No plans for unbundling – Harmony, AngloGold Ashanti

Gold Fields’ decision to separate causes speculation

Goldfields separates local assets from offshore operations

Gold Fields’ decision to separate a large portion of its old local assets from its early-stage open-pit offshore operations started much weekend speculation that other international mining houses with local assets will follow suit. But so far, both Harmony Gold and AngloGold Ashanti have no such plans.

This is the case following Gold Fields' decision on Thursday to unbundle by spinning off two old, deep-level, narrow-vein underground operations into a new gold company called Sibanye Gold. These old assets – Beatrix and Kloof-Driefontein Complex mines – have suffered from declining production and rising costs over the past five years.

Harmony spokesperson Marian van der Walt said the company would not split its assets, as it did not believe it would generate further value for shareholders, while AngloGold chief executive Mark Cutifani commented to Bloomberg in Geneva last week that the company did not have plans to split the business and that all options had to remain open.

Gold Fields CEO Nick Holland said last week the unbundling of the company could be a catalyst for the entire gold industry in South Africa, hence the speculation.

“It could help us tear down boundary fences, and I would like to think that the other gold companies are thinking about the effect it may have,” he said.

He said Gold Fields planned to focus on lower cost, lower risk operations and hopefully see its exposure reduced to about 30% in 2016 when its new, fully mechanised South Deep Gold Mine near Johannesburg gets into full production in February, subject to various approvals.

The decision was welcomed by Cadiz fund manager Peter Major, who said unbundling would unlock value. Others liked the deal because it showed reduced labour risks, with labour-intensive mines being ditched and only the mechanised one maintained.

And, indeed, Gold Fields’ share price jumped 7% after Thursday’s announcement and another 1.5% on Friday.

But this enthusiasm may well be dampened this week following rating agency Moody’s decision to place Gold Fields on review for a credit downgrade shortly after the Johannesburg Stock Exchange had closed.

This was in order to reflect on the potential negative effect of the move with regard to Gold Fields’ business risk profile, cash flows and strategies, as it could affect bondholders.

Furthermore, analysts have pointed out that the price-to-earnings ratios of South African gold companies are 60% lower than those of international senior gold producers, and achieve half the price-to-cash-flow values of their global counterparts. Most investors took a dim view of the country’s sociopolitical issues and black empowerment.

Gold Fields’ European investors declined from 23.51% in September 2010 to 15.6% in September this year.

Neal Froneman, who is known for turning around marginal assets, takes over as CEO of Sibanye Gold and could do the same for this company.

“South African mines still have the largest, richest reserves in the world. Now they get to keep their excess profits to add life to these mines,” he told the Sunday Times: Business Times.

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Issue 42