World number-six gold miner Harmony is looking to create the world’s largest gold mining group with its hostile bid for world number-four gold miner Gold Fields, Harmony chief executive Bernard Swanepoel said on Monday.
A combined Harmony-Gold Fields entity would have gold output of about 7,5-million troy ounces, eclipsing the 7,4-million oz of gold output produced by United States gold group Newmont Mining in its 2003 financial year and AngloGold Ashanti’s expected 6,1-million oz for its 2004 financial year.
“The value proposition of the combined entity makes for a compelling investment case. Harmony has a track record of unlocking value of turnaround assets and this can be achieved with Gold Fields’ South African assets,” Swanepoel said.
Gold Fields’ representatives were not available to comment on the offer.
At noon on Monday, Harmony shares on the JSE Securities Exchange (JSE) were quoted down 7,5% from their previous close at R77,20. Gold Fields’ stock was quoted up 4,1% at R97,90.
Harmony has also received a signed, irrevocable commitment of support from Russia’s Norilsk Nickel for Harmony’s proposed merger with Gold Fields. Norilsk Nickel bought Anglo American’s (Anglo) 20% stake in Gold Fields earlier in 2004.
A merger of Harmony and Gold Fields would create the world’s second-largest gold producer by market capitalisation and the company with both the highest reserves and resources of gold, Swanepoel said.
The proposed new group would also have the sixth-largest market capitalisation on the JSE at R71,7-billion, behind Anglo, BHP Billiton, Richemont, SABMiller and Sasol.
On the New York Stock Exchange (NYSE), the combined entity would rank at number 348 on the NYSE Composite Index.
The larger group would have access to a greater investor universe, increased index weighting, increased liquidity as well as global scale and relevance, Swanepoel said.
Cost reductions
Harmony would be able to implement significant reductions in Gold Fields’ cost base, he added. In South Africa, Gold Fields has three operations: the Driefontein, Kloof and Beatrix gold mines.
Swanepoel also accused Gold Fields’ management of condemning the group’s South African assets to a lingering death, through its deal with Canada’s Iamgold and its lack of investment in the local operations.
In terms of the offer, Harmony is offering 1,275 Harmony shares for every Gold Fields share, which values Gold Fields at R52,9-billion or $8,1-billion.
“This represents a premium of 29% to Gold Fields’ 30-day, volume-weighted average price,” Swanepoel said.
The premium being offered is a “deal-making” one that compares very favourably with the average winning offers of 22% in South Africa from 2001 to 2003 and 25% for all-share deals in the rest of the world of more than $500-million concluded from 2001 to date, he added.
Harmony will be able to pay back the premium it is offering to pay by reducing the unit costs at Gold Fields’ South African operations by 15% a year, on top of Gold Fields’ existing efficiency initiatives, Swanepoel said.
These savings equate to about R1-billion rand a year, Swanepoel said.
Cutting corporate overheads, improving operational efficiencies, services and procurement management as well as capital programme management will achieve the cost reductions at Gold Fields’ operations, he added.
Swanepoel pointed to the cost reductions achieved by Harmony at its Evander, St Helena, Randfontein and Freegold gold mines as examples of what the group has achieved in the past and can achieve at Gold Fields’ three South African mines.
In particular, Swanepoel said there are clear synergies that can be achieved between Gold Fields’ Beatrix mine and Harmony’s Joel mine, as a result of a merger between the two groups.
Harmony will examine Gold Fields’ Cerro Corona project in South America and Artic Platinum Project in Finland to see if they have sufficient potential, Swanepoel said.
No deal with Iamgold
As part of Harmony’s bid for Gold Fields, Swanepoel announced that one of the conditions for its proposed acquisition of Gold Fields is that the proposed deal between Gold Fields and Canada’s Iamgold be stopped.
Gold Fields and Iamgold are currently in the process of merging Gold Fields’ international mining assets with Iamgold’s gold-mining assets.
“The Iamgold transaction is value destruction for Gold Fields’ shareholders,” Swanepoel said.
On the other hand, the Harmony offer sees no value leakage to third parties, he added.
“Gold Fields has proposed to sell its international assets on the cheap and at a substantial discount to Gold Fields’ own rating. Most commentators assume that the international assets should contribute a higher rating to Gold Fields’ average rating,” he said.
Iamgold’s assets add little to the critical mass of Gold Fields’ international operations and there are no synergistic benefits, Swanepoel stated.
“There is additional potential value leakage through a corporate structure, which is inefficient. There is also a potential holding company discount,” he added. “We question the ability of Iamgold to pay dividends to Gold Fields.”
In the Harmony offer, shareholders would retain cash and cash flow to fund capital expenditure and pay dividends, he stated.
The Harmony deal, as compared with the Iamgold deal, would see unrestricted access to growth, full management control of existing assets and Gold Fields’ South African assets revitalised rather than harvested.
“The merged entity is a compelling investment proposition when compared to the Iamgold transaction currently recommended by the Gold Fields board,” Swanepoel concluded.
No competition problems
Harmony marketing director Ferdi Dippenaar said the group sees no competition authority problems arising as a result of the proposed deal between Harmony and Gold Fields.
“The gold-mining industry is an international one that is quite fragmented and we don’t see any competition problems,” Dippenaar stated.
The proposed combined group would have a 75% exposure to South African gold mining and a 25% exposure to international gold mining, he added.
The merged entity would only have one other rival in the South Africa gold-mining sector, AngloGold Ashanti, with the Harmony-Gold Fields entity having a dominant position in the local gold-mining sector. — I-Net Bridge
Gold groups poised for merger