The David Gleason Column
The arrival in South Africa of a major North American gold company gives further emphasis to the extraordinary changes which have taken place in this country’s mining industry in the past five years.
After months of negotiation, it was announced this week that Vancouver- based Placer Dome, already among the world’s leading gold producers, has bought a 50% stake in JCI Gold’s Western Areas mine. The price for the purchase is $235-million, to be paid in cash. In addition, Placer must pay 1,75% of its share of annual production in perpetuity and another 3,5% on its share of output if total mine production exceeds one million ounces a year.
JCI Gold deputy chair Brett Kebble estimates that the annual payments represent a cash stream over the life of the mine of about $65-million in today’s money, after applying a discount rate of about 13%. If he’s right, that means the purchase of a half-stake in Western Areas mine is valued at $300-million. That translates to about R1,725-billion.
Placer is only buying into the asset of Western Areas mine. That asset will be excised from the listed company and placed in a joint venture which will be owned equally by Placer and Western Areas. Management will be vested in a committee dominated by Placer.
The transaction raises a number of issues. Predominant is the question of what will now happen to JCI Gold and Western Areas itself. At least one option must be for the two companies to merge, and then, perhaps, for both to be rolled into Consolidated African Mines (CAM), controlled by the Kebble family. An extension of this is that, once it is achieved, the logic dictates a further merger with London-listed Randgold Resources, so immediately creating an internationally-based, African- concentrated, mining house.
Then there’s the matter of Western Areas’ value. Kebble believes the company to be fairly valued at around R42,50 a share. The range from stockbroking analysts is between R23 and R36 a share. It is presently priced – fairly, says a senior broker – at R27.
So much for the numbers. Western Areas’ South Deep project accesses a gold reserve of roughly 60-million ounces (in the ground), making it easily one of the world’s largest unmined gold resources. It is pretty easy to see why it was targeted by Placer whose own reserves, according to its last annual report, are a more modest 31-million ounces. The Western Areas deal, therefore, virtually doubles the Canadian company’s gold reserve.
This begs the issue of why JCI Gold and Western Areas between them sold a resource so clearly in demand. It is also known, for example, that Gold Fields was an anxious bidder, though it was apparently interested in buying Western Areas lock, stock and barrel.
Analysts say the real problem was that Western Areas required another R1-billion (Placer’s estimate is $300-million) to complete the South Deep shaft which is being sunk to 3 000m, and this would have stretched its resources beyond prudent limits. Kebble says Western Areas has enough in its pot to complete the job but concedes it would have left the group without adequate cash reserves.
“It was a question,” he says, “of roast duck or no dinner. It would have left us with little room for manoeuvre.”
Finally, the deal leaves investors and analysts with something of a conundrum. Western Areas will be stuffed with cash and, clearly, it will be the vehicle for the group’s broader expansion. But will it soon be merged with JCI Gold? And is a much broader strategy now being contemplated in Fox Street?
It is certainly true that JCI possesses a strong technical ability to develop and engineer new operations. It is already heavily involved, for example, in a hot iron briquetting project in Mozambique, an iron carbide scheme at Sishen (in partnership with Iscor and Sasol) and a new nickel project in Cuba, for which some of the financing is being sourced through the Commonwealth Development Corporation.
But big new gold mining projects aren’t that easy to find. The Placer experience underlines this – it took two years to assess and conclude the Western Areas deal. The logic has to be that JCI will want to hold Western Areas’ cash offshore to put it to the best possible international use, so generating a cash stream and dividends into South Africa.
The arrival of Placer in South Africa is unusual to the extent it signals that the North American big battalions have finally decided they can do business in Africa on a meaningful scale. The criticism Placer must expect from its shareholders is that for some investors it is now too exposed to areas of perceived high risk – Venezuela, Papua New Guinea, Mexico and now South Africa.
For this country, Placer’s investment decision, the largest ever made by a foreign mining company, clearly underlines the desirability of South Africa’s mineral resources.
I find I am not alone in my real concern about the current global economic plight and, therefore, what this may spell for South Africa. Stockbroker Merrill Lynch’s local economist, Jos Gerson, has now graphically illustrated the problem facing the Federal Reserve and its chair, Alan Greenspan.
Imagine a crazed kidnapper, says Gerson, climbing up the ledge of one of New York’s prodigious skyscrapers. He is clutching a baby in his arms. Sharpshooters are positioned all round him. But their dilemma is that if they shoot him, the baby will fall to the street many hundreds of metres below. If they give the kidnapper leeway, he may climb higher and disappear.
There are no prizes for guessing who these characters portray. The sharpshooters are men from the Federal Reserve; the baby is the real economy; the kidnapper represents the capital markets.
Merrill’s chief strategist, Chuck Clough, says United States banks are taking on increasing quantities of corporate debt. Not only is the corporate sector haemorrhaging cash, but consumers too are borrowing or liquidating assets to fund consumption. Hence Gerson’s analogy with the baby.
This is exactly how it is – the world economy is now balanced precariously on a knife-edge. Our own fortunes are inextricably linked with it. Take note.