Separate futures for Harmony Gold and Gold Fields
By: Jim Jones
Posted: '20-MAY-05 14:00' GMT © Mineweb 1997-2004
JOHANNESBURG (Mineweb.com) -- Now that the dust is settling over Harmony Gold’s abortive bid for Gold Fields, perhaps the miners can return their attention to breaking rock and milling ore.
The bid proved, in the end, to be highly destructive and highly disruptive. As it progressed the thinness of Harmony’s capacity to squeeze profits out of ageing South African mines -- the “Harmony Way” – became clear. And Gold Fields plans to lift its international gold production to an annual 1.5 million ounces by 2009 were hurt when the bid to merge the group’s assets located outside South Africa with those of Canadian miner IAMGold were defeated by the votes of shareholders encouraged by Harmony to block the deal.
So, what next?
This weekend a defeated Harmony Gold CE Bernard Swanepoel will be thinking hard about what he should do with the 11.8% Gold Fields investment. There is probably little point in holding on to a minority stake that gives him little prospect of influencing the future direction of Gold Fields. But Swanepoel argues that the stake is "strategic" and that he has no intention of selling at present.
Nevertheless, if he were to let personal feelings intervene, he might be tempted to offer the stake to Norilsk Nickel, lifting the Russian miner’s stake in Gold Fields to just short of 32%. In round figures, that would cost Norilsk $575 million. But there are obstacles, mostly unadmitted, to such a move.
Across the possibility of a $575 million transaction between Swanepoel and Norilsk’s Mikhail Prokhorov falls the lengthening shadow of inquiries now under way in Canada, Russia, South Africa, and elsewhere of an apparently massive money-laundering scheme allegedly connected to Harmony Gold’s transactions abroad. Russia's Central Bank has already confirmed that it carried out a classified investigation of the initial $1.16 billion purchase by Norilsk Nickel, at Prokhorov's instructions in March last year, of the 20% Gold Fields stake.
The dealmaker working for Prokhorov at the time, Leonid Rozhetskin, subsequently sent Ian Cockerill, Gold Fields's CEO, a confidential e-mail warning him that the purchase transaction was under high-level investigation by the Russian authorities. Following that, Rozhetskin arranged with Swanepoel that Norilsk would back the Gold Fields takeover, and ordered a subordinate to sign the irrevocable undertaking Swanepoel needed. By January, Prokhorov had removed Rozhetskin from the company; and the latter is reported in the Russian press to be under investigation by federal prosecutors for other transactions.
While Norilsk is in a face-off with the Kremlin over the alleged illegality of its original Gold Fields purchase, it would be injudicious for it to become involved in a high-profile further acquisition of shares in the self-same company.
Then there are other possibly-related issues.
According to a report this week in The Guardian, a London newspaper, South Africa’s elite investigations unit, the Scorpions, has uncovered an alleged scheme involving at least 74 bank accounts that received payments for a certain "Zacharias Bernardus Swanepoel", an identity Bernard Swanepoel, CEO of Harmony, categorically denies is his even though the name is his.
"It must be some other person", The Guardian quotes Swanepoel's spokeswoman as saying. She also told the London newspaper that Swanepoel welcomes the South African investigation because he has requested it. As reported in London, investigations to date have uncovered a scheme to conceal and move about $40 million in funds between these bank accounts over a period of about three years in separate transfers of about $5,000 at a time. Details of the timing and origin of the funds have not been released.
Apart from averring that this is a matter if identity theft, Swanepoel has chosen not to respond formally or legally to the allegations of wrong-doing in The Guardian.
But back to Gold Fields. Spokesman Willie Jacobsz says that his company’s strategy remains unchanged insofar as international production targets are concerned. Acquisitions and mine developments in countries as far apart as Ghana and Peru remain on track. And, if the door were to be slammed on international acquisitions by South Africa’s restrictions on exports of capital, exploration and new mine developments would form the basis. As it is, Gold Fields’s forays outside South Africa have been more successful than Harmony’s.
But, judging for example from the problems that DRDGOLD has been having at the long-established Emperor mine in Fiji and those encountered by AngloGold Ashanti at Obuasi in Ghana, foreign acquisitions are not always beds of roses.
There will be no new and significant greenfields gold mine developments in South Africa. And Harmony’s latest retrenchment and closure plans in the Free State will, the company reckons, cut its annual gold production to 3 million ounces from 3.3 million. Further rand weakness against the dollar might help, but Harmony’s cash-burn rate needs to be managed by realizing investments. Ahead of the R830 million sale of a 14% stake in associated mining group ARM, Harmony had a cash deficit of some R230 million at end-March and was burning cash at a quarterly rate of some R530 million.
The fact that the 14% ARM sale was affected at a book loss of R440 million underscored Harmony’s urgent cash needs. It still faces the cost of the newly-proposed retrenchments and closures even if the closures do return the company to being cash-flow positive. Nevertheless, the need to pull in revenue from disposal of the Gold Fields holding could be urgent with extension projects at the Elandsrand, Tshepong and Doornkop costed at a remaining total of some R1.2 billion. This June quarter alone, capital spending and retrenchments in South Africa seem likely to reach more than R500 million.
Sure as God made little apples, Harmony will not be looking to increase its stake in Gold Fields. And any future acquisition targets are likely to be small and any bid underpinned by a cash alternative.
The question remains: Where will those Gold Fields shares go? Dumping them on the market is out of the question, and an option might be to sell them to Gold Fields itself. Gold Fields might then re-issue the shares for further acquisitions abroad, though its preferred strategy as with the case with the abortive IAMGold merger plan, would be to establish a separate company to hold the assets outside South Africa.
Still, as Gold Fields CEO Ian Cockerill told Mineweb Radio just over a week ago: “We have provision, as a general provision which has been approved already by shareholders, to buy back generally in the market. So I think that the concerns that people may have about an overhang are not valid because at these prices we think Gold Fields is very reasonably priced. And certainly on the basis of our current performance and our future prospects, we think this share price is as low as it has been for a long, long time. It is a good buying opportunity for Gold Fields. So, no, I am not worried about an overhang.”
