[miningmx.com] – GOLD Fields shareholders will receive shares in Sibanye Gold on February 18, a week after the company is listed on the JSE. The one-for-one share issue is a function of the unbundling of Gold Fields’ South African mines, excluding the 700,000 ounce per year South Deep project.
The question Gold Fields shareholders may be asking themselves is whether it makes sense to hold the share?
Analysts are wary. Of the three interviewed telephonically by Miningmx, all asked to be left off-the-record, presumably owing to the negative opinion they had of the stock. The predominant view is that Sibanye Gold could make good returns, especially in its first year of operation, but that generally the company is laden with risk.
“If they have the problems of last year [on-mine violence and strikes] the company is going to have difficulties,’ said one Johannesburg analyst. “Under the right environment, it could do quite well,’ he added.
The right environment is largely related to exogenous factors, such as a weak rand which would boost the leverage inherent in the South African assets. Peaceable wage negotiations later in the year for the gold sector would also go some way to reducing the risk in Sibanye Gold. Conversely, an acceleration of labour tensions would achieve the opposite outcome.
Sibanye can’t afford to lose production. While the company is expected to list at between R10 to R15/share – producing a potential dividend yield of around 10%, which is extremely high for a gold share – it has to service some R4bn in debt, predominantly bridging finance raised by Gold Fields’ KDC and Beatrix mines, the constituents of Sibanye Gold, when last year’s strikes were in full flow.
“We will look to refinance the debt,’ says James Wellsted, investor relations manager for Sibanye Gold. “We’ll attempt to get more friendly, longer term debt. But we also think we can pay that off pretty quickly, in a year or two, based on the current gold price,’ he adds.
Another exogenous factor is the potential overhang in Sibanye Gold shares. The company’s creation was a response to foreign shareholder discontent with South African exposure. As a result, foreign shareholders are likely to drop the stock having achieved the gold exposure they want with the restyled Gold Fields, shorn of its risky, mature South African mines.
According to Sven Lunsche, spokesperson for Gold Fields, the company’s share register as of end-November was dominated by US-based investors, equal to 48% of the total base, followed by UK shareholders (10%), the rest of the world (18%), and then SA shareholders (24%).
“I’d suggest you dump the share,’ said another analyst. “Some of the local shareholders may decide to hang in for a year in order to collect a dividend, but that’s about it,’ he said.
Wellsted believes the reponse from foreign investors was surprisingly good, however. “I think we’re coming back [to South Africa] in a more positive frame of mind than when we left,’ says Wellsted, currently on the US leg of a roadshow with CEO, Neal Froneman.
In truth, Sibanye’s shareholder register is likely to churn, somewhat. Speaking at the announcement of Sibanye Gold’s creation, on November 29, Froneman didn’t believe the future shareholder base would be reliant on traditional areas of investment, thinking instead Asian investors would pile in, eventually.
Froneman’s marketing skills are legendary and so he stands a good chance of generating traction from Asian shareholders, especially if they know him from his efforts at Gold One International, which was bought out by a consortium of Chinese investors.
But he’ll also need to de-risk Sibanye Gold’s asset base through acquisition and business agreements. While he has a reputation for dealmaking – some good, some middling – this process will take time.
In the interim, the emphasis is on “fixing the assets,’ says Wellsted. There’s a number of things Sibanye can do such as returning to unmined, high-grade pillars in sections of KDC and treatment of tailings.
One analyst warned the writing was on the wall: that KDC and Beatrix were mature mines with declining reserve profiles – down 27% in three years to an estimated 9.6 million ounces for KDC – but Wellsted says economic conditions change the picture.
“Gold Fields reserves statement assumed a gold price of R420,000/kg while the competent persons’ report worked on R380,000/kg. This compares to a current rand gold price of R520,000/kg,’ he says.
