Selling SA gold mines is strategy of last resort

[] – THE prospect of breaking up Gold Fields along geographic lines has resurfaced again years after the merger of the group’s non-South African mines with IamGold was foiled by the South African government.

Responding to questions at the group’s September quarter presentation, CEO Nick Holland, said the notion of ‘spinning out’ the South African assets was always a consideration.

According to a Cape Town fund manager, the externalisation of the South African mines is a theme frequently driven by international shareholders. That’s why AngloGold Ashanti’s CEO, Mark Cutifani, like Holland, also refuses to completely dismiss the idea.

In Gold Fields, however, selling off the South African mines gained special currency as Holland was so particularly gloomy about the local industry. It had five years, he said, to remediate its problems or face extinction.

But before expounding on the benefits of ‘spinning out’, ‘selling’ or splitting up the asset base of any gold company, there has to be clarity on what is actually meant, and the consequences of such actions.

It also has to be viewed as a strategy of last resort.

“You can’t really know until you do it,” the fund manager says. Yet there are some models to avoid, such as Barrick Gold’s creation of African Barrick, the London-listed Tanzanian gold producer created in 2010.

African Barrick was intended to provide Barrick Gold with an exit strategy from African operations that were troublesome and might better flourish under ‘independent’ management. The feeling among analysts, however, is that African Barrick became little more than an orphan.

Adrift the Canadian mother ship, African Barrick’s operational problems did not magically disappear just because it was listed in London; in fact, they intensified. And with a 74.9% stake in the business, Barrick Gold has merely presided over further value loss: the stock is just under 30% down since listing, and is now the subject of a possible buy-out by Chinese company, China National Gold.

“The option of splitting out assets is not the correct way,” says David Davis, an analyst for SBG Securities who thinks Gold Fields would be better served downsizing the existing assets, rather than just selling them.

“Its mines won’t fall off a cliff, and some are high margin. You just need to fix them,” said Davis. Hiving off the South African assets doesn’t remove the exogenous risks of a carbon tax, or a 16% increase in the electricity tariff.

International investors, however, view it differently, another analyst says. “They want a company without the labour, political and cost risk; assets that are closer to them,” he says. “Create a company that South African investors can invest in if they want and can handle the risk,” he says.

Holland’s view seems to fall on managing the assets, however, not selling.

He talks of the greater good derived from downsizing its South African mines: protecting the majority of the 40,000 jobs by shutting down the unprofitable areas.

Foreign investors have divested of the company but they will return given “the right ingredients”, says Holland. He knows that while shareholders may not understand the nuances of South Africa, they do understand value.

“I think some shafts will close anyway because they are getting old,” said Holland. “But if they are contributing to fixed costs we might keep them,” he adds.

Some may think the value of the South African mines is not reflected in the Gold Fields’s share price, but were Holland’s team may think it won’t get the value from the mines by selling them either.