Sale of the century

[] — FOR all its moving parts, you’d have expected the race to own South Deep to have been a more complex affair. But it wasn’t; not on paper, at least.

Where was the bidding war? Where was Harmony’s Bernard Swanepoel hectoring his old rival, Ian Cockerill of Gold Fields. And what of AngloGold Ashanti, the mighty prodigy of Anglo American? We’re told there were other bidders, but they must have dropped out early.

Instead, Gold Fields has elegantly swept up Barrick’s 50% stake in South Deep, and lifted its own stake in Western Areas which looks like it will be delisted next year. Cockerill, Gold Fields CEO, swans out the door with the last great treasure likely to be delivered up by the Witwatersrand (Wits) Basin.

The fact of the matter is Gold Fields really is the best positioned company to mine South Deep. The realisation has a sort of business integrity that one wishes could have been applied down the years in South Africa’s gold mining sector – instead of the barrel of pitched battles between companies over their farm fences.

For its part, the investment sector thinks everyone got a good deal. At $106 per reserve ounce, South Deep is a bargain for Gold Fields bearing in mind Canadian firm, Goldcorp, is bidding to pay nearly $600 per reserve ounce for Glamis Gold, another Canadian firm.

But it’s worth acknowledging that South Deep was never likely to tempt offshore suitors. The mine is a daunting 3km deep, and requires specialised experience. Placer Dome had an awful time trying to mine the orebody. And while it’s no slam dunk Gold Fields will do better, one struggles to imagine who would. Maybe Swanepoel?

But not even Swanepoel would be able to deliver the synergies at Gold Fields’ disposal, a virtue of South Deep’s contiguity with Kloof which Gold Fields is extending.

What else is there to recommend this deal? Well, the South Deep deal is a thunderous vote for the Wits Basin, especially as it’s by a company that threatened to harvest its South African mines five years ago. That was when the gold price was languishing at $255/oz and economic conditions were much different (worse).

Now, with the world’s mining sector unable to find new gold reserves quickly enough, Gold Fields is to invest R25bn in South Africa. The change in heart is a reminder of the extraordinary cycles inherent in extractive industries.

Announcing its success, Gold Fields suggested that South Deep was born to be its property owing to its large and long-life characteristics; exactly the kind of asset the gold firm specialises in managing. For its 4.2 million oz/year, Gold Fields has nine mines under its control, way less than some of its competitors and a factor that keeps management thickly spread over its assets.

Yet there are questions. The hedge book has a R3bn negative mark-to-market, a term used to represent the cost of delivering into the hedge book’s contracts today. Nick Holland, Gold Fields chief financial officer, makes the intriguing comment that the firm could issue a cheque to rub out the hedge book if it so desired. Surely that’s talking tough? The preference, rather, would be that Gold Fields is likely to manage the hedge book down, while simultaneously assuring shareholders the company remains committed to spot price exposure.

There are also operational challenges. Cockerill is a mining engineer running a mining company – not always a given in today’s world. He must be mindful that South Deep has never done well. You can bet cynics will leap on Gold Fields should it derive a bad series of results from South Deep. In that respect, the pressure is on.

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Shareholders, in the meantime, may be wondering if Gold Fields has retreated to South Africa, effectively going soft on its offshore growth strategy. It hasn’t, but investors in North America are wary of South African mines.

Just ask Swanepoel, the gold mining entrepreneur who must now dwell on his second corporate defeat in as many years. In truth, failing to secure South Deep has its own blessings. Harmony’s Swanepoel knows what he must do and has even more time to focus on the job on hand. No more distractions then.