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Mining's big soliloquy: to merge or not

Saturday, 19 August 2017

Twelve years after Harmony's audacious bid for Gold Fields, the sector is up against it

It's been 12 years since the audacious bid by Harmony Gold to buy its larger rival Gold Fields collapsed. It proved an acrimonious affair, one which would eventually be contested in court.

Now, with South Africa's gold mining industry seeming to be on its last legs, the craftsmen of that original deal may have been prescient in their rationale for the merger, which would have created the world's largest gold miner.

Bernard Swanepoel, who was at the helm of Harmony at the time of the bid and waged a bitter battle with contemporary Ian Cockerill, said "the premise that we [Harmony] would have done better with the mines is untested".

However, he added that Gold Fields'spinning off of its South African mines to Sibanye "at least spoke to the proposition we made that the mines be run differently". Sibanye had done that, running them at lower cost, Swanepoel said.

From Harmony's first move on the much larger establishment-darling Gold Fields, to its decision to quit the deal, it took seven months. The battle - which was hostile in every respect - played itself out in the courts and in the financial press here and across the world's major capital markets with opposing sides defending their positions.

The proposed deal came just a few years after an even more audacious failed bid by Richard Laubscher-led Nedbank for Jacko Maree's Standard Bank.

Separately, the banks have since managed to chart a more successful path to growth. For the gold miners, however, the road has led to a far dicier place.

Since talks ended in May 2005, Harmony's shares have fallen by more than 44%, while its ambitious target's stock price has largely remained flat, down a marginal 0.1%. The dollar price of gold has more than trebled. Overall, the JSE gold mining index is down 4.8%.

Swanepoel resigned as Harmony's chief executive 10 years ago, ending a 12-year term. Cockerill, who wasn't available for comment, left in 2008, six years after he took over the owner of South African gold mining's mechanised jewel, South Deep.

With gold trading at around $1,200 an ounce, and ore grades declining fast in South Africa, miners are being forced to close down or sell assets.

The question once again is whether consolidation is the way to lengthen the industry's life beyond the next decade.

Nick Holland, who replaced Cockerill as CEO of Gold Fields, and who has often been seen as a supporter of consolidation, is no longer its biggest proponent.

He said that consolidation synergies now were less than they were in the past, and even if the gold price were to improve, it would simply delay the inevitable.

"In five years' time you will be shocked to see where the industry is and I remember saying this five years ago. Mining output will be much lower."

South African gold production peaked in the '70s.

Holland said when Gold Fields spun off its assets into Sibanye Gold in 2012, led by Neal Froneman, that was a case of consolidation, and it was a good move for shareholders.

Leon Esterhuizen, an analyst at Nedbank, said the cost of running South African mines has far outstripped inflation. Even if consolidation were to occur, it would reduce operating costs by a mere 10% and prolong some old mines by three years or so, as against the more than 30% reduction in costs needed in the industry.

"Where you have two loss-making companies, you consolidate to cut costs, lose production and people in the process, but consolidation hastens the decline in grades," Esterhuizen said.

Beyond improving

He added that if Gold Fields South Deep worked profitably, it would probably be the last gold mine standing in 10 years' time, at the current gold price.

South Africa was beyond improving efficiencies, Esterhuizen said, because operating costs increased yearly at a faster rate than the gold price, while mining became ever-deeper with no further capital investment.

"South Africa is pushing old mines to their limits," he said.

Harmony, which is rumoured to have been in talks with AngloGold Ashanti to acquire Ashanti's local business, needed more production, Esterhuizen said, otherwise it would find itself in a dire situation in five years' time.

AngloGold's mines made sense for Harmony, he said. "If Harmony were to buy AngloGold's South African assets, they would have to take into account the third version of the Mining Charter. This drives the value of those assets down. They can't pay what it's worth to AngloGold simply to mine out and close."

Peter Steenkamp, Harmony CEO, is tight- lipped about these rumours. Consolidation could do no more than prolong the time to a shutdown but policy certainty was sorely needed, he said.

"What we need to do is to find opportunities to grow inside or outside South Africa. Things evolve over time and mining companies have to go to where the ore bodies are situated," Steenkamp said.

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