The David Gleason Column
Last week I addressed some of the issues surrounding the putative takeover by Driefontein of Gold Fields, a stratagem devised to get around the problems posed by minority shareholders who want to be paid more than is likely to be put on the table.
Since then a lot of hot air has been manufactured by those who should know better. So let’s revisit the tangle of the Anglo restructuring and the Gold Fields/Anglogold toenadering (rapprochement). The two are quite separate but are being muddled, which makes it hard to pick out the underlying issues.
In late 1997 Gencor and Gold Fields of South Africa (GFSA) announced a merger of their gold assets. These were injected into a new company, Gold Fields. Gold Fields is emphatically not GFSA by another name.
The merger astounded many because it was generally believed that GFSA’s managers had concreted themselves into an impregnable position by the deal they had struck with Rembrandt. This was done after Anglo American’s international arm, Minorco, failed to take control of London-based Consolidated Gold Fields.
A storm followed the merger. Anglo American expressed its displeasure, especially about the inclusion of Driefontein, the wealthy gold mine at the heart of the West Wits line. Anglo, which promptly announced it would put all its gold mines together in Anglogold, claimed Driefontein is critical for its plans to exploit the rich but ultra-deep deposits remaining in the south of the area.
After much argy-bargy, Gold Fields and Anglogold agreed Driefontein would stand outside both their companies but would be jointly owned: 60% by Gold Fields and 40% by Anglogold. This presupposed that minorities in Driefontein would be prepared to sell their shares. Many investors immediately climbed on board the Driefontein train in the belief they stood to make a handsome profit.
Driefontein is a great gold mine which has been badly managed for years. When Gold Fields assumed management control over it, Gencor let it be known that its managers were amazed that Driefontein made profits while it was mining as much as 70% below cut-off grade (it is not economical to mine rock containing less gold than the cut-off grade). Should the mine ever be restored to the industry average of 30%, imagine what a cornucopia would follow. It costs no more to blast and transport the same quantum of rock if it has a higher gold content – and if the contained gold should miraculously increase, think how wonderful that would be. Perhaps this is why little is now being heard of the quality of Driefontein – neither Gold Fields nor Anglogold wants to talk up the price.
The word in the market is that Gold Fields is suggesting Driefontein shares are worth about 0,6 of a Gold Fields ordinary. In other words, 10 Driefontein shares will earn six Gold Fields shares. But many analysts and investors suggest that Driefontein is worth a lot more, perhaps as much as between 0,85 and 0,9 of Gold Fields. They base their numbers on calculations which include the net present value of both companies and the expected life of the Driefontein operation.
This response hasn’t gone down well with either Gold Fields or Anglogold, which is why the proposal that Driefontein should instead buy Gold Fields has now surfaced. The intention would be for Driefontein to change its name to Gold Fields after the transaction is completed and for Driefontein then to be excised from Gold Fields and injected into a joint venture held between it and Anglogold.
As I said earlier, this is a stratagem intended to secure the Driefontein asset at the lowest cost for the two mining companies. There is nothing wrong with trying to get the best deal and it is legal. If minorities want to stop it they’d better get their act together.
The issue will revolve around who is allowed by the Securities Regulation Panel (SRP) to vote at meetings of the companies involved. The SRP’s record isn’t exactly distinguished when it comes to protecting minorities. So minorities will have to take heavyweight legal advice when it comes to deciding whether parties involved in the scheme, such as Anglogold, will be allowed to vote.
A not dissimilar situation prevails in the case of Anglo American’s own restructuring and its desire to turn Amic into a wholly-owned subsidiary. When Anglo announced the broad terms of its restructuring, it also said it wanted to incorporate within itself Minorco, Amcoal and Amic. In the cases of Amcoal and Minorco it offered the alternative of a cash payout for the good reason that both companies either contained or would hold substantial cash reserves. Amic was different however – it has net borrowings.
This has clearly upset investors who piled into the stock when the announcement was first made – again in the fond hope they would be in line to make substantial windfall profits, presumably at Anglo’s expense. Nothing else has changed in Amic’s foreseeable future to justify a surge in the counter from R63,60 to more than R100 in a few months.
Anglo is offering to take over the shares of minorities in Amic in exchange for shares in Anglo itself. The manner of valuation appears unremarkable. A continuing issue has been whether De Beers, a substantial shareholder (24,9%) should vote on Anglo’s scheme, though from the documents it seems it will exercise its rights in this regard.
The attitude of the SRP will be critical to what transpires at meetings of shareholders. And if shareholders don’t turn up and express their views they will have only themselves to blame if things turn out differently from what they – and their wallets – desire.