The return of Bernard Swanepoel

[miningmx.com] — LOVE him or hate him, former Harmony CEO and one-time gold industry “wunderkind’ Bernard Swanepoel is back in the gold business in a big way.

Should his Village Main Reef (Village) group succeed in buying Blyvooruitzicht (Blyvoor) from DRDGold for R150m in Village equity as announced last week, then this will be the third, large deep-level gold mine under Swanepoel’s control.

There are two critical questions. What exactly is Swanepoel’s strategy this time around and can he really generate at Village the same kind of excitement and share price heat that he managed at Harmony?

The short answers are: Swanepoel has no intention of trying to turn Village into another Harmony, and the major determinant of how successful Village will be with these mines is likely to be the gold price.

In a nutshell – Village looks a high-risk, high-reward play that widows and orphans should avoid but gold bugs could be attracted to like moths to a candle.

Let’s first quantify the risk/reward scenario using the example of Harmony.

On Swanepoel’s watch, the Harmony share price soared from around R20 in 1995 to peak at around R170 in 2002 as he acquired a string of marginal gold mines from groups like Gold Fields and AngloGold Ashanti.

The combination of a soaring rand gold price and a new management approach dubbed “the Harmony way’ temporarily turned these mines around and sent profits soaring.

Then the wheels came off as the gold price stagnated and Swanepoel opted for what former colleague Mark Bristow – CEO of Randgold Resources – described as the “John Wayne option’.

Swanepoel tried to “shoot his way out of trouble’ with the hostile bid for Gold Fields in October 2004, which failed, and the Harmony share price subsequently plummeted to around R46 by 2006.

Which is why you either love or hate Swanepoel, depending on when you got into – and out of – the stock.

So far, market reaction to Swanepoel’s comeback has been predominantly negative judging by what has happened to the Village share price.

Village sky-rocketed from 24c to 400c in 2009 when Swanepoel took the shell company over from former owner Harmony. But since then Village has traded overwhelmingly south as Swanepoel has acquired assets, even though these often appeared to be for good value.

Through his To The Point (TTP) operation, Swanepoel picked up gold/antimony operation Consolidated Murchison (Cons Murch) from Metorex for R1 and got Metorex to kick in R65m to help recapitalise the company.

He then “flipped’ Cons Murch to Village for R30m, which subsequently raised R22.5m through a private placing to expand and upgrade the mine.

In January last year, he bought control of Lesego Platinum for R411m in Village equity issued at 200c/share.

Swanepoel followed that in December with the reverse takeover of Simmer and Jack Mines (Simmers) in a deal worth R1.3bn, also settled with Village equity issued at 220c/share. That gave Village ownership of the Tau Lekoa and Buffelsfontein (Buffels) mines.

If the DRDGold deal is completed then it will cost Village R150m in equity issued at 175c/share for a mine valued by JP Morgan Cazenove analysts Steve Shepherd and Allan Cooke at between R350m and R500m.

Village shares plunged 40% to 126c following the Simmers transaction but have since recovered to current levels at around 180c/share – a performance that Swanepoel decribes as “disappointing’.

Reason is that – at current gold prices north of R400 000/kg – all the gold operations are profitable, while Village continues to expand the platinum resource base at Lesego through the R140m drilling programme being funded by the IDC.

BEST DEAL EVER

Even the antimony price has played ball resulting in Swanepoel describing Cons Murch as “arguably the best deal that Village may ever do’.

“We have been extremely lucky with the gold price although you would not say so if you look at our share price,’ says Swanepoel.

He comments that Village’s business approach will be different from what happened at Harmony in two key respects – size and management strategy. “This isn’t a take two of Harmony or the DRDGold of old. We don’t intend to become a mining group hugging multiple assets that all require tender loving care,’ Swanepoel comments.

Instead, profits will be taken off the table and paid back to shareholders through bringing assets to account by selling them or carrying out IPOs (initial public offerings).

Swanepoel says he has his eye on one more gold mine, which he won’t name, “which logically can do with a Village turnaround but it would be a pity if it comes up for sale in the next six months”.

Reason is he wants to sell one of Village’s existing mines so that his organisation does not become too thinly spread. Swanepoel also plays down speculation over Village’s possible involvement in the much-touted “end game’ for the South African gold sector.

That revolves around major consolidation between the remaining three big players – Gold Fields, Harmony and AngloGold Ashanti. He still believes such consolidation makes sense – as it did when he bid for Gold Fields – but says Village is “playing further down the feeding chain’ meaning assets which could come up for acquisition such as Gold Fields’ Beatrix mine “are just too big for us’.

Asset disposals have already started with the sale of much of Village’s equity stake in First Uranium to AngloGold Ashanti. Swanepoel describes the Weltevreden project acquired from Simmers as “a dripping roast at R440 000/kg but not one that fits into the Village business strategy’.

He adds: “It should be put in the hands of someone who’s prepared to spend the capital required over a seven-year time horizon and, if we’re not going to take it forward, we should take money off the table.’

Intention is also to pay that money out in “chunky’ dividends when possible.
Swanepoel has firm ideas on his role at Village, which is that he wants to get more involved in hands-on work as a “coach’ at operating level on the mines.

NEW CEO

He has designated chief financial officer Marius Saaiman to take over as CEO within 12 months commenting: “I want to do more of what I like and less of what I don’t like.

“A typical CEO’s job involves 80% wasted effort on issues taking place off the mines – all the meetings, all the travel. You have to do that well but I don’t want to do it anymore.’

According to DRDGold CEO Niel Pretorius, Swanepoel is the one person “who actually knows how to run these mines. He’s the man who developed the strategy to optimise these kinds of assets.’

That was through the management method dubbed “the Harmony way’ but many observors question whether it’s still relevant more than 10 years after it was first implemented.

Swanepoel acknowledges the point and describes his approach as “more common sense than the Harmony way’.

He comments: “While the Harmony way may no longer be relevant, you still cannot buy those kinds of neglected mines and just run them in the same state. That cannot be a sustainable business.

“We have to demonstrate real impact unlike Simmers which paid too much for Tau Lekoa and then ran it at lower levels than the previous owners – AngloGold Ashanti – which destroyed value.

“Anglo sold Tau Lekoa as a profitable mine with a three-year remaining life. But, when I got to Simmers, Tau Lekoa had become a mine with a 14-year life during which it would never make any money.

“I still don’t think the South African gold industry is performing at its potential.
“So, we will reduce cost per ton even though overhead cost levels are not the same as in the past and management structures are also not the same although some are not too far away from it.

“While the Harmony way may no longer be relevant, you still cannot buy those kinds of neglected mines and just run them in the same state.”

“We often find confused decision-making on some of these older mines. I hear the same talk about “cost obsession’ but then I’m amazed to find that it’s not necessarily in place”.

But the most important factor for investors considering a punt on Village has to be the gold price, which right now is running heavily in Swanepoel’s favour.
There is, of course, a downside. Gold would not escape damage should the world go into a double-dip recession, and companies like Village would be heavily exposed because of the high-cost nature of its mines.

Swanepoel comments: “We think both Tau Lekoa and Buffels are in far better shape than they were six months ago. Blyvoor can be a good transaction if the gold price stays favourable and we can do the things we hope we will find the opportunity to do there.

“But at a gold price below R350,000/kg at today’s operational levels we would be in the dwang.

“At R350,000/kg you would not buy Blyvoor. Tau Lekoa is fine at R300,000/kg but it would not make money. Buffels is fine at R350,000/kg but it also would not make money.’

So, you have been warned. If gold holds up, Village could well perform like an early stage Harmony or Simmers but this is a stock to be traded.

– The article first appeared in Finweek. If you want to subscribe to the digital format of Finweek visit www.zinio.com.