Gold Fields held talks with AngloGold

Brendan Ryan | Wed, 21 Apr 2010 13:45

[miningmx.com] -- GOLD Fields has had “high level discussions and conversations” with AngloGold Ashanti over a possible combination of their South African operations.

This was confirmed to Miningmx by Gold Fields CEO Nic Holland who commented, “there’s no immediate deal on the table. Nothing substantive or formal has come from this otherwise we would have made an announcement.

“We have had discussions from time to time about potential synergies and opportunities where our mines are contiguous. I am sure we will continue to talk about it in the future.”

Holland added, “you need to remember that all the gold company CEOs are fairly new in their jobs and, I think, are all grappling with the challenges that have arisen over the last couple of years in particular.

“I don’t think any of these executives would be averse to seeing those discussions going further and I certainly would not. If there’s value to be released by consolidation we would be silly not to consider it.”

But Holland made it clear his first priority was to “fix the problem” and make Gold Fields South African mines perform.

“It’s up to us to show these assets can perform. If we can’t then we will have to relook at strategies about the structure of the portfolio but I still think we can get these assets to perform.

“If I could unlock value by restructuring that’s something I would consider but we have not come to any definitive view on that. You should not walk away thinking we are in favour of it.”

Holland’s comments come against the background of growing market speculation about a major restructuring of the South African gold sector in order to cope with negative operating conditions and to improve investment ratings of the listed equities.

The speculation stepped up a notch with the comments by AngloGold Ashanti CEO Mark Cutifani early in March that he would consider splitting up the group’s global portfolio of gold mines if he believed it would add value for shareholders.

Cutifani subsequently played down his comments saying there was no immediate plan to split the group’s assets.

In a research report published on March 22, JP Morgan Cazenove analysts Allan Cooke and Steve Shepherd commented there may be merit in pooling some of the South African assets of Gold Fields and AngloGold Ashanti “given the geographic proximity of the operations.”

They said, “we consider there could be meaningful synergy created by combining the operations of neighbouring Driefontein and Mponeng, Tau Tona and Savuka on the West Wits into one business unit.

“Also, since Harmony has consolidated all of the Free State goldfield except for Beatrix there may be merit in arguing that Gold Fields’ lone Free State mine could have synergies with the rest of the region under one umbrella.”

The analysts commented that the “value trap” they highlighted at Gold Fields during 2008 “apparently remains in place” and said, “we continue to believe it would make sense for Gold Fields to move some of its SA mines into a separate listing in order to release value.”

Holland replied, “this is not a new issue. It’s something which has been exercising my mind for the past two years I have been in this job.

“If you look at a sum of the parts valuation, take Gold Fields international assets and apply an international market multiple to them then you swiftly see that there is very little value being attributed to the group’s South African assets. That is obviously a concern.”

Cooke and Shepherd quantified that calculation in their research report where they said “one currently pays 29c in the dollar for Gold Fields SA assets if its offshore portfolio were rated similarly to its North American peers.”

Holland queried, “is it because the SA assets have gone through a tough period or is it because they are tainting the entire portfolio? I don’t think there’s any empirical evidence to suggest what the real answer is.

“ But you have to wonder how Gold Fields can be valued the same way as some international company that produces 400,000oz of gold annually when we produce 3.6 million ounces annually and have reserves of 14 million ounces.

“It does not make sense and we need to get to the bottom of that but these are multi-dimensional issues.”

The JP Morgan Cazenove analysts calculated that Gold Fields shares could have an “aggregate fair market value of some R136” if the group’s assets were separated.

That could rise to around R161 depending on whether the developing South Deep mine was able to attract an international rating. The current Gold Fields share price is R94.

The writer owns shares in Gold Fields.