Mvela reverse a hidden positive

[] — IT was puzzling…. First Mvelaphanda Resources (Mvela Resources) suggests it may sell its Gold Fields investment.

A day later, after declaring strain with shareholders and partners, it restates its position in which it explains it doesn’t yet own Gold Fields shares; that it is not currently thinking about selling them; and that it may consider selling them in the future (read the original Miningmx story by clicking here).

From an outsider’s perspective, Mvela’s statement sends more than one message. On the one hand, the media have “erroneously implied that Mvela Resources is considering selling its investment in Gold Fields’.

On the other hand, its long-term intent is to become a focused operating company which “… may involve the sale of some investments in order to apply its capital to other opportunities that offer value’.

Elsewhere in the note, Mvela Resources says it may sell some Gold Fields shares to pay down nearly R2bn in mezzanine debt. Paying down debt by selling some Gold Fields shares doesn’t really add up. Surely then Mvela will be a yet smaller minority shareholder, further marooned?

Mvela’s stated intention of selling assets it has no prospect of controlling is consistent with its long-standing strategy. The company trades at a discount to net asset value because it doesn’t have tactical influence over its investments. Cash flow constraints suggest it’s presently highly unlikely that it will have enough fire power to alone control Gold Fields.

So what’s going on?

Mvela’s strategy has shifted hands from Mvelaphanda Group to Incwala Resources, the firm that recently announced plans to buy a 23 % stake in the firm, and inchoate. For its part, Incwala has said it supports Mvela Resources’ management.

Is Incwala really just in for the ride at Mvela as a large but passive shareholder? Unlikely. Does it have roadmap for Mvela as yet undisclosed to the market? Probably. It would have been irreponsible to have spent nearly R1bn on the Mvela stake without having a strategy.

In the long-run, Mvela Resources shareholders ought to be interested rather than perplexed by developments. If the firm has been discouraged to propagate the view it intends selling Gold Fields shares, then perhaps it’s because it may find the means to grow its gold exposure.

Other points in Mvela’s statement are perfectly true, however, and worth repeating (again, see earlier Miningmx article).

Mvela Resources doesn’t yet own any Gold Fields shares.

In 2004, Mvela Resources finalised a deal in which it was to buy a 15% stake in Gold Fields’ South African gold assets for about R4.1bn. The deal has a five-year term before maturity (2009) at which point Mvela has the option to convert its asset level ownership into Gold Fields Ltd shares.

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Owing to a later refinement of the transaction, this “flip-up option’, as it has been dubbed, converts into no less than 8% and no more than 10% of Gold Fields. In short, Mvela Resources will only own Gold Fields shares by 2009.

The firm’s comments earlier this week are that it may consider selling those shares after the conversion process. This will only be after another conversion process – the conversion of Gold Fields’ old order mining rights into new order mining rights which underlies the entire rationale for the deal from Gold Fields’ perspective.