A major re-ordering of South Africa’s gold mining industry is expected to get under way on Monday with Gold Fields of South Africa poised to announce a multibillion-dollar merger with one of its big Johannesburg-based rivals, most likely Harmony Gold. The move could create the world’s largest producer of the precious metal.
Amid what one financier described as ”knife edge discussions”, Gold Fields appears to have been pushed into a deal by Norilsk Nickel, the Russian metals group controlled by the oligarch Vladimir Potanin, which took a 20% stake in Gold Fields in the spring.
Potanin, who heads the world’s largest producer of nickel and palladium, is said to have been furious with a recently announced move by Gold Fields to merge its international resources, including mines in Ghana and Australia, with Iamgold, a Canadian producer with a string of gold mining assets across West Africa, in a R11,5-billion deal.
Norilsk is thought to have had ambitions to merge its international assets with Gold Fields, but was not fully consulted on the Iamgold plan, despite the fact that the Russian and South African companies were supposed to be cooperating on international ventures.
Potanin is seen as one of the Russian oligarchs vulnerable in President Putin’s crackdown on Russia’s controversial business elite.
A merger of sorts with Gold Fields would have offered one way of moving Norilsk’s assets out of Putin’s reach. There was a flurry of speculation over the weekend that Norilsk was about to launch a takeover bid for Gold Fields.
In the event, Potanin is believed to have sanctioned a plan whereby new management would be brought in to Gold Fields through a merger with either Harmony or its South African rival AngloGold, an associate company of Anglo American.
Under this arrangement his stake in Gold Fields, which he bought from Anglo American, would be diluted to perhaps 10%.
Investment banking sources said on Sunday night they believed Harmony was the most likely partner, although they cautioned that the proposed deal was complex and had numerous conditions attached.
It would be the latest example of consolidation in the industry. Last year AngloGold merged with Ghana’s Ashanti to create AngloGold Ashanti, the world’s largest gold company, while a Gold Fields/Iamgold deal would have created the number seven producer.
Harmony is South Africa’s largest domestic producer and number five in the world. Last year it merged with ARMgold in what was seen as a significant example of black empowerment. ARMgold’s Patrice Motsepe became non-executive chairperson of the joint company.
Despite the relative strength of the gold price, South Africa’s big mining groups have been squeezed by the appreciation of the rand, which has driven up their local cost base.
The result has been the loss of thousands of jobs across famous mining areas such as the Free State province, while companies such as Harmony and Gold Fields have increasingly concentrated their attention on developing assets elsewhere in the world.
Outside its South African base, Gold Fields has operations in Ghana and Australia, and is at an advanced stage in prospecting for gold in Peru and platinum in Finland.
In the biggest example of inward investment in South Africa, Norilsk paid £640-million for its stake in Gold Fields in April. The two companies indicated at the time that they would seek to cooperate in developing new resources around the world.
Harmony has links with Russia. It held a 31% stake in London-listed Highland Gold, Russia’s third largest producer, until it sold the shares last year for a £47m profit, double its original investment.
While competition authorities have demonstrated their unease at the pace of consolidation in the metals sector generally — the EU blocked the merger of Lonrho’s and Gencor’s platinum assets — the situation is said to be more relaxed in the case of gold.
That metal has fewer industrial uses than others and in any case the world’s central banks are still sitting on vast supplies which would easily meet any likely growth in demand.
In 2000, Gold Fields tried to merge with its then Canadian rival Franco Nevada. The deal was blocked by the South African authorities which feared that Gold Fields would abandon Johannesburg as its home.
Since then, the South African government has become relaxed as a string of the country’s largest enterprises, including Billiton (now BHP Billiton) and South African Breweries (now SABMiller) have migrated to London as they sought to build their international clout. – Guardian Unlimited Â