings could be made by accessing parts of the lease area underground from adjacent Gold Fields properties. But 29% is enough to block Gold Fields from compulsorily acquiring 100% of Western Areas and delisting it, or even passing special resolutions. It might just be a spoiler reaction, but that doesn't rule it out as a possibility. Facing the real test The other possible hitch is that there's no cash element in the Western Areas bids. That may be a pity, but given the high liquidity in Gold Fields scrip, it shouldn't be a big problem; anyone who doesn't want to hold Gold Fields scrip will easily be able to sell it on the market.Free news alerts: click here to subscribe
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