The merger between Harmony Gold Mining and Patrice Motsepe’s ARMgold — to create South Africa’s largest and the world’s fifth-largest gold producer — had to happen.
Motsepe, now non-executive chairperson of the merged entity, HARMony, told the Mail & Guardian the merger was essential to allow ARMgold to pursue more ambitious deals and to offset falling production.
The benefits for Harmony are obvious. It fulfils the asset transfer requirements of the mining charter — 26% over 10 years — and can now focus exclusively on growth.
In a move that took the market by surprise late last Friday, Harmony announced it would issue ARMgold shareholders with two of its shares for three of theirs. Before the merger is implemented, ARMgold will pay a dividend of 500c per ordinary share.
The result is that African Rainbow Minerals Holdings, the parent company of ARMgold and platinum subsidiary ARMplatinum, will hold 14% of HARMony. The boards and senior management of the two companies will be integrated to reflect the new structure.
The climax will be the delisting of ARMgold, just more than a year after its successful May 16 listing last year.
There were some indications of things to come. In its biannual publication, The Senior Gold Book, from July 2002, HSBC Securities noted ”similar management styles have yielded positive results”, mainly from working together in the Freegold Joint Venture. It added that the management might be keen to ”explore common territory [with Harmony] in future”.
Of all his recent ventures — which include assuming the presidency of the National African Federated Chamber of Commerce and Industry (Nafcoc) and buying a stake in Sundowns Football Club — the merger has forced the most vocal explanation from Motsepe.
Some in empowerment circles were disappointed at his apparent ”sell-out” to white corporate interests, even describing the merger as a ”sad day” for empowerment. Motsepe is seen as a role model of successful independent black entrepreneurship.
At ARMgold’s quarterly results presentation this week, Motsepe said ARMgold had had many offers from companies looking to meet empowerment requirements. Even without Freegold, Harmony was ”the most natural fit”. ÂÂ
”It has always been ARMgold’s intention to become internationally competitive,” he said. ”At that cold global level, you have to hold your own.” Empowerment observers had not expected this to include buying into a larger company to gain leverage.
This week’s results largely explain why ARMgold had to merge with a heavyweight. The company experienced a 17% or R143-million fall in revenue, from R861,7-million to R718,5-million. Of this, R51,6-million is attributable to a stronger rand. The balance, R91,6-million, is due to a 822kg fall in gold production, to
7 667kg.
During the quarter, ARMgold had to close the Orkney No 1 shaft because it had ”no economically viable reserves remaining”. Gold production from the shaft pillar at Orkney No 2 shaft was expected to be depleted by next month. ARMgold has had to suspend operations at the No 1 shaft in GK Block in Welkom until the rand gold price is more favourable.
This underscores ARMgold’s vulnerability as a marginal producer with wasting assets. Before the merger, ARMgold is estimated to have had a lifespan of seven years with proven and probable reserves of eight million ounces. After the merger, the lifespan of existing operations will rise to 12 years with 57-million ounces in reserves.
An analyst said: ”For ARMgold this deal is about improving its limited lifespan and liquidity, and for Harmony it is about empowerment.”
The analyst noted that HARMony had to be seen to be an empowerment, rather than empowered company.
According to empowerment rating agency Empowerdex, an empowerment company has more than 25% black shareholding, while an empowered firm has between 5% and 25%.
Companies could not claim credits under the new mining charter scorecard system unless their partner was a true empowerment outfit, the analyst pointed out.
Bernard Swanepoel, CEO of both the old and the new Harmony, expressed confidence that the merged company now satisfied the mining charter’s requirement of 26% black shareholding a decade ahead of schedule. However, the government will be the final arbiter in the matter.
Swanepoel said empowerment was now about more than numbers. ”The important thing is not to conform to the letter, but also to the spirit of the legislation,” he said this week, adding: ”I can now go to my shareholders and tell a story about growth.”
HARMony’s growth will come from areas such as the Phakisa mine in the Free State, currently a 50/50 joint venture in the Freegold portfolio. The mine will require an investment of R550-million in the next three years and reach full production in 2010. It will produce 278 000 ounces per year.
HARMony’s first deal has been the purchase of 34,5% of Anglo Vaal Mining (Avmin) for R1,7-billion, raising questions of whether it is looking to diversify, given Avmin’s interest in gold, platinum and base metals such as nickel.
Swanepoel insisted the company’s interest remained the yellow metal. Avmin owns 42% of Avgold, which in turn owns Target mine, with an ore body of some 80-million ounces.  Motsepe appeared surprised by the lament over the perceived demise of his company. ”My view is that if we were a role model for aspiring black business, we should be more of one now,” he argued.
Questions have also been raised about the influence Motsepe will exert as non-executive chairperson. Swanepoel said the ARMgold boss ”will continue to advance the long-term interests of [the] company”. Motsepe said he would spend 70 % of his time on the new company, 10% on endeavours like Nafcoc and the empowerment task team and 20% on developing his platinum assets, anchored by the Modikwa mine, a joint venture with Angloplats.
He said would like to see these reach ”critical mass” before considering a listing. Motsepe added to growing misgivings about the upcoming Royalties Bill. ”Our ability to create jobs is greater than [the] government’s,” he said.
At the Phakisa mine alone, the levy lowers the internal rate of return from 26% to 24%, threatening 2 600 jobs.
Motsepe said he expected the royalty ”to be lowered substantially”. Like Anglogold’s Booby Godsell, he favours royalties based on profits rather than revenue.