Mark Bristow, CEO, Randgold Resources
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» Gold Fields to dig 11m oz more gold in SA
» SA gold industry profitable again
» Bidding for South Deep to intensify
» SA gold sector bulking up

» JSE:GOLD FIELDS LIMITED:
10630c 7%

Gold industry aflood with dollars
David McKay
Posted: Tue, 12 Sep 2006

[miningmx.com] -- “THERE’S a lot of cash flying into the market – but no growth. It’s just rearrangement,” says Mark Bristow, CEO of Randgold Resources and arguably one of South Africa’s most successful mining entrepreneurs. Bristow’s view of consolidation in the world’s mining sector is widely held, which is surprising. The evidence suggests the majority vote wants mining consolidation to continue.

Research by Bloomberg News shows that mining deals worth over $100bn have been completed this year alone. That implies that for every word of caution concerning the evils of overpaying for assets, there’s a vault of merchant bankers wanting them to happen anyway.

Steve Shepherd, an analyst at JP Morgan in Johannesburg, says exogenous pressure on mining executives is partly to blame. “The core competence of mining executives is finding ore bodies and building mines. Putting pressure on them to buy assets changes what they do. Is that a good thing?”

There are a number of reasons why gold and other mining firms shouldn’t be considering mergers, including the negative effects on management, which deteriorates the larger a company becomes. “They just spread themselves too thin,” says Shepherd of miners sitting atop ever-ballooning corporations.

In any event, there are other ways of growing a mining business. Bristow’s success as a businessman has been to take Randgold Resources from a $327m company in 1997 to around $1.6bn now without engaging in other corporate business. “Mining companies are just getting bigger for the sake of it,” says Bristow. “We’ve never relied on bankers to direct our business.”
Mining companies are just getting bigger for the sake of it
Bernard Swanepoel, Harmony Gold CEO, though currently beleaguered, could prove the sector all fools in three years’ time. That’s when he intends bringing an estimated 800,000 oz/year of new gold production to Harmony Gold through projects. Ironically, Swanepoel built Harmony through a series of acquisitions – approximately 23 in total – but is now turning to grassroots development instead.

“I thought immediate gratification was just a male thing,” says Swanepoel of the interest in mergers. “It’s also a shareholder thing. If you can bring an immediate deal people clap their hands. If you spread it over several quarters you get crucified.” Harmony has spent around R400m/quarter in projects – an activity described pejoratively as “cash burn”.

However, compare those new Harmony production ounces to the $8.7bn Goldcorp is paying for Glamis Gold in Canada, which hopes to produce 600,000 oz this year. The proposed transaction is the gold industry’s second largest in value following Barrick’s bid for Placer Dome, another Canadian gold producer. It’s expensive and potentially value-destructive should the gold price significantly weaken.

The problem is that new gold resources are scarce and, in most estimates, the gold price is unlikely to weaken. Consequently, gold producers have been willing to pay anything for new production, mostly using shares that have gained sharply in value as the bull trend in gold continues. Last year, the value of the world’s top 40 mining stocks increased 72% to $791bn, says auditing firm PricewaterhouseCoopers.

From a South African perspective, that raises the question as to whether AngloGold Ashanti, Gold Fields and Harmony Gold – which traditionally have lower rated shares than their North American counterparts – will be rendered uncompetitive. It certainly doesn’t appear to be troubling Gold Fields. Instead, it has set about a modular, almost prosaic, strategy of bolting on smaller acquisitions, such as buying Bolivar Gold in January for $360m. It also announced two projects worth several hundred millions of dollars to deepen Driefontein and Kloof, a brownfields development of its two largest South African mines.

The decision earlier this week to add the 800,000 oz/year South Deep mine in a $2.5bn is a major departure for the group. But the spend appears motivated by the sheer attractiveness of the deal.

John Munro, Gold Fields' business development director, says it wasn't opportunism; the South Deep mine west of Johannesburg had been on the group's radar for several years. It was more a case that South Deep, slam centre in Gold Fields' backyard, made the company the best positioned.

Once the world’s largest gold producer, AngloGold Ashanti now stands to be ranked fourth in production behind a Goldcorp-Glamis marriage. Among South African producers it might be the exception, having been pushed into the consolidation and merger debate by dint of its former parent company, Anglo American.
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Plans by the London-listed firm to sell down its 51% stake in AngloGold Ashanti have already been set in motion. Preferring the proactive route, AngloGold Ashanti may prefer to use its shares in a large acquisition – Goldcorp has been mooted – diluting Anglo rather than have Anglo place shares in the market.

Theoretically, the large premiums paid for mining firms may have been in problem in the price Barrick expected for its 50% stake in South Deep. But it wasn't. Says Stephen Roelofse, a fund manager for Sanlam Investment Managers: “They wouldn’t expect any foreign buyers for South Deep.”