Golden Balls: A profile of Ian Cockerill
David McKay Posted: Fri, 23 Feb 2007
[miningmx.com] -- IT’S just possible that Ian Cockerill, the 52-year old CEO of Gold Fields, is having the time of his life.
In a little over 12 months, the Gold Fields’s board has bought two companies, started two new mines in South America, and won mining permits for its South African mines. Add to this the gigantic South Deep mine that Gold Fields whipped from under the nose of rival Bernard Swanepoel, CEO of Harmony Gold. If ever an event proved Cockerill had learned to street fight, the outmanouevring of Harmony over South Deep was it. He wooed Barrick, won the ear of Western Areas, tamed all the possible moving parts that made ownership of that mine the imponderable it became. In the end, Cockerill was just quicker to the punch.
All the while, a tide of confidence had been rising in the gold market, pushing the price of gold higher in nearly all currencies; in fact, nearly
three-fold in dollars since its low of 2000. The result has been to send Gold Fields’s share price up 50% in two years helped by record quarterly earnings and production, and billions of rands in cash generation.
Said Cockerill: “We don’t call this the mining business. We call this the ‘shit happens’ business”. It’s a good joke, and isn’t untrue for the most part of the mining industry’s hurly burly. But since surviving the hostile takeover bid from Harmony in 2004, Cockerill and his board have cut a wide swathe.
“I think the perception of Cockerill when he started was of a little, grey man,” said Liston Meintjies, chief investment officer for Metropolitan Asset Managers. “But you now get the feeling that what he would like to happen can be made to happen.”
Perhaps the Harmony hostile takeover attempt in 2004 helped galvanise Cockerill and his team; after all, they nearly, very nearly lost their jobs. Certainly, Cockerill and his team didn’t see it coming.
Perhaps in a mirror-staring moment, he decided never to allow that to happen again.
In money terms, Cockerill has overseen growth related spend of R24bn ($3.3bn). And there are other plans. Gold Fields wants to spend a further R9.7bn deepening its South African mines, as well as start another one in Peru. There’s also some R3bn that may be spent by 2010 upgrading the South Deep mine if a feasibility study is fully adopted. And to think Cockerill was once likened to a greengrocer owing to his pedestrian management style.
Not all are so convinced. Piet Viljoen, who runs Regarding Capital, a fund management firm, believes Cockerill listens to his shareholders - to his detriment. “Let’s be honest, gold industry shareholders are not the most rational,” said Viljoen. As with any typical gold company, Gold Fields is value destructive over the long term, he said.
It's the shit happens business
“Cockerill’s not worried about capital costs and return on capital. It’s all about getting production up as high as possible. For us, it’s not a core investment holding,” Viljoen said.
Today, however, it’s 8am on a Saturday morning, and all is well with the world. The sun has already climbed above the trees, and the day is shaping into a typical Highveld scorcher.
Clearly not content with hectic corporate life, Cockerill is rebuilding at home having shifted a few streets in the plush setting of Johannesburg’s Morningside. It’s exactly what you’d expect of an executive home. “What do you think of the view?” he said waving an arm at the new garden.
It’s momentarily difficult to connect garden birdsong and Cockerill’s praise for some ancient oaktree – the genus of which he forgets – with the manic scenes two days earlier when Gold Fields was
unleashing its latest corporate manoeuvre.
Having racked up more than $2bn in net debt, the company announced it would embark on South Africa’s largest single book-building, raising $1.2bn. Five days later, the share issue was complete. In a further announcement that surprised analysts, Gold Fields said $528m had been spent closing the hedge book in Western Areas.
“I guess we were expecting the hedge book to be removed, but not so rapidly as it was,” said Mandla Mapondera, a fund manager for Old Mutual Asset Management. “Generally that was a positive thing, meeting the issues fairly early in the process.”
Imposed by the late Brett Kebble while CEO of Western Areas, the hedge book was nothing but trouble.
“Every $1 per oz move in the gold price added $1m in liability to the company,” said Cockerill. Weighed under by crippling debt elsewhere, Kebble used South Deep, a 28 million oz gold mine on the west Rand, to raise debt. He sold gold forward at
prices well below the acccelerating spot price completely under-estimating the enormous groundswell of support for a higher gold price.
Gold Fields valued the hedge book in December at a negative $600m. This was when its chief financial officer, Nick Holland, had started selling it down. “To have removed it at $530m puts us $70m ahead of our own budget,” said Cockerill.
“This is a very positive development,” said Georges Lequime, an analyst for RBC Capital Markets in London. “From a morale point of view, the removal of the hedge book losses should be a huge psychological boost.” Cockerill agreed with that: “It was a financial millstone at the mine [South Deep]. When they heard it was removed, there was euphoria.”
They’ll be much focus on South Deep now. The mine was never well operated, a fact put down to a fractious and decision-confounding joint venture that ran it. Under one management, hopes are high for renaissance.
But how? At
the outset, Gold Fields has planned to dig less expensively. A feasibility study compiled by Western Areas showed that some R1.1bn could be taken off the expenses sheet over the life of mine with better planning.
Another idea is to use infrastructure that Gold Fields developed at its Kloof mine which neighbours South Deep. That way it’ll be quicker and cheaper to mine South Deep’s more deeply stowed gold. But there’s a geological fault between the two properties, a feature that has led to divided views on South Deep’s worth among Gold Fields’s senior management in the past, and might raise hackles again in the future. The challenge of combining South Deep with Kloof had delayed Gold Fields’ moving for the South Deep mine earlier. But the interest has always been there.
Cockerill confirmed the group had been kicking around the South Deep conundrum since the Nineties, soon after Jay Taylor, then CEO of Canadian mining company, Placer Dome, took management control. Then
the plan was cooperation, but the death of Kebble and the interest showed by Swanepoel in the mine forced Gold Fields’ hand.
Now with the mine finally under its control, Gold Fields hopes production could be taken higher. There’s also a tax shield from accumulated assessed tax losses and unredeemed capital expenditure of some R3bn to R4bn under which the mine can operate until 2014.
Finally, there’s the removal of the hedge book, a short-term bonsella that enables South Deep to be paid a full price – currently some R151,000/kg - for the gold it produces. Compare this to the constraints imposed by the hedge book which kept revenue at R80,000/kg.
Balance sheet worries
NICK HOLLAND, Gold Fields’s mild-mannered, almost demurring bean-counter, said he wouldn’t be kept awake by the company’s balance sheet. That was in December when Gold Fields had bridging finance of $1.2bn and total net debt of $1.9bn. Bold statements indeed from Holland who, the
market has long suspected, doesn’t love debt much. In November, for instance, the group’s net debt totalled $130m. It’s no exaggeration to say that that was a fairly typical number for Gold Fields to be carrying on its balance sheet.
Clearly, the sudden decision to close the Western Areas’ hedge book, at a cost of $528m, was a step beyond. “At $2.5bn, debt would have been at 2.8 x EBITDA,” said Cockerill. Banks lend when you don’t need it. But what if the gold price fell out of bed? What if mines struck upon some difficult times? Cockerill’s “shit happens” axiom was pressed into action.
Amid the high-flying corporate action, there are present fears Cockerill, focused tightly on corporate matters, has lost a grip of the mines, particularly in South Africa. The December quarter operating results, announced simultaneously with the share placement and hedge book closure, were disappointing with costs spiralling disturbingly high. Analysts even spoke of deliberate cloaking
of results with corporate matters. “How stretched is the guy [Cockerill]? I don’t know,” said Peter Major of stockbroking firm, Cadiz. “The mines didn’t have a good [December] quarter.”
Predictably, Cockerill doesn’t think he’s lost control of the company’s daily activities, but concedes what few managers have acknowledged in the past: “The South African mines are old, tired, difficult mines. It’s like running those old Alfa Romeos. If the tolerances are out of whack, it all goes wrong. If they are right, it runs beautifully.”
He also raised a complaint growing in the mining industry that skills are thinly spread. The gold industry loses too many people to platinum, he said. “Over the past few years, the perception is that platinum is the much sexier metal,” said Cockerill. And while the senior team is relatively intact, salaries for artisans are ‘ballooning’, he said.
Platinum is a subject close to Cockerill’s heart. It’s thought his company desires adding
platinum assets as mirrored in the R650m ($90m) it spent trying to develop a platinum/palladium mine – known as Arctic Platinum - in the northern reaches of Finland. When you go that far for assets, you know management has a yin for it.
I met with Brad Mills (Lonmin)
The R3.65bn ($500m) project has since been farmed out to North American Palladium because it wasn’t feasible for Gold Fields. The time spent assessing the property, and the money, proves even the best corporate teams can have a dud. Still, the white metal is part of the strategy. “We remain very interested in doing something in that sector,” said Cockerill. The problem is that Gold Fields’ must produce enough metal or it simply becomes a mining contractor to “the big boys” by which Cockerill means, Anglo Platinum, Impala Platinum and
Lonmin.
Talking of the big boys in platinum, there was speculation in February 2006 that Gold Fields and Lonmin had discussed a merger. Cockerill acknowledged meetings occured with Brad Mills, Lonmin CEO. “We struck up a relationship but I don’t know how the story circulated there was a merger,” said Cockerill.
Actually, it was Lonmin that generated that story. Following interesting (but not mind-blowing) morning gains in its share price, Lonmin made a surprising announcement to the London Stock Exchange on February 17, that it was engaged in talks that could lead to an offer for the company. (Predictably, Lonmin’s stock then went ballistic notching up an intraday gain of 34%).
“Yes, I asked Brad about that,” said Cockerill. “He said: ‘Oh, it’s got nothing to do with you guys’”. Whatever talks took place were firmly displaced by the LSE announcement. A week later, Lonmin said talks surrounding the company had been terminated. It remains to be seen whether
Cockerill’s platinum interests are over however.
Searching high and low
VENEZUELA IS NOT the easiest place to do business. Yet Cockerill authorised the R2.4bn ($330m) takeover of the Toronto-listed Bolivar Gold which owned the Choco 10 prospect there. South America has been hit by a wave of indigenous nationalism. In Venezuela it resulted in the re-election of president Hugo Chavez who said recently the government would seek control of assets owned by foreign businesses, a move reminiscent of early drafts of South Africa’s own mining charter.
Gold Fields has a mining license that supercedes Chavez’s more recent promises to being foreign businesses to heel, but the risk of losing this license is high, says Terence Goodlace, Gold Fields’s former international mines head. Contravening a law, any law, can end with Gold Fields losing its right to mine under the old dispensation.
The Choco 10 mine was another bold move by Cockerill following on from the
development of the Cerra Corona mine in Peru, a mine that could produce 300,000 oz/year. Whether this one will work out is a moot point. Could this far-flung trek become another Arctic Platinum? Cockerill insists Gold Fields remains the kind of company Chavez wants to see in his country’s borders.
And yet some fund managers in the US credit no value to the Venezuelan asset in Gold Fields’s books.
Cockerill can see it’s a risky asset. “There’s a lot we underestimated in Venezuela,” he said. Logistical issues are one, mainly due to government bureaucracy. “We’ve been trying to lay a simple 200mm pipe. It’s taking forever,” said Cockerill of the development of the Choco 10 mine.
And there’s another burning irony: “We’re are in the middle of a South American rainforest, and we’re running short of water. It’s been frustrating but we recognised it might be,” Cockerill said. Gold Fields is, however, uncovering more resources at Choco 10, But it wants the resource
upgrades to be kept under covers.
The acquisition of South Deep has an interesting bearing on Cockerill’s earlier promise to internationalise the group. In 2005, he unveiled a plan to source 1.5 million oz/year from mines in offshore (non-South African) locations.
There’s some 600,000 oz still outstanding but the massive South Deep shifts total unmined gold resources – a common benchmark used to value mining firms – to 80% South African. This has led some analysts to observe that diving for South Deep, perplexing Swanepoel, and weighing down the balance sheet has only turned Gold Fields’ into a parochial South African entity.
“It’s far from a reversal of international strategy,” said Cockerill. “South Deep provides a fantastic platform in South Africa from which the group can grow internationally,” he said.
But finding another 600,000 oz of gold per year won’t be easy. It’s madness in the world of gold industry merger and acquisition activity. According to Bloomberg News, about $186bn of mining deals were concluded in 2006, many of them at massive premia. In order to compete, Holland’s natural parsimony will be tested.
In one deal alone, the North American gold firm Goldcorp paid $8.7bn for Glamis Gold which ironically had 600,000 oz – Gold Fields’s magic number – targeted for 2006. The pressure is squarely on finding
new gold reserves which makes South Deep valuable to Gold Fields, and why it’s so expensive.
Completion of the share placement must sound a note of vindication for Cockerill’s boldness of late. About 79 million shares were placed with a 60% oversubscription, and a relatively modest 2.9% discount. The new shares are a 14% enlargement in Gold Fields’s share capital to follow the 13% dilution in 2006 when it issued 64 million shares to part pay for Barrick’s 50% stake in South Deep, and Western Areas.
The success of the share issue is also a resounding vote of confidence in South African shares as well as Gold Fields. “It shows the company is pretty robust,” said David Davis, a gold analyst for Credit Suisse Standard Securities, in Johannesburg. “The share overhang was the only thing pulling Gold Fields down. The rest looks pretty good,” he said.
It's the shit happens business
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