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Bernard Swanepoel
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» Funds attack gold company managers

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Time to unbundle gold companies: Swanepoel
Bernard Swanepoel
Posted: Mon, 01 Oct 2007

[miningmx.com] -- IN THE same week we read on our favorite mining news website that BHP Billiton has to spend $3bn to develop the Olympic dam ore body, we also get reminded from Denver that the big gold companies we have created to be able to develop and fund these huge projects are sub-optimal from an investor’s perspective. [See article: Funds attack gold company managers - Ed].

All of this leaves one wondering how we fund the next generation of gold mines, whether it is the 78 million oz resource of Olympic Dam, a five million oz open pittable deposit in a remote place in a high risk country, or my own pet topic: the next generation of 3km deep underground mines in South Africa.

Now I know that BHP Billiton is not a gold company, and I even know that Olympic Dam is not really a gold mine; but it makes the point that you need large, strong companies to develop large capital intensive deposits. But as we heard from Denver, fund managers are not happy with the value proposition of these large gold companies.

Let's unbundle them! Let's relist the mines separately and give fund managers choice!

Those mines that are cash generative can be high dividend yield stocks (like South African platinum shares); the developing mines can be growth stories (like Banro Corp. and Great Basin Gold); while gold bugs can buy into undeveloped properties such as Wits Gold.

If you like Papua New Guinea, but want to avoid Nevada (like me), then it's easy to buy stocks in mines according to your view of the world or your view of the gold price. Volatility in stock prices will increase, but the fund managers can then trade more and we all know how that creates value for all involved.

So how do we fund the development of the next underground mine in South Africa?

Not through consolidating the previous 35-odd listed mines into three to four companies. The shareholders of these companies hardly wants to see all free cash flows of today re-invested in a better future ten years out. The banks wouldn’t touch it without hedging.

So we have to re-invent the past! Prefund a new gold mine with shareholder equity. Impossible? I think not.

But let's face it, if a project can’t be financed separately and cleanly with equity then perhaps it's not worth building.

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I'm not against debt, financial engineering, or tax efficiency or synergies or scale benefits, but if investors aren’t prepared to buy the story as a standalone, then perhaps we are doing it for the wrong reasons and just forcing current shareholders to follow reluctantly.

I thought I would write a few words about how we threw out the baby with the bath water when we undid the South African gold mining house structures, but I ran out of the 300 words David [McKay, editor] allowed me.

In conclusion, my point is that we need to re-invent funding models with the transparent simplicity of the past where we match the right investment dollar with the right risk profile and acknowledge that portfolio optimisation and diversification is for fund managers or investors.

Bernard Swanepoel was CEO of Harmony Gold from 1996 to 2007 in which time he presided over umpteen number of financings of major gold mines and/or acqusitions. At the time of leaving Harmony, he had several new mining projects on the boards including the large Golpu/Wafi prospect in the Papua New Guinea and a number of relatively deep projects in South Africa.