Hugo Nelson, Coronation Fund Managers
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» Gold Fields in $2.5bn swoop for South Deep
» Western Areas swung by single owner
» Gold Fields offshore strategy intact
» Market forgives Western Areas failure

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A dream deal for Gold Fields

Posted: Mon, 11 Sep 2006

[miningmx.com] -- THE $2.5bn bid for South Deep gold mine by Gold Fields is a dream transaction that was an inevitability, said fund managers who universally labelled it a “good transaction”.

Hugo Nelson, a fund manager at Coronation Asset Management in Cape Town, raised concerns about what demands will be placed on the Gold Fields balance sheet from the future capital expenditure requirements at South Deep. Even so, he still thinks it is a good strategic transaction for Gold Fields.

Gold Fields is paying Barrick Gold $1.2bn in cash and $325m in shares for its 50% stake in South Deep it acquired when it took over fellow Canadian miner Placer Dome in January this year.
one of those dream deals
The all-share part of the deal to acquire the 82% of Western Areas it does not already own will bring the total value of the deal to some $2.5bn.

“This is a fabulous deal for Gold Fields and, when you weigh it all up, it’s not a bad deal for Western Areas shareholders,” said Georges Lequime from RBC Capital Markets in London.

Gold Fields will acquire 29.3m reserve ounces in the transaction, which opens up the possibility of utilising its Kloof mine to access South Deep. This would speed up the development of phase two of the South Deep project, which was decades away under the current owners.

For Gold Fields, their enterprise value per reserve ounce is about $150, which is what investors would pay for the company, said Lequime. The company is acquiring South Deep for $104 per reserve ounce.

“If you look at it that way, you are getting good quality, long-life ounces on your doorstep, there are synergy benefits to exploit and you can accelerate phase two,” Lequime said.

“It’s the right fit. It’s always been the right fit putting these two assets together. This is one of those dream deals that had to take place.”

It had been widely anticipated that Barrick would sell South Deep for a number of reasons. South Deep, at three kilometres deep, falls outside Barrick’s area of expertise, which is relatively shallow mining, and its balance sheet could use a healthy cash injection.

A NASTY HEDGE BOOK

“Barrick’s balance sheet is not a pretty thing. They’ve got roughly $3bn in debt,” said Murray Pollitt, president of Toronto-based Pollitt & Co.

“They’ve also got a nasty hedge book,” he said, which made it difficult to raise project finance. “Project finance is no longer a walk in the park for these guys.”

“This is one of the biggest assets that Placer Dome brought to the table. It’s one of those transactions where two plus two equals five. It is worth more to Gold Fields than Barrick,” he said, pointing out there are synergies between South Deep and Gold Fields’ Kloof mine.

“Africa has been pretty tough for Barrick and I think they’d rather push ahead in South America,” Pollitt said.

Vince Borg, vice-president of communications at Barrick, said the decision to sell South Deep was not a vote of no-confidence in South Africa and the company had good uses for the cash it was about to receive.

"It will bolster the balance sheet. We've got an unrivalled pipeline of projects that require an awful lot of capital to bring into production. We'll be applying it to those projects in our pipeline," Borg said on the Classic Business Day week-nightly business radio show.

South Deep was not going to reach full, steady state production of 800,000 oz/year for another five years. Gold Fields reckons it might take a year longer than that. The exact level of capital expenditure needed to bring the mine to that level of production as well as developing phase two is yet to be made public.

“I think this makes a lot of strategic sense for Gold Fields,” said Coronation’s Nelson. “I think we still need to get more information from them. They’ve not been all that transparent about capex requirements, timing of phase two and so on. There’s still some uncertainty there.”

For Western Areas shareholders, perhaps the company could have held on for more, but there was a higher risk because the mine is currently without its main hauling shaft after a falling skip damaged it in May.

Western Areas chairperson Gill Marcus reckons repairs to the shaft are on track for completion in early 2007. The loss of the shaft will severely dent South Deep’s gold output this year. Last year, it produced 460,000 oz.

“The main risk is the build up to 800,000 oz. There is always risk in the build up of production. There’s the risk from the hedge book. Western Areas needed cash and they needed another rights issue so shareholders would have been diluted,” Lequime said.
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Western Areas has an unpleasant hedge book that by the end of the June quarter had a negative mark-to-market of R3.7bn. The book expires in 2014.

Western Areas and Barrick had planned to spend R580m at South Deep in 2007 to deepen the ventilation shaft and generate horizontal underground development.

While AngloGold Ashanti is understood to have taken a look at South Deep, it has been noticeably quiet in this whole process.

“We’ve got no comment to make,” said spokesman Steve Lenahan.

Analysts suggested a number of reasons why the world number three did not get involved in the bidding process.

The suggestions included AngloGold having its hands full with its difficult assets in Ghana, not having the same firepower on it balance sheet to conclude such a transaction and not wanting to get into a bidding war with Gold Fields.

“I guess it’s not something they had the stomach for right now,” Nelson said.