SA gold industry enters final chapter

David McKay | Sun, 09 May 2010 11:16

[miningmx.com] -- I’VE got to admit I’m a bit of a fan of Nick Holland, Gold Fields CEO. You’ve got to stand for something in life and I think Holland has integrity to risk lowering production in favour of safer mines. In a recent call to analysts, he defended against downsizing the South African mines on the basis that he didn’t want to put people on the street.

But in business, as in all walks of life, the nice guys frequently come last. The fact of the matter, however, is that Gold Fields employs 55 000 odd people on the South African mines against the 32 000 employed by AngloGold Ashanti and only produced 11 000 more ounces in the March quarter than AngloGold Ashanti. Something’s got to give.

On top of that, Mark Cutifani, AngloGold Ashanti CEO, has dismissed the prospect of participating in consolidation in the South African gold industry, as I thought he would. This was after Holland told Miningmx he had had interaction with Cutifani on the possibility of merging assets. The gold mines of the two companies are on different tracks currently. Cutifani is betting on the success of a 12 to 18 month Project One initiative which is about efficient mining and cost cutting. I don’t know if Holland has a similar thrust but he needs to turn the mines around. The pressure’s really on.

In the absence of consolidation, and were there a repeat of the March quarter performance, some analysts have suggested that Gold Fields management will be cast into a period of soul searching, and could even split up the assets independently. I was wondering how this could work.

It would basically comprise a kind of sell off of the weaker assets which got me thinking as to whether Harmony could eventually get the wish of its former manager, Bernard Swanepoel, and end up running Gold Fields assets after all.

Seasonally, the March quarter is always a tough one so this is a clear case of getting ahead of onesself, but the clock is ticking on Holland.

And what of the South African gold sector? One apprehension is that the industry has well and truly started the final chapter. Quite how the equities will fare is a question. In terms of margin, the South African mines are a drag on Gold Fields; in terms of valuation, they help make its business case as nowhere else in the world is there such a scale of reserves and resources.

We’ll have a much clearer picture in a year or two, but with the cost pressures from labour and the likelihood the gold price isn’t going to do much from here, the emphasis falls on really smart management to either start harvesting the mature mines, or taking a more brutal approach to how they are packaged, the kind of brutality Holland hasn’t shown as yet.

Xstrata

The general feeling from within Xstrata is that a merger with shareholder and commodities trader, Glencore, will happen. Debt in both companies is a major driver while from Xstrata’s side non-mining issues in both Australia and South Africa motivate it.

Should the tax on super profits in Australia be supported in its current form, the benefits of scale become more important. In South Africa, meanwhile, the shortage of new power from Eskom means Xstrata can never have the platinum refinery it desires to be fully integrated.

Currently, Xstata has a toll-treatment arrangement with Anglo Platinum but not having control over the entire platinum production chain in a major constraint. As a result, Xstrata will have to buy something in order to have a refinery. It has just under 25% of Lonmin but it’s not certain it will build on this stake.

It may be some time before it can finance a takeover of Lonmin which, in the meantime, has a weakening share price and costing Xstrata money on its initial investment. The prospect of a $50-odd billion Glencore/Xstrata would raise the prospect ofa bid for Anglo American and its listed subsidiary, Anglo Platinum.

The Xstrata/Glencore tieup has obstacles to ovecome, however. Quite apart from getting shareholder support for a certain valuation and rationale, there’s also the question of how the Glencore culture would combine with that of Xstrata.

Glencore is, shall we say, somewhat more ‘seat of the pants’ than Xstrata which, as a listed company, has all kinds of corporate boxes to check: controls and governance regulations. It would be interesting to see how Glencore would adapt to operating in this way. Not an easy one.