Gill Marcus, chairwoman, Western Area
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» It's a material incident - Gill Marcus, Western Areas chairperson


South Deep poser for Barrick
Allan Seccombe
Posted: Thu, 11 May 2006

[miningmx.com] -- BARRICK Gold is likely to take a good hard look at its only exposure to deep-level mining after an incident at its jointly held South Deep project in South Africa halved production for up to a year, analysts said on Thursday.

“Barrick’s appetite for deep-level mining might have waned because of this incident. It might lead to them reviewing whether they want to be in deep-level mining. It might push them into a possible sale,” said David Davis, a gold mining analyst at Andisa Securities.

Production via the main shaft in the 17-month old twin-shaft facility has been curtailed after a skip and 6.7km (4.2 miles) of steel rope detached from the winder on 5 May and fell to the bottom of the shaft, damaging lift infrastructure on the way down.

Georges Lequime, an analyst at RBC Capital, said he didn't think the incident would convince Barrick to exit South Deep.

"Even if costs go up to $500/oz from $350, South Deep will still generate free cash flow because the gold price is around $700. I don't think what happened changes Barrick's thinking one iota," he said.

While the 29 million ounce reserve at South Deep is seen as the remaining jewel in the South African gold mining industry, there have been delays and problems ramping the mine up to full potential.
Barrick’s appetite for deep-level mining might have waned
Western Areas and Placer Dome initially started and operated the South Deep project. Barrick acquired Placer in January this year, making the Toronto-based company the world’s leading gold producer.

Barrick bought into South Deep when the rand gold price was R85,000/kg. It is now R140,000. "The move in the gold price received outweighs any short-term blip in costs," Lequime said.

Barrick has had an open aversion to deep-level mining, which has raised questions about whether it will hold on to its half of South Deep, particularly now that the difficulties of working at depths of up to 3km or 1.9 mile underground have been made glaringly obvious.

“This will be Barrick’s first serious deep-level mine. Given that its skills set is in open pits rather than deep levels, you would have to question whether they would have a long-term commitment to that project,” said John Clemmow, an analyst at Investec Securities in London. “I think their decision to be in or out will not be predicated on the short-term or medium-term performance of the mine.”

The recently appointed general manager at South Deep is understood to have been driven by Barrick, which would seem to indicate a commitment to the project.

The asset makes up a chunky proportion of Barrick’s reserves and Davis wondered if the Canadian company would be content to sell its South Deep stake in a global environment where the hunt is on for replacement ounces.

It would be easier for another mining company to get into South Deep through buying Barrick’s stake rather than acquiring the more complicated corporate and financial structure of Western Areas.

Barrick has a pre-emptive right to Western Areas’ stake in South Deep. While Western Areas has the same rights to the Barrick stake, it is no position to exercise that right.

AngloGold Ashanti CEO Bobby Godsell told Bloomberg his company would be happy to buy the Barrick stake. Gold Fields, whose Kloof mine neighbours South Deep, has expressed an interest in cooperating in accessing the deeper parts of the mine.

Western Areas, the JSE-listed company, which has just South Deep as an operating asset, is an acquisition target but it is difficult to figure out its true value. It is financial dire straits because of this incident and the stranglehold of its onerous hedge book has been made a whole lot worse by the fall in production.
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Out of its 20,000 attributable ounces it was receiving each month before the incident, 11,000 were going towards hedge book commitments well below current spot prices. Western Areas is facing an intensive capital expenditure programme, so the news could not have come at a worse time. Chairwoman Gill Marcus said it is going to the market to raise cash through the issue of 15.4 million new shares.

Lequime says the shares would "fly out the door" because investors were hunting for access to gold companies during this bull market.

Western Areas has said that a 20% improvement in the gold price would increase its reserves by 26%.

“The incident has put Western Areas in a more desperate situation,” said Mandla Mapondera, a gold securities analyst at Old Mutual Asset Management. “Anybody who wants to take them over has to deal with that hedge book, which would probably slow down anybody wanting to get in there fast.”

It’s going to be a long slog turning the company around and how patient and committed shareholders are when it comes to putting cash into the operation until it generates its own cash flows, he said.