Holland resorts to merger heroics

[miningmx.com] — Nick Holland’s recent comment to Miningmx colleague Brendan Ryan that Gold Fields had explored synergies with AngloGold Ashanti, including a possible merger of South African assets, has to be seen in perspective.

Holland, while not yet desperate, has real grassroots problems attempting to improve the performance of Gold Fields’ South African mines.

Production has been rebased down from 1 million oz per quarter and costs appear stubbornly high. Even the lower production targets have been missed lately.

Holland would probably like to consider splitting out the South African assets from the group’s international ones as per Barrick Gold’s recent demerger and listing of its African mines. But, in the words of one stockbroker, any rerating of Gold Fields international assets would be offset by a derating of the South African ones.

Nor can Holland easily realise his stated ambition to reduce the group’s exposure to South African production over the next five years to 40% of total. That’s because some 95% of Gold Fields’ growth capex is linked to South Deep, the west Rand mine. Of its R26bn three-year capital budget, there’s very little net growth at its international assets.

Holland’s problem is that he lacks operational and strategic flexibility.

The inescapable task for Gold Fields’ executive team is to fix the South African mines. Faced with the difficulty of this, and the fact shareholders are becoming impatient, Holland is considering the kind of corporate action he decried at the 2009 Investing in Africa Indaba as “merger heroics’.

Said Holland in the recent Miningmx interview: “It’s up to us to show these assets can perform. If we can’t then we will have to relook at strategies about the structure of the portfolio.’ Hence the “high level talks’ with AngloGold Ashanti’s Mark Cutifani.

One can only imagine these meetings to be polite discussions between industry peers. I doubt Cutifani and Holland were actually hauling out mine plans. After all, what would incline Cutifani to fix Holland’s problem?

Policy Potential

So South Africa has slid into the Fraser Institute’s bottom quartile of least policy competitive mineral jurisdictions. What a surprise.

Put another way, South Africa’s mineral policy is only fractionally more trustworthy than the Democratic Republic of Congo and Zimbabwe.

The review of mining legislation, the imposition of the Royalty Act, and the country’s various infrastructural challenges which include expensive power, scarce water, limited rolling stock on its national freight lines – all of which express or inform government mineral policy – are most probably to blame.

I wonder if the institute’s study was completed before ANC Youth League president Julius Malema’s sustained calls for nationalisation of the industry? And what will the institute make of these utterances in a year’s time?

So it’s against this backdrop that the ability of Brian Gilbertson’s Pallinghurst Resources to attract $100m in sovereign fund investment into the little known Platmin, only worth R4bn on the JSE, is a remarkable achievement.

One of the funds, the Dutch pension fund Algemene Pensioen Groep manages some R2.2 trillion in investments. It’s never invested in metals before, never mind Africa. The same is true of the Malaysian investor – Temasek Investments: it had never invested in metals until Gilbertson brought it into Platmin.

Yet for all Gilbertson’s silver-tongued persuasiveness, I reckon the deciding factor must be the sheer robustness of the metals market, platinum in particular.

It’s acknowledged that the platinum supply deficit will turn on the ability of South Africa’s junior miners to meet production plans.

Perhaps Platmin is one of those companies. Its mineral resources are situated in the western half of the Bushveld Complex and are thought to be geologically difficult. In Platmin’s favour is the fact that some of the more outcrops while its deepest reaches is only at 600m.

And then of course there’s the metal. Gilbertson bought control of Platmin through Pallinghurst Resources in late 2008 when the platinum price was about $800/oz. It’s now $1700/oz. Interestingly, jewellery demand hasn’t been dented at this price which is a significant sign the platinum price won’t be knocked off its stride at these levels.