World number-six gold miner Harmony Gold on Tuesday said it believes that rival Gold Fields’ directors have mismanaged their South African assets and their performance has been sub-standard to Harmony’s operations for several years.
“If you look beyond all of the lawsuits and other delaying actions by Gold Fields management in their effort to delay their shareholders deciding on our offers, the simple fact is that the combination of Harmony’s renowned efficiencies with Gold Fields’ higher grade ore body would bring value to both our shareholder bases,” said Harmony chief executive Bernard Swanepoel.
“We firmly believe that the proposed merger is in the best interests of all stakeholders, and we are committed to ensuring that they all have the opportunity to review the facts of the merger and judge its merit for themselves,” he added.
Harmony’s report outlines how the proposed Harmony/Gold Fields combination will provide immediate and long-term shareholder value through a sustainable cost savings with a market value of more than R17-billion.
Harmony’s experience with other acquired mines, including two previously acquired from Gold Fields, suggests that cost savings could well equate to a market value of R23-billion.
The report cites that among the ways that Harmony can unlock greater value in Gold Fields’ existing assets are more efficient operations, superior allocation of capital, increased reserves, retaining Gold Fields’ international operations, and a premium to Gold Fields shareholders.
Harmony is looking to make Gold Fields’ gold miners more efficient by introducing a more efficient operating structure to the existing Gold Fields’ assets.
“Gold Fields currently disguises its lack of efficiency and the high cost of its underground mining operations through the contribution of its lower-cost international portfolio and surface mines,” Harmony said in a statement.
Gold Fields also reports rand per kilogram, rather than rand per tonne, which is a truer measure of mining efficiency.
For the year ended June 30 2004, Gold Fields’ underground South African operations cost R546 a ton, compared to R413 a ton at Harmony.
“Gold Fields appears to have misled its shareholders for a long time,” said Swanepoel.
Harmony also claims it can achieve a superior allocation of capital. For the past five years, Gold Fields has spent about R4,8-billion on capital expenditure in South Africa with little visible benefit to shareholders, Harmony said.
During that same time, Gold Fields’ development, underground production levels and viable reserve base have all declined, while the reverse is true for Harmony. Gold Fields’ declining cash flow from operations puts its historic levels of capital expenditure at risk.
By contrast, over the past few quarters, investment has been maintained at Harmony in order to retool the mines for the strong rand environment, Harmony said.
The vast majority of this restructuring is complete so that Harmony’s operations are no longer absorbing cash.
“We will never apologise for investing in assets that show a convincing return for shareholders time after time,” said Swanepoel.
Harmony said that its acquisition of Gold Fields will result in an increase in proven and probable reserves.
“Harmony’s cost-cutting initiatives will enable it to mine previously unprofitable reserves by making currently below-infrastructure projects, in the money,” Harmony said in a statement.
Harmony estimates that reducing pay limits by 15% should add 36% to Gold Fields’ reserves at a rand gold price of R90 000/kg.
While Gold Fields’ South African production has fallen, its international asset portfolio has grown significantly and now accounts for the majority of the company’s operating profit.
“These are the assets the management of Gold Fields is now ‘contractually bound’ to give away at far below fair value to Iamgold,” said Swanepoel.
This unwise transaction dilutes the exposure Gold Fields’ own shareholders will have to the growth from its offshore mining operations.
Moreover, the recent elimination of exchange controls for new foreign investment by South African firms, as announced by Minister of Finance Trevor Manuel, makes the need for this type of offshore vehicle unnecessary.
Harmony has stated that it will protect and enhance this value, not give it away, or complicate exposure to the profits in a value-destroying holding-company structure.
Contrary to the questionable analysis produced by Gold Fields, and unlike the proposed Iamgold transaction, Gold fields’ shareholders will receive a fair premium for their shares from Harmony.
“The Harmony-Gold Fields merger will create the world’s largest gold-mining company by production value — a benchmark for the industry — with superior liquidity, a single listing without a holding company discount, and a management team known for its ability to inject an empowering, business-savvy culture into its acquisitions,” said Swanepoel.
“Clearly, the new Harmony would provide an investment vehicle with considerable more investor appeal than the two mid-cap gold producers that Gold Fields intends to create,” Harmony said.
“There is a clear fit between Harmony and Gold Fields and we have identified multiple opportunities to unlock sustainable value. We hope that all stakeholders agree with Gold Fields’ largest shareholder, Norilsk, and the world-renowned Institutional Shareholder Services, who both support a Harmony/Gold Fields combination, and accept our offers,” Harmony said. — I-Net Bridge
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