Momentum with “Bold Fields’

[] — THE appetite for South African gold shares among investors looks like being tested again. Gold Fields’s $1.2bn equity raising, the largest ever by a South African company, follows last year’s placement of 63 million shares which was raised to help finance the $2.5bn acquisition of the South Deep mine from Barrick Gold and Western Areas.

Now, at a current share price of about $18/share, Gold Fields’s new issue will see another 67 million shares placed into the market, increasing total shares in issue a further 12%. You got to believe those gold shares will go for a fair-sized discount if only because so many other South African gold shares are swimming in the market, including its own.

Take, for instance, the 113 million shares in AngloGold Ashanti that will hit the market sooner or later. That’s the amount implied in the 41% stake in AngloGold Ashanti that parent company, Anglo American, said it will sell.
Investors digested 27.6 million AngloGold Ashanti shares sold by Anglo American and newly issued by AngloGold Ashanti last year at only a 1% discount. But can Gold Fields’ repeat that performance?

“I wouldn’t be surprised if they settled for a 10% discount on the shares issue. It’s over R8bn worth of shares, which is a lot,’ says Peter Major, a fund manager for Cadiz. Confirmation of the pricing is likely on January 30 after the joint JP Morgan-Citigroup global book-build.

Helping Gold Fields is the gold price. Having closed out the Western Areas’s hedge book at approximately $622/oz, at a cost of $528m, the gold price has raced up to $651/oz at the time of writing. As one fund manager has said, Gold Fields’s has chosen the right environment to set about these plans.

However, one potential consequence of Gold Fields’s share issue is that it might send the emerging market investors to Harmony Gold. With overhang pressures sitting on Gold Fields and AngloGold Ashanti, there’s a sense that if it can bring costs at its operations to heel, Harmony is a safer bet, particularly given its 8% underperformance on rumours costs were out of hand again during the December quarter.

Not all agree. Major thinks it makes more sense to steer clear of all South African gold stocks at the moment. “I don’t really like any of the South African golds right now,’ says Major. “I don’t think they’re doing well enough with the gold price they’ve got.’

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If anything, Gold Fields’s share issue, and the decision to close out some 1 million oz of gold is a statement of faith in the gold price. “Gold Fields have made some glowing observations about seeing the gold price go up,’ says Paul Theron of South African fund management firm, Vestact.

In the meantime, one must marvel at the considerable forward momentum behind Gold Fields management at the moment. The recapitalisation of the balance sheet is bold and decisive as was the bid for South Deep. Add to these actions, new mines in South America and meeting legislative targets in South Africa. After falling to victim to Harmony Gold’s hostile takeover proposal in 2004, Gold Fields appears to have strongly taken to heart the axiom of act or be acted upon.