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ARM to deal with untied strings
David McKay
Posted: Fri, 22 Jul 2005
[miningmx.com] -- AFRICAN Rainbow Minerals CEO Andre Wilkens makes the observation that there aren’t many companies the size of ARM building six new mines. “We know what the market’s saying regarding the structure and value traps in the group,” he says, somewhat incredulously that the question could be asked. “But at this stage we don’t have to do anything except make sure we now build our mines properly.”
ARM recently announced plans to proceed with a R1,2bn platinum mine – Two Rivers – with its 45% partner, Impala Platinum. It also completed the development of the Nchwaning 3 manganese ore mine for R775m in April and hopes to press ahead with the R280m expansion of the Nkomati Nickel project.
The development of the so-called BKM (Bruce, King and Mokaning) mines in the Northern Cape is another priority, an expansion that will see iron ore from the group increase
10m/t/year.
Notwithstanding the expansions, the market’s saying is that ARM still has too many untied strings following its formation in 2003 in a three-way merger of ARMGold, Harmony Gold and Anglovaal Mining. Part of this unfinished business is a 16% holding in Harmony Gold, an asset that ARM doesn’t control and is, therefore, contrary to the group’s owner-operator strategy.
The outcome is that the market applies a discount to this “value trap” – partly because management cannot dictate important operational decisions. A cross-holding structure, in which Harmony owned 20% of ARM, has already been unwound after Harmony sold the stake into the market and to a black economic consortium.
“The key to unlocking the discount that the market’s placing on the value of the assets controlled by ARM is the restructuring of the ownership structure of Assmang and the sale of the Harmony shareholding,” says Georges Lequime, an analyst at RBC Capital Markets. “We
believe that both will be concluded within the next six to 12 months.”
Says Wilkins: “At this stage we don’t have to do anything with the Harmony stake. But in 12 months we should at least be at a stage where we can consider that. We know we don’t see the gold premium.”
it’s a sensitive matter, partly owing to exposure the relationship between the two companies received during Harmony’s hostile merger proposal for Gold Fields. ARM was supportive of Harmony but later said it wouldn’t back an increased offer.
Harmony CEO Bernard Swanepoel disagrees that ARM will necessarily dispose of its investment in his company. Says Swanepoel: “Of course ARM doesn’t get the gold premium because it doesn’t trade like a gold stock. But we’re a large part of their net asset value (two-thirds before the bid for Gold Fields) and when our share price recovers that will be reflected in ARM. In any event, Patrice [Motsepe, chairman of ARM] is a gold bug.”
ARM’s relationship
with Assmang, a company separately listed on the JSE Securities Exchange in which ARM has a 50,4% stake, is equally sensitive. But the expectation is that Assmang will be delisted in an effort to invest more heavily in its projects and mobilise the cash flow for reinvestment in ARM.
In terms of the current arrangement, ARM derives a management fee while Assore, another listed company with a 45% stake in Assmang, derives a marketing fee.
In the 2004 financial year, ARM’s fee was R72m against R104m paid to Assore. Wilkins says: “Why make a few tens of millions when you can make hundreds of millions from Assmang? Surely development of the commodities will become more valuable that the fee structure?”
Wilkens declined to comment on the exact nature of the plan, but a delisting of Assmang will further simplify ARM’s structure. “We’re engaging with Assmang to find a way forward. We’ve not concluded the process but we’re comfortable with what’s been
achieved.”
In the medium term, Assmang is the sharp end of ARM’s financial future. The Harmony investment isn’t generating cash, nor is not core; while the platinum assets – Two Rivers and Modikwa – are developing projects. In Assmang’s assets, ARM has exposure to impressive Chinese demand for steel products.
Meanwhile, Wilkens says that negotiations to share infrastructure with Kumba Resources, the dominant iron ore producer in the Northern Cape, have resumed. But he confirms talks are now about realising synergies. Wilkens says: “We’re certainly developing some momentum in finding those synergies. But we’re not sellers or swappers of assets.”
That relates to earlier proposals, with Kumba suggesting swapping iron ore mines with those of Assmang in order to better use infrastructure, including the rail links to Saldanha Bay.
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