Prepare for more unbundling as gold dries up
The unbundling of Gold Fields's assets to create Sibanye Gold is likely the first of many in South Africa as gold reserves continue to disappear.
On Thursday Gold Fields announced the unbundling of its subsidiary GFI Mining South Africa (GFIMSA) to create the new company which will hold its Kloof Driefontein Complex (KDC) and Beatrix mines as well as some service operations.
These are the very same mines which recently experienced weeks of lost production as wildcats strikes persisted and the move has raised concerns over the investment landscape in South Africa.
But Sven Lunsche, Gold Field's spokesperson, told the Mail & Guardian that the move was not prompted by recent wildcat strikes. "We started thinking about this mid-year [before the strikes] … it makes a lot of sense … it has nothing to do with the unrest."
Lunsche said the reasoning was that KDC and Beatrix were not priorities for Gold Fields investment and the life of the mines would be extended if spun off into a different company.
Gold Fields and Sibanye Gold will be operated as separate entities and will be independently governed and managed. Neal Froneman, chief executive of Gold One International, will take the helm as chief executive of Sibanye Gold while Nick Holland will remain chief executive of Gold Fields.
Lunsche noted that many of the other operations were mechanised and did not require as much labour management as KDC and Beatrix.
Current Gold Fields shareholders will now be invested in both companies, he said.
A mining analyst, who asked to remain anonymous, said it would appear the transaction was a deliberate move to leave South Africa behind. "They are trying to get rid of toxic assets. That's what it looks like."
But Lunsche said interpreting the transaction as a disinvestment in South Africa would be a very shallow reading of the situation and that one local project, the development of South Deep Gold Mine, has in fact received a great deal of investment.
"South Deep accounts for two thirds of our reserves, after the split," he said. R30-billion has already been invested in the project and a further R5-billion will be paid in … In 50 or 60 years' time it will be the only gold mine left in South Africa," he said.
David Davis, mining investment analyst at SBG securities, agreed that the real issue here is that gold mines are dying.
"Declining reserves are killing the golden goose," he said. "Production is down because reserves are dwindling."
The restructuring would mean a longer lease on life at lower production.
The reason being that as production declines, unit costs go up – especially against inflation.
"KDC would fall into the mature mine category," Davis said. "It has declining reserves and production. They have to be operated differently, with more efficiency – you have to optimise the value".
Goldfields said the mineral reserves at December 31 2011 were 22-million ounces for Sibanye Gold and 64-million gold-equivalent ounces for Gold Fields.
It also said Sibanye Gold's gold is "one of the largest domestic gold producers in South Africa," but it doesn't change the fact that it is aging.
Davis said KDC has experienced a decline of around 1 000 ounces each year.
In a press release, Froneman said Sibanye will be committed to maintaining profitable, stable and low cost operations that provide a high degree of leverage to the gold price.
While Holland said: "The separation will liberate Sibanye Gold into a fit-for-purpose, sustainable gold mining company best positioned to maximise long-term value for stakeholders."
Gold Fields may have been the first to make a move, but Davis believed others would follow. Most recently, Anglo gold Ashanti, in its latest quarterly results, the company noted it was conducting a study of its corporate costs, focusing on drawing fewer, higher-quality ounces from its South African mines
Earlier this year, Davis predicted that a number of mines would have to start restructuring their operations within the next 12 to 36 months.
But he said strike action certainly would have accelerated the need to bring right-sizing into being as soon as possible.
In its announcement, Goldfields noted there will be no job losses directly as a result of the unbundling and conditions of employment will remain unchanged.
It also said Sibanye Gold will develop policies which will incentivise its workforce to benefit from the success of the business through a profit-sharing scheme as well as continued investments into improved living conditions that will improve the lives of employees.