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South Africa’s gold CEOs ready for mergers as prices decline

24th October 2014

By: Bloomberg

  

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South Africa’s gold miners are ready for mergers and acquisitions (M&A) as the falling price of bullion forces companies to cut costs and repay debt.

“Maybe there’s some smart consolidation that can take place on a regional basis,” says Sibanye Gold CEO Neal Froneman. “I think there will be. I think it’s the right time. I think it’s necessary. I don’t think my counterparts in the industry are on completely different pages either.”

Sibanye Gold is the country’s biggest producer of the metal.

Gold’s 27% drop since the start of last year has prompted executives to consider deals as a way of cutting costs in South Africa’s ageing mines and insulating investors from risks such as strikes in the country, which is the world’s sixth-biggest producer of the metal. AngloGold Ashanti failed in its attempt last month to split its local mines from its international operations only because investors baulked at the accompanying $2.1-billion share sale.

“We’re probably a good target right now,” says Graham Briggs, CEO of Harmony Gold Mining, South Africa’s third-largest bullion producer.

Sibanye Gold, a collection of mature South African mines spun out of Gold Fields, has risen 75% by boosting cash flow and dividends since it was created in February 2013, giving it firepower for acquisitions. Froneman wants to make the company’s dividend sustainable beyond 2028, when his mines begin to expire, by acquiring assets, including in platinum.

“The gold industry has to do something so we can benefit from a combination of regional and overhead structures,” he says. “We’re all spending probably R1-billion a year on regional overheads. I haven’t done the exact work, but I imagine you could save 60% to 80% of that through consolidation.”

Harmony has not had any takeover approaches, Briggs says. “It must be one of those things that arises but you have to have your shareholders supporting you,” he says. “Generally, when gold prices are flat to going down, the board is probably more cautious on M&A activitity.”

Gold fell 0.2% to about $1 233/oz last week, taking the decline since its 2014 peak on March 17 to 11%.

Even so, Harmony is on the lookout for any mines that more indebted companies may be wanting to sell, Briggs says.
AngloGold Ashanti’s South African operations are “an obvious choice”, Briggs says.

“Almost all of our assets are ex-AngloGold Ashanti assets,” he says. “The best time to sell those assets is when there’s still some meat on the bone. You don’t want to run it into the ground and then try it sell it because then nobody’s going to buy it. We’ve got that proven track record of squeezing more out of an asset.”

The South African assets are “core” for AngloGold Ashanti, says Stewart Bailey, a spokesperson for the world’s third-largest producer of the metal. “They are high quality and have a long life span. There is a huge amount of upside, both through ongoing operations and with our new reef-boring technology.”

The company’s South African assets make up a third of its production and are cash-generative, backing a portion of its $3.2-billion in net borrowings. That is why a $2.1-billion share sale was needed to split the company, a move that was rejected by investors, including hedge fund billionaire John Paulson.

“The gold sector works well together,” Sibanye’s Froneman says. “We have to find ways of being stronger and having better margins at these sorts of prices.”

Edited by Bloomberg

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