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Gold Fields sells a second international asset
Allan Seccombe and David McKay
Posted: Fri, 12 Oct 2007
[miningmx.com] -- IN the second large disposal of assets, Gold Fields on Friday said it was selling its Venezuela mine to TSX Venture Capital-listed Rusoro Mining for $532m, of which $150m will be in cash.
Gold Fields on Thursday said it was selling its 60% stake in Essakane exploration and development project in Burkina Faso to its partner in the project Orezone for $200m.
"Additional capital investment is required to realise the full potential of the Choco 10 gold mine. However, after careful consideration we have concluded that, given the current environment, this investment is better made by others, with Gold Fields retaining exposure to the upside inherent in the assets, said CEO Ian Cockerill.
The offer from Rusoro has presented us with an attractive opportunity to achieve this objective, as well as a return of approximately 25% on our total investment of $425m,
he said.
The Choco 10 mine has so far not lived up to expectations, with ongoing water shortages hampering production. There was also the political risk associated with the Hugo Chavez government, which has embarked on a programme of nationalisation of some key businesses, like those in oil.
I think Choco 10 was a dog for Gold Fields," said David Davis, a gold analyst with Credit Suisse Standard Securities. "It was blighted with water problems and was starting to become a yoke around their necks."
Gold Fields bought the asset for $360m and after spending $22m in the 2007 financial year has recognised a 25% return. "They've also kept the upside to the asset in the form of the Rusoro shares," said Davis.
Rusoro will pay Gold Fields a minimum of $150m cash, $30m in convertible debt, and 140 million Rusoro shares, which will be approximately 38% of the outstanding shares of Rusoro after the transaction has been concluded.
Rusoro is understood to be close to the Chavez government, which makes the deal a sound strategic one for Gold Fields because it now has a partner that acts as a buffer between it and the government and use its relationship.
"Rusoro's management plans to use its Venezuelan operating experience to resolve certain hurdles encountered by Gold Fields at Choco 10," Rusoro said in a statement.
A large
capital programme is needed at Choco 10 to lift production up to 300,000 oz/year or more from the current plans of 100,000 oz. The bulk of that is now off the Gold Fields' balance sheet.
Gold Fields had debt of $640m at the end of the June quarter and faced a $1bn capital bill in the current financial year in South Africa and Peru.
The largest of the capital projects are in South Africa, where it is developing the South Deep gold mine it bought from Western Areas and Barrick Gold this year, as well as the deepening of its Driefontein and Kloof mines.
It's thought the focus of Gold Fields' growth is falling squarely on the South Deep mine in South Africa, an producing asset that cost the group $2.5bn in cash and shares. "There's no doubt this is the jewell in Gold Fields' crown," said Davis. South Deep is slated to produce between 700, 000 and 800,000 oz/year.
Gold Fields remains committed to growing its international ounces despite the two sales
of offshore assets, Cockerill said.
"We have definitely not changed course and our aspiration to grow our international portfolio with appropriately sized, value adding assets, remain as strong as ever.
The Essakane project would be a difficult to construct, needing capital of $346m to bring into production in 18 months. At best the project would have achieved output of 290,000 oz. Gold Fields would have an effective 54% of that, falling well below its hurdle rate to keep a project within the portfolio of production of 200,000 oz/year with potential to increase that.
Essakane, on the edge of the desert, posed problems with logistics, water and power, with all electricity having to be generated on site. There is also a community living above the deposit, entailing the contentious relocation of villagers.
"Management has tightened its focus, reduced the pressure on its balance sheet and improved its capital risk profile," an analyst said.
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