[miningmx.com] — WHAT’s the price of gold in the ground thousands of metres below surface in South Africa?
That’s the burning question following the sale of two deep and marginal gold prospects in April to Chinese investors for R3.9bn.
Or put more bluntly: Who screwed up on this one? Harmony – which sold those assets to unlisted Taung Gold in September last year for R300m – or Hong Kong-listed Wing Hing International, which has just agreed to buy them from Taung for R3.9bn in equity?
Let’s start with some background. The assets are the former Jeanette mine in the Free State, which has been closed since 1955, and the Evander 6 shaft, which Harmony shut down in 2008, along with the adjacent, undeveloped Twistdraai project.
Documentation released by Wing Hing shows the two projects control a combined minerals resource of around 24m oz of gold but another $1bn (about R6,8bn) will have to be spent on developing Evander, with a peak funding requirement of $315m.
A further $1,1bn (around R7,4bn) will have to be spent on Jeanette, with a peak funding requirement of $603m.
First gold production is expected to come from Evander in the third quarter of either 2014 or 2015, so there’s a three-year wait for the first cash to start flowing back – assuming all goes well. History shows making such optimistic assumptions is dangerous with deep level gold mining projects in SA.
Now let’s look at what else Wing Hing could have bought in SA for that kind of money. It could have bought Neal Froneman’s Gold One International [JSE:GDO] – current market cap: R2,7bn – in which another Chinese investor called Baiyin Precious Metals has just bought an 18% stake for around R480m.
Or Wing Hing could have gone shopping in the JSE’s bargain basement bazaar for DRDGOLD, which has a total market capitalisation of around R1.54bn at its current price of around 399c/share. Wing Hing would have to pay a takeover premium, but even if it paid double the current price for DRDGold, it would still come in well south of R3.9bn. For that they would get ownership of a company currently producing around 270,000oz of gold a year and which should increase production by about 20% from year-end 2011, when its second plant at Ergo kicks in.
DRDGOLD has made net profits of R100m over the past six months and has an attributable mineral resource of around 60m oz of gold, of which 22m oz belongs to the operating Blyvooruitzicht (Blyvoor) mine, 30m oz belongs to the mothballed ERPM mine and around 7m oz is hosted in the highly-profitable surface dump material being treated at its Ergo and Crown divisions.
DRDGOLD CEO Niel Pretorius has just announced he’s putting Blyvoor up for sale. He won’t specify the price he’s looking for but points out Blyvoor’s net asset value is around R500m.
The boys at JPMorgan Cazenove clearly believe anyone thinking they could get that kind of price for Blyvoor is smoking his socks. Analysts Steve Shepherd and Allan Cooke commented in a recent report: “We don’t believe the group will get much for this asset IF it can find a buyer. We attribute little value to this mature, marginal mine in our base case valuation. It’s not generating cash and requires a brave investor to commit significant capital to its ageing infrastructure.’
Bottom line is that something just doesn’t add up when you compare the value attributed by the market to DRDGOLD with what Wing Hing has agreed to pay for Jeanette and the Evander 6 shaft. Either DRDGOLD is a screaming buy or Wing Hing has paid way over the top.
Pretorius has got the message. He’s targeting potential Chinese buyers, using the Beijing Axis as consultants.
Taung CEO Neil Herrick tells me the price was reached with Wing Hing on the basis of the valuation of “ounces in the ground’ – plus the value added by Taung through scoping and engineering studies since they acquired the assets from Harmony. Says Herrick: “It would be simplistic of you to merely compare the two nominal figures at which we bought and sold and conclude we just flipped the assets to Wing Hing.’
But in my book there are two kinds of gold “ounces in the ground’: those that can be mined profitably and those that can’t – and the ounces at Jeanette don’t look the kind you can make money out of.
Both Herrick and Harmony Gold CEO Graham Briggs maintain that’s not the case, although Briggs concedes mining Jeanette “will be difficult’. The reason lies in the geology, which is why Jeanette was never actually brought into production despite its two shafts being sunk to depths of 1,290m and 1,547m respectively. The problem is a geological formation called the Khaki Shale sitting above the main gold-bearing Basal Reef.
This shale band is particularly thick at Jeanette and parts of the adjacent Loraine mine, where it forced an end to mining at its No 1 shaft. That’s according to a report published by Stephen Oke and Toby Antrobus in 1988 for former stockbroking firm Mathison & Hollidge. The shale band is “soft, friable and up to 4m thick in the vicinity of Loraine’ the analysts say, and it can cause huge problems in supporting the hanging wall of the mining workings.
Herrick replies: “We don’t believe the Khaki shale band presents the same challenge it did 50 years ago. Mining technology and mining support systems have changed.’ He says further technical details of the proposals to develop and mine Evander and Jeanette are due out in a circular to be published shortly by Wing Hing.
Briggs says some investors “have a completely different view of the world’ when it comes to valuing un-mined gold. “We think US$1 500/oz is a very good price but they may believe it’s going to $5 000/oz. They may also be looking at the gold more as “money in the bank’ even if it remains in the ground for the next few years and isn’t mined.
“You can ask the question: if Taung could do that why couldn’t Harmony? Perhaps we didn’t have the right advisers or access to the right contacts, or we lacked the capacity to dress it up. We did what we thought was right for Harmony at the time. Our focus is on Wafi-Golpu in Papua New Guinea and we aren’t going to spend $1bn on developing another mine in SA.’
Which brings up the practical topic of how you raise $1bn to meet peak funding requirements on Evander 6 and Jeanette – assuming Wing Hing isn’t going to cough it all up by itself?
Raising money for deep-level SA gold projects is tough, says Wits Gold CEO Marc Watchorn, who’s been trying to get such a project off the ground for the past few years.
Wits Gold has shelved its Bloemhoek project – where mining would have to take place at depths of between 1 300m and 2 000m and for which it would need to find around $1bn – in favour of the much shallower De Bron project, which should cost around $400m. Watchorn describes Bloemhoek as “a bridge too far’ but reckons De Bron will be SA’s next new gold mine.
– The article first appeared in Finweek
