Anglogold, Gold Fields tie-up talk makes return

[miningmx.com] – ONE of the most abiding mergers ideas in the South African mining sector must be the mother of all gold tie-ups: the marriage of AngloGold Ashanti with its once fierce rival, Gold Fields; once fierce because gold companies the world over are less about raking ambition than survival.

In their heyday, AngloGold and Gold Fields were the two largest gold producers in South Afrca with the former representing the progeny of the ubiquitous Anglo American whilst the latter represented the ambitions of Gencor.

These days both companies have South Africa as but a part of their operations; in fact, Harmony Gold and Sibanye Gold have a larger footprint in South African than either Gold Fields or AngloGold Ashanti.

Yet the notion of combining the two companies has won some favour again, and whilst there are heavy doubts that the two companies will ever combine, it does make for rather interesting and entertaining reading.

“We believe the time has come to merge AngloGold and Gold Fields,’ said Leon Esterhuizen, an analyst for CIBC Capital Markets in a report dated May 20. He adds that there has been “a significant deterioration’ in the South African risk premium which sees gold companies operating outside South Africa trade at much better premiums.

His strategy would be to merge the companies, split the merged entity into South Africa and international assets and then sell or list the South African asset base in South Africa for an estimated $1.2bn.
This would leave the international group, which would still be domiciled in South Africa, producing 4.3 million ounces of gold a year at a cost of $870/oz and valued at some $5bn.

Assuming sales of non-core assets for $800m, the international company would heavily cut into the combined net debt levels and even allow raising of some $1bn in equity now that the company’s paper is more highly rated.

“This would leave the new international company with much lower debt and with cash flow that would easily service this debt,’ said Esterhuizen.

One of the last times a combination of the two companies was seriously mooted, in 2006, it was thought only value destruction would follow: firstly because the leviathan that would have been created then – with 11 million oz/year in gold production – would be too large to manage; and secondly, the company would be immediately cast as ex-growth.

There were also questions about whether then leaders – Bobby Godsell and Ian Cockerill – could actually get on: an observation that might be feasibly raised of the firm’s current leaders, Srinivasan Venkatakrishnan of AngloGold and Gold Fields’ Nick Holland.

What’s perhaps most interesting about Esterhuizen’s thesis, however, is that it reflects a growing scepticism that South Africa is a place for international capital given the country’s regulatory, infrastructural and labour challenges – a growing view articulated by Mike Teke, president of the Chamber of Mines.

Speaking at the chamber’s annual general meeting last month, he asked: “The key question is whether South Africa is still a preferred mining investment destination globally and in Africa or whether other jurisdictions are taking preference.

BHP Billiton recently washed its hands of South Africa by demerging non-core assets into South32, a third of which are in the country whilst Anglo American, so consistently penalised for its South African exposure, was reported by the UK’s The Times to be considering a listing of its controlling stake in listed subsidiary, Anglo American Platinum (Amplats) which would considerably lessen its local exposure.

Is it possible that after years of warning by the private sector that South Africa’s regulatory environment was making the country’s mining sector unplayable for international investors is actually coming to pass?