A NEW joint venture in Ghana between Gold Fields and AngloGold Ashanti proved irresistible to fellow scribes, who asked at a press conference last month if it was a prelude to a merger. In the context of about $30bn in first-quarter mining industry merger & acquisition activity, it’s a fair question.
AngloGold CEO Alberto Calderon wafted it away, however: “It’s the last thing we talk about,” he said. In truth, the joint venture partners have good reasons to demur. Gold Fields’s board is frozen until it appoints a new permanent CEO to replace Chris Griffith, who left in December. His failed takeover of Canadian firm Yamana Gold has put Gold Fields in search of credibility and off blockbuster deal-making.
AngloGold Ashanti is in a not too dissimilar position. The group was without a permanent CEO for a year before Calderon’s arrival in September 2021. During the interregnum, costs blew out, resulting in a market downgrade. AngloGold spokesperson Stewart Bailey says his company is now rebuilding its competitiveness, to which end the agreement with Gold Fields is a marker.
By removing the boundary fence between two properties — AngloGold’s Iduapriem and Gold Fields’s Tarkwa — the joint venture doubles the lives of each mine to a combined 18 years, cuts costs to below $1,000 an ounce, and opens growth options from 2040 that weren’t available to the mines individually. The joint venture also attracts the grand epithet of “Africa’s largest gold mine”.
UBS analyst Steve Friedman calculates that incremental production and lower total costs will add $250m in value over the joint venture’s first five years. Based on a forecast of average production totalling 600,000oz a year across the extended mine life, a further $1.4bn in value is added, assuming a long-term gold price of $1,500/oz. Before handing a stake to the Ghanaian government, which must approve the transaction, Gold Fields will control and operate two-thirds of the joint venture.
It’s a classic win-win, but prompts the question why the tie-up wasn’t concluded before. Gold Fields interim CEO Martin Preece acknowledges that the companies had circled each other in Ghana for “many years”, but discussions only gained momentum last year. There were specific reasons for doing so. For Gold Fields, a deal with AngloGold perfectly segued into its post-Yamana strategy of unfussy, incremental bolt-on deal-making.
“We think the deal improves the long-term production outlook for Gold Fields,” say analysts at Bank of America Merrill Lynch in a recent report. For AngloGold, the joint venture continues recent form.
In September, AngloGold announced the $150m purchase of Coeur Mining subsidiary Coeur Sterling, which owns properties in Nevada’s Beatty district containing an estimated 914,000oz in mineral resources. The deal meant AngloGold had spent $500m consolidating the region on which a major part of its resource replacement and growth strategy rested. This included the $370m purchase of Corvus Gold, a transaction that predated Calderon but which he completed.
The joint venture also helps AngloGold cut its average cash costs, which Calderon wants reduced to below $1,000/oz on average. Gold sector inflation, however, has become a major headwind for Calderon’s plans. AngloGold’s average cash costs last year increased by $120/oz, and are forecast to average between $1,050/oz and $1,120/oz this year.
Still, on a relative basis AngloGold has performed better than its peers in the cash cost stakes. Whereas Barrick and Newmont recorded 19% cost increases, AngloGold’s $120/oz increase was only 6% up. The “cost benefit is clear” for AngloGold, says Merrill Lynch of the joint venture.
Ghana approval
One key question, however, is what Ghana thinks of it all. “The level of interest held by the Ghanaian government is key to how much value will accrue to both Gold Fields and AngloGold shareholders,” says Merrill Lynch. There’s little reason to suspect the government will throw a spanner in the works if it can see a clear advantage, especially in the context of a national debt crunch.
South Africa’s four largest banks expect to write off as much as $270m in bonds as the West African country restructures its finances. It’s not alone in this regard — Zambia and Ethiopia are also in talks to revamp debt — but according to S&P Global Ratings, foreign securities in Ghana are facing a haircut of as much as 50%.
The stress was evident in November, when Ghana’s government ordered all large-scale mining companies to sell 20% of their entire stock of refined gold at their refineries to the Bank of Ghana from January. This was to help it buy oil. Gold producers, including Newmont, the world’s largest, say no official approach has been received, but the Miningmx understands the matter is far from over.
This story was first published in the Financial Mail.
