Ian Cockerill, CEO Gold Fields

» Let the games begin » Gold Fields' great escape

[miningmx] THE debate between Harmony Gold and its quarry Gold Fields is underpinned by legacy issues regarding what a potential merger, or its failure, might mean for South Africa’s gold industry.

One view is that its bid for Gold Fields signals the end of Harmony’s seven-year odyssey as a turnaround expert. Harmony built its empire buying mines and improving them through better cost control. But Gold Fields doesn’t appear to offer long-term sustainable cost savings that existing management, led by CEO Ian Cockerill, isn’t installing on its own.

Consequently, the suspicion is that Harmony has recognised it can no longer make a sufficient or sustainable impact on its operating margins. Therefore, the bid for Gold Fields is an effort to prolong its operating life and shore up its declining cash reserves.

Peter Townshend, an analyst with Barnard Jacobs Mellet, says that Harmony is burning R400m/quarter in cash. Moreover, Harmony will in January 2005 have a R500m interest bullet payment on debt due.

Cockerill, who last week turned the launch of the company’s defence document into stinging offence, pointed out that Harmony hadn’t earned enough in its September quarter to cover this interest liability.

However, Swanepoel does make the interesting point that Gold Fields has a better cash position because it recently stopped spending the money on mine development. “Harmony is hardly in a net cash position,” Cockerill said in his recent defence of Gold Fields. Swanepoel rebuffed that comment with: “The perception that we’re near the cliff only helps Gold Fields’ management. We’ve no intention of shutting down marginal assets.”

That’s typical of the personal interchange that’s kept the Harmony-Gold Fields contretemps rumbling along with such pace and élan.

Then there’s the more profound notion that Harmony’s bid tacitly recognises the curtain is coming down swiftly on SA’s marginal gold mining industry. Only a radically weakening rand will save them. The estimates of Nick Goodwin, a gold analyst with stockbroker T-Sec, are that the SA gold mining industry burned cash (after capital expenditure) of R1,1bn in the September quarter, a 15% reduction on the previous quarter’s figures.

As a result of industry-wide margin deterioration, and the depleting nature of the mining business in general, Harmony is dying a slow death. Naturally, that’s not a view Swanepoel will tolerate. He believes the current margin pressure is a variation on the pressure exerted by the weak US dollar gold price between 1997 and 2002.

Swanepoel intends to adapt, as he was able to in the days of a sub US$300/oz gold price. In his view, Gold Fields and Harmony share external circumstances that affect both equally hard. “About 17% of our production needs attention (about 560 000 oz/year). But all of Beatrix (a Gold Fields mine in the Free State producing 625 000oz/year), made a loss.”

Another perspective is that no matter how shareholders vote on the proposed takeover of Gold Fields, Harmony stands to disappear. In buying Gold Fields, Harmony’s long-term strategy is likely to involve shutting its own marginal mines rather than seriously optimising Gold Fields.

Unfortunately, the probable outcome of this protean battle is slightly more complicated. Darryll Castle, a fund manager for Stanlib, the asset management firm that owns the shares of Gold Fields and Harmony, says a clear victory for either side isn’t guaranteed.

In the example of the corporate equivalent of a hung jury, Gold Fields would have its reverse listing into IamGold Corporation, a Canadian firm, voted down while Harmony would fail to command enough votes to fully impose its will on Gold Fields. That could happen if, as seems logical, opposing shareholders in Harmony and Gold Fields support their respective managements. Then the complexion of the tussle changes significantly.

Could Harmony end up treating Gold Fields as its listed subsidiary? It might then buy the company out over time. That outcome would represent a draw and might even see both Cockerill and Swanepoel retain their jobs.

In most other scenarios, this is a public joust. Swanepoel may walk if he fails to capture shareholder support for the tripling in share capital, the quantum needed to buy Gold Fields. Swanepoel’s open letter to Cockerill and comments by Cockerill that negotiation between the two sides is possible, with conditions, are fripperies in the corporate masquerade. But it will end badly for someone.