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Politics taints Gold Fields bid
David McKay
Posted: Wed, 23 Nov 2005
[miningmx.com] -- GOLD Fields CEO, Ian Cockerill, could perhaps be forgiven his surprise following reaction to his company’s proposed $330m bid for Bolivar Gold, a Canadian listed junior mining firm.
This is because the key concern for analysts is the potential political risk associated with investing in Venezuela where Bolivar’s key asset, the El Choco 10 mine is located. There’s a certain irony here, too.
Gold Fields’ offshore investment is part of a strategy to shift a greater proportion of total gold production from South Africa where Government has shown itself to be unpredictable in its minerals policy.
South Africa’s gold mines are also ageing. Apart from an outside chance of an investment in the expansion of the 45 million oz South Deep mine, there’s little left on the plate of the Witwatersrand.
The political concerns relate to comments attributed to
Venezuela’s president, Hugo Chavez who criticised US led plans for a free trade zone (FTAA) in the Americas stretching from Alaska to Patagonia.
“The FTAA can go to hell,” Chavez said to a gathering recently which was reported on the BBC’s website. “The country is free, we are not going to be colonised again.”
Consequently, North American analysts have been concerned about the security of Gold Fields’ long-term investment.
Why, one asked, was Gold Fields prepared to plough cash into Venezuela when the company backed out of an investment in Turkey in 2003? “We see better potential in Venezuela than we did in Turkey at that time,” said Cockerill.
“There’s been R500m in North American equity investment in Venezuela in the last two years,” said Cockerill. “And discussions with the Venezuelan government, including several ministers, indicates that Gold Fields is exactly the kind of investment it would want.”
“We are aware of the
environment. This was not an impulsive buy.”
Gold Fields bought 11.4% of Bolivar Gold about two years ago, and while it doesn’t have a board representative it thinks the reserves currently owned by the company are early signs of a new major gold camp.
Georges Lequime, an analyst at RBC Capital Markets, said however that the purchase of Bolivar Gold suggests Gold Fields is getting panicky about its future gold production. The acquisition is therefore a change in direction.
“The board is definitely becoming more aggressive and taking on more risk,” he said. “And it’s a big political call. Are they getting desperate as their production falls off in a few years time?”
The Choco 10 mine is slated to produce 190,000 oz/year in 2006 and there are plans to grow
output relatively quickly to 400,000 oz/year. But Bolivar’s other key attraction is the unknown gold yet to be discovered in a region known as ‘El Callao’.
Bolivar owns about 1.3 million oz of gold reserves taking Gold Fields’ reserves up 2.2% to 61.7 million oz. Bolivar Gold also owns 1.8 million oz of resources and a further 1.7 million oz of inferred resources.
Meanwhile, there some additional concern that Venezuela has informally launched its version of South Africa’s mining charter.
Cockerill styled this as a use it or lose it policy as imposed by Government.
“Loosely, the approach of the Venezuelan state is not dissimilar to South Africa. Assets vest with the state and the firm has an exploration licence,” said Cockerill.
The Venezuelan government owns 5% of the Choco 10 mine through its parastatal CGV. “We don’t see plans by the Venezuelan to increase this stake,” Cockerill said.
The Bolivar deal is also considered an
expensive one. “The acqusition appears, on the face of it, to be expensive, in our view, and in what may be perceived to be a risky country,” wrote Steve Shepherd, an analyst for JP Morgan, in a recent note.
Said Ian Cockerill, Gold Fields CEO: “We’ve paid a fair and full price. But we’ll make a sensible return to shareholders.”
On an enterprise value, Gold Fields paid $277 per ounce in Bolivar Gold when a much larger resource, Western Areas, would currently cost about $41/oz with much the same political risk, said Lequime.
On this basis, Gold Fields has paid $80 more per reserve ounce than the 10 year average, according to Goldman Sachs analyst, Alberto Arias. Arias was also cautious of the political risk presented by Venezuela:
“We believe the political risk associated with Venezuela outweighs the prospect potential from El Callao mining district, which is touted as one of the largest in the world,” he said.
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