Gold Fields executives are fighting for their jobs after Harmony launched a hostile R53-billion bid for the world’s fourth-largest gold producer this week.
If shareholders accept Harmony’s takeover offer, Gold Fields’s head office will disappear, along with many of its senior executives.
There are also job fears on the shop floor. Trade unions fear wholesale retrenchments at Gold Fields should Harmony take control, despite assurances from Harmony CEO Bernard Swanepoel to the contrary.
If successful, the deal will create the world’s leading gold producer based on production, resources and reserves, and second-largest by market value.
What worries unions is Harmony’s plan to cut Gold Fields’s costs by 15% — anyone working down a mine shaft knows what this means: shaft closures and retrenchments.
The National Union of Mineworkers berated both companies for the hostile nature of the bid. This, it said, was creating uncertainty. While the higher dollar gold price should enable both companies to invest in growth and development, the focus instead was on consolidation and shrinkage.
The union also challenged Gold Fields’s plan to merge its foreign assets — accounting for about a third of its annual production of 4,3-million ounces — with Canadian producer IAMGold and list them abroad. This last point was the casus belli for Harmony, which will now try to convince Gold Fields’s shareholders that it can do a better job managing the assets.
Swanepoel says the merger move would destroy value and externalise control of assets, a claim rebutted by Gold Fields CEO Ian Cockerill. Addressing analysts this week, Cockerill said Gold Fields would retain 70% control of Gold Fields International, as the new group is known, while its foreign listing gave it better access to international debt and capital markets.
Swanepoel’s plan is to block the IAMGold deal and create a much larger gold mining group predominantly based in South Africa. By blending Harmony’s marginal mines with Gold Fields’s higher-grade assets, the international investors would have better exposure to the gold price, where small movements would yield bigger movements in the price of the share.
Swanepoel achieved legendary status in the gold-mining sector for taking a bunch of moribund mines and turning them into a profit machine. He did this by ruthlessly slashing costs and introducing operational efficiencies, such as continuous mining.
Thousands of Harmony workers have been retrenched over the past year to staunch losses resulting from the strong rand, though Harmony says it has saved 47 000 jobs since 1995. Back then the group produced just 650 000 ounces of gold, against 3,3-million today.
BOE Private Clients economic analyst Evan Robins said the pronouncements by both camps made it appear that they had been crying wolf about the impact the rand is having on their businesses.
Robins questioned why Harmony, perhaps the more vocal proponent of a weaker rand, was willing to pay a premium of 29% for Gold Fields.
“If the strong rand has forced mining companies to cut their costs to the bone, it is telling that Harmony is still building its case around achieving a 15% cost reduction at Gold Fields,” he said. “Despite cash losses in the current currency environment, Harmony would no doubt argue vigorously against any suggestion that the business is struggling.”
Analysts had been expecting a move on Gold Fields for some time. When Russian nickel producer Norilsk acquired 20% of the group earlier this year, the air was thick with rumours of an all-out bid for Gold Fields. However, few expected it to throw its votes behind Harmony’s bid. The event that triggered the hostile raid was Gold Fields’s plan to reverse its foreign-held assets into IAMGold.
Gold Fields is planning a vigorous defence, and both Swanepoel and Cockerill are likely to spend the next few weeks presenting their cases to investors in the United States and Europe. About three-quarters of their investors reside abroad.
“Gold Fields will have to prove that Harmony’s claims are nonsense, and talk up the shortcomings of the offer,” said one analyst.
Much like the blocked Nedcor bid for Standard Bank several years ago, management performance on both sides will be thrust under the microscope.
Harmony’s claim that it can slash another 15% from Gold Fields’s costs is a slight on the latter’s management. Cockerill hit back, pointing to Harmony’s weakening cost structure over the past year. “Profitability is not just about cutting costs. It needs a balance between revenue [growth] and cost reduction,” he said.
Gold Fields has a number of defensive strategies open to it. It could bring forward the shareholder vote on the IAMGold deal and present Harmony with a fait accompli. This would effectively suffocate the latter’s ambitions. Cockerill said such an option “will be tough, but not impossible”.
Another option is the so-called “poison pill”. Gold Fields could make an acquisition of its own to drown out the Harmony noise and present shareholders with a viable alternative. Harmony would then have to swallow a much larger whale.
With a market capitalisation of R23,5-billion, Harmony is making an all-share bid for a group currently valued at R44-billion. But if Gold Fields did a deal of its own, lifting its market capitalisation to, say, R60-billion, Harmony might choke on the meal.
While Gold Fields rejected the Harmony offer as “opportunistic” and “grossly inadequate”, it comes down to more than money. When asked if Gold Fields would accept a more generous offer, Cockerill replied “it’s not just about value, it’s about strategy”.
Leon Esterhuizen, precious metals analyst at Investec Securities, believes the Harmony offer makes sense. “Harmony wants to focus on the South African asset base; Gold Fields is putting its attention offshore and wants to park the best assets there.
“The Gold Fields asset base in South Africa is not performing, and Harmony has shown that it has got what it takes to turn things around.”
Esterhuizen added that Gold Fields’s investment programme focused on maintaining its existing operations, but despite this, ore grades had fallen. “Harmony’s project pipeline focuses on higher grade reserves, which is where you want to be in a climate like this.”