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Mvela moves to fix share slide
David McKay
Posted: Mon, 07 Feb 2005
[miningmx.com] -- EMPOWERMENT in the mining sector has slowed owing to the strengthening of the rand. But the currency’s strength is also starting to unpick the fabric of existing deals. There’s no better proof of this than the unveiling last week of a new arrangement between Gold Fields and Mvelaphanda Resources (Mvela).
During 2003, Mvela finalised the purchase of 15% in Gold Fields’ SA assets with the option of converting this stake to shares in the holding company, Gold Fields Ltd. Since that deal, the value of Gold Fields’ SA mines has declined drastically. This was evidenced by the gold producer’s December quarter results in which local assets contributed less than a third to total operating profit. Two years ago, the contribution of the SA mines was about 70% of total operating profit. Things have clearly slipped.
Mvela spokesman, James Wellsted, says the decline in the
value of the SA mines meant covenants in its loan agreements in respect of the Gold Fields deal could have been triggered. As a result, the parties decided that the value of Gold Fields’ SA mines could not be allowed to deplete further without establishing a framework for converting Mvela’s investment.
The outcome is that Mvela’s 15% stake in the SA mines will be worth between 8% and 10% of Gold Fields; or a floor of no less than 44 million Gold Fields shares at the agreed maturity date of no later than March, 2009.
This bundle of Gold Fields shares is worth about R3,6bn at the gold company’s current share price, and would see Mvela post a R1,4bn profit after settling R2,2bn of mezzanine level debt, including interest that accrues at a relatively high rate of 14,25%. (The mezzanine debt is one part of the financing structure Mvela arranged with its bankers when it took the investment in Gold Fields’ SA mines).
Fixing the rate of conversion of Mvela’s
asset level investment in Gold Fields’ mines into Gold Fields Ltd shares may also have the ultimate benefit of shoring up Mvela’s share price. Mvela’s share price has been on the rack, sliding from a 12-month peak of about R28/share last year to R12,95/share at the time of writing.
Target valuations differ vastly
More worrying for Mvela is that some analysts have calculated target valuations for the share as low as R5/share; others believe the share is worth R20/share. The apparent discrepancy in outlook is based on how some analysts tackle the future value of the rand, which most stockbrokers believe will be stronger than first expected this year. As a result, the value of Mvela’s stake in Gold Fields’ SA assets is declining fast. At the same time, however, analysts have not adjusted for operational changes Gold Fields would implement to contain any margin erosion.
Wellsted says the agreement on converting the Gold Fields investment now imputes
some tangible value. “We believe the value of our stake in Gold Fields is worth R11/share, but you can see some analysts were applying a low, or even a negative value to the stake; or alternatively, providing no value to our exploration potential, the stake in Northam Platinum or in Trans Hex,” he says.
An additional benefit of fixing the “flip-up rate”, as this transaction is euphemistically termed, is that Mvela can consider restructuring the terms of its Gold Fields investment. “If we can refinance the debt, possibly down by about 0,5% a year, it will save us R200m to R300m,” says Wellsted.
Discussions with banks are already underway, but it’s possible JP Morgan and Gold Fields could take their places in a new mezzanine syndicate that currently has the International Finance Corporation and SA’s Public Investment Commissioners as constituents, Wellsted says.
There have been observations that the deal is extraordinarily sympathetic to Mvela shareholders
at the expense of Gold Fields. In fact, the only obvious negative for Mvela in finalising the flip-up value of its Gold Fields stake is that it entrenches the empowerment firm’s status as an investment holding company.
Empowerment investors are being told that asset-level deals are “more real” than deals at the holding level because they help alter the notion that empowerment is passive or token. Wellsted says Mvela has every intention of becoming an operating company. It must be aware that the top valued empowerment firm, African Rainbow Minerals, has a strong operational bent.
Gold Fields financial director Nick Holland says fixing the conversion rate underpins the financing structure. In addition, claims that the deal is prejudicial to Gold Fields shareholders, but very sympathetic to Mvela shareholders, is myopic, he contends.
“It depends on your view of future prices. If the rand falls out of bed, the ranges given are reasonable,” Holland says.
Were the rand to slip to R9/$, Mvela could find it is capped out pretty quickly,” he says. The rand might be eating away at industry margins, but it’s also posing important legislative challenges to the mining firms, which are finding empowerment compliance increasingly difficult to reach.
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