The purchase of a slice of Gold Fields by Mvela-phanda Resources may be one of the most significant in its acquisition trail over the past year and one of the largest empowerment deals in mining to date, but it worries analysts.
Mvelaphanda’s share price fell 7% to R20 on Wednesday.
The R4,1-billion deal gives Mvela —as former Gauteng premier Tokyo Sexwale’s company is popularly known — 15% in Gold Fields South African Assets. These include the Beatrix mine in the Free State, as well as the Driefontein and Kloof operations in Carletonville, west of Johannesburg. The assets are valued to account for 70% of Gold Fields total assets. Gold Fields is the world’s fourth largest gold producer with a market capitalisation of about R44-billion.
Last month, ARMgold purchased 14% of Harmony to create HARMony in a R4,9-billion merger.
According to one analyst, the deal “dilutes value for current share- holders” and Mvela “probably paid too much”. He said the debt of up to R2,8-billion, which was incurred by Mvela in funding the deal, was particularly worrisome.
Other analysts did not seem too perturbed about repayment of the debt as Gold Fields indicated Mvela would have access to its cash flows. But the sceptical analyst notes that assuming a 10-year maturity on the debt, at current debt costs, Mvela’s attributable cash flows (of 15%) will not cover the debt repayments. “And they will not want to wait that long before seeing returns,” he said.
Some R300-million will come from a Gold Fields financing facility, while Mvela will raise between R1-billion and R1,2-billion from a share issue.
Another analyst differed on over- payment, noting, “Mvela paid market price for quality assets”. He said one’s view on valuation depended on whether one agreed with the notion that Gold Fields’s South African assets account for 70%, which he did. As for the drop in price, he suspected nothing sinister. “When a company is about to undertake a share issue that is large relative to its market cap, you are likely to see such a drop.”
He attributes the dip to investors who sell their stake, hoping to buy it back at a discount when the issue occurs.
In the case of this deal, he says, it all depends on the final details of the financing involved.
The deal is an extension of one concluded in July last year, which gave Mvela the rights to participate in Gold Fields’s exploration in Africa.
Gold Fields has gold and platinum group metals interests, with operations in South Africa and other parts of the continent, as well as in Australia, Europe and North and South America. It has attributable gold production of 4,1-million ounces and mineral resources of 187-million ounces per year, supplemented by reserves of 79-million ounces.
Gold Fields now meets the mining charter’s requirement of having 15% empowerment equity ownership in five years. The next hurdle is to push this to 26% in 10.
Mvela is a 70% owned subsidiary of Mvelaphanda Holdings, the company founded by Sexwale that has spread tentacles into many sectors.
In mining it already has platinum and diamond interests. In the former, it owns roughly 23% of Northam in the North West, with a market capitalisation of R3,1-billion. It also has undeveloped interests it co-owns with Southern Era Mining near Potgietersrus in Limpopo.
The group owns 23% of diamond mining concern Trans Hex, which is worth R1,7-billion on the bourse, and last July it formed Nodwana Explorations in collaboration with De Beers.
Entry into the gold sector will alter the benchmarks against which it is measured.
“Whereas [Mvela’s] share price has moved in line with platinum mining companies, we now expect it to move in line with diversified mining companies like heavyweight Anglo,” said one analyst.
Apart from unearthing precious metals, Mvelaphanda can design and construct a small office park, rent you a house, secure both properties and offer you financial asset management services. Last year it formed a R500-million private equity fund with banking group Absa.
At the beginning of this year it acquired 30% of Abvest, Absa’s asset management division. Meanwhile, through Mvelaphanda Strategic Investments, it has bought into a number of diverse entities.
The group now holds 50% of Broll Properties, 30% of Siemens Business Services and 26% of security firm Securico. It also has interests in Unitrans Fuel and Chemical, Dorbyl and a controlling interest in Arcus Gibb, the largest empowerment engineering firm in the country.
A centrepiece of Mvela Strategic Investments’ philosophy is “no high-risk business”. Last year, Mvela Holdings CEO Mark Wilcox denied rumours of interest in a deal with the Independent Newspapers group. The traditionally low returns of media assets may explain the group’s lack of interest.
The group has stated its intention of drawing on the Absa fund to in-vest in companies valued between R500-million and R1-billion, with deal values ranging from R50-million to R300-million. It deems five years a reasonable holding period for investments that offer 30% to 35% returns.
The group is still largely viewed as a resources-focused company. A mining analyst said its “growth by any means” strategy had the potential to stretch the allocation of resources, especially human resources, but there had been no evidence of this to date. “The group can engage in other investments for, say, two years to realise capital gains, as long as it is careful in how it allocates resources like board members and senior management,” said the analyst.
He also believes Mvela should more adequately explain its rationale to shareholders. — Additional reporting by I-Net Bridge.