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It's little more than a year since Chris Griffith took the helm as Gold Fields CEO and he hasn't wasted much time, launching a bold $6.7bn bid for Toronto-based Yamana that will vault Gold Fields into the big league of global gold miners — and position his company very clearly as one of the sector's leading growth plays.
The market hasn't fallen over with enthusiasm for the all-share deal, which was priced at a 33% premium. Griffith will have to do the hard sell to Gold Fields shareholders anxious that he is overpaying for Yamana and concerned that there are few direct cost synergies. But if equity investors are nervous, ratings agencies are not, with Moody's Investors Service waxing lyrical about the deal, which it sees enhancing the credit quality of both companies.
The combined group will benefit from larger scale and broader geographic diversification, says Moody's. And Gold Fields, which is coming to the end of its investment cycle as it ramps up production at its giant South Deep mine in SA and prepares to start production at Salares Norte in Chile, will be able to finance Yamana's $1bn pipeline of growth projects over the next few years without raising much new debt.
The deal is expected to make Gold Fields the third-largest global producer, raising its output by almost 1-million ounces to more than 3.2-million ounces a year across eight countries and 14 mines. While size-wise it's still quite far behind global leaders Barrick and Newmont, its growth and projects will see it catching up in coming years, and its enhanced asset mix will make it a serious competitor.
Regaining position
For SA the deal has some important lessons and implications, which are both encouraging and sobering. On the upside, Gold Fields' head office and primary listing remain firmly in SA, which stands to benefit from hosting a gold group with a larger global footprint. Indeed, South Africans will now head up two of the four global gold industry leaders, with Griffith joining Barrick CEO Mark Bristow in the group.
SA has long ceased to be the world's No 1 gold miner, accounting now for hardly more than 4% of global gold output, but its gold miners are regaining their position in the top league. And Griffith, with his strong track record as the former CEO of Kumba Iron Ore and Anglo American Platinum, is a highly regarded operator who can be expected to do a lot with the larger asset base of the combined Gold Fields/Yamana.
But the strategic benefits of the deal for Gold Fields should also be pause for thought for SA and its African neighbours. Analysts point out that one of the reasons it's expensive for Gold Fields to pay for the acquisition in shares is because of the SA discount applied to its shares. Equally, the fact that it is diversifying into North America, which is seen as a far more attractive and less risky destination for mining investment than SA or Ghana, is a big plus.
Moody's notes that the deal would cut Gold Fields' high exposure to Ghana from 33% to 23%, and more broadly its broader geographic footprint will cut its overall exposure to a single country or single mine. More specifically, it will cut its exposure to countries — including SA — that are rated subinvestment grade, or junk, and instead ensure that almost 60% of its revenue comes from investment-grade countries such as Canada and Chile.
"We see operations in sovereigns with weak credit quality as high-risk mining jurisdictions because there is increased exposure to uncertainties such as political instability, unexpected changes in regulations and resource nationalism," says Moody's.
Griffith is not the only SA mining CEO who has been looking to expand globally into lower-risk jurisdictions in North America or Europe rather than higher-risk, albeit resource-rich, ones in SA and elsewhere in Africa. Deals such as that involving Yamana are good news for SA's place in the world as a mining centre, but they should also be a wake-up call for its policymakers.
