Harmony’s Bernard Swanepoel and Gold Fields’s Ian Cockerill are determined men — determined not to lose in the corporate world.
Neither could count on inherited wealth or influence. Both have worked their way up from the rockface. They are driven to succeed.
Yet these two are face-to-face in one of South Africa’s more rancorous hostile takeovers. Harmony, whose lower-grade mines have been thrust into losses over several quarters by the rand’s strength, and which is burning cash reserves because of capital spending and retrenchments, wants to acquire Gold Fields, blessed with richer mines, to get its hands on the latter’s tempting positive cash flows.
The fight for control of Gold Fields is exposing the sleazier side of mining finance and investment banking, generally concealed under a thin veneer of sophisticated respectability.
To begin at the beginning: Harmony cannot afford to pay cash for the larger Gold Fields. So it has come up with one of the craftiest scrip-based takeover mechanisms Johannesburg has seen.
Issuing its own shares for others is the way Harmony has acquired mines. It has spent the past few years acquiring the poorer mines that other mining groups do not want, and then wringing immediate profits by retrenching miners, closing shafts, concentrating on mining the richest remaining ore and curbing capital and other expenditure.
This is the “Harmony Way”, which Swanepoel and his colleagues say can be applied to Gold Fields’s mines to save R1-billion a year, if management can be transferred to Harmony.Â
Cockerill and his team argue that the “Harmony Way” will lead to job losses and misery. Not so, claims Swanepoel. The job losses will be among the head-office fat cats; miners’ job will be preserved as far as possible.
Neither side is averse to hyperbole. Both are willing to appeal to that lowest of common denominators, patriotism. Yet both companies must diversify outside South Africa to secure their longer-term futures.
Swanepoel’s determination to succeed is shown by his achievement in turning Harmony into the country’s third-largest gold producer by acquiring the poorer mines being ditched by other mining groups. That has not always been easy, such as when Harmony manoeuvred its way around an equally determined Brett Kebble to win control of the Randfontein mine.
Cockerill’s determination showed after Gold Fields was refused official permission to move its corporate domicile to London. The mining groups are pinned into South Africa by exchange control rules, but gold mining here is in decline and there are no obvious opportunities to open major new mines.
Gold Fields and Harmony have both established exploration and mining operations offshore — Gold Fields with more success. But Cockerill knew that if this strategy was to succeed, Gold Fields had to escape South African exchange controls. The means of escape: a merger of Gold Fields’s non-South African interests with those of Canadian miner IAMGold under the umbrella of a separate company to be called Gold Fields International.
Announced in mid-August, the merger plan would enable the new company to be domiciled in a country that allows free capital movement. It has yet to be voted on by Gold Fields’s shareholders and was, in part, the brainchild of investment banker JP Morgan. Within days JP Morgan was scavenging for more merchant banking business and trying to interest Harmony in buying Gold Fields’s South African mines.
In fact, Swanepoel turned to JP Morgan’s competitor, HSBC, which put up a strategy proposal with Gold Fields’s 20% shareholder, Russian-owned Norilsk Nickel, as a “concert party” with Harmony in a bid for Gold Fields.
The “concert party” concept has adverse legal and financial implications for the bid process, and Swanepoel dismisses the HSBC strategy as the product of an investment bank touting for business. Nevertheless, Harmony has almost slavishly followed the HSBC proposals as it has crept up on its prey.
All the merchant bankers involved have at one time worked for Harmony or Gold Fields. And they have generally acted as expediently as one might expect from firms driven by self-interest.Â
Norilsk, too, is restricted by exchange controls. Its controlling shareholder, the post-Soviet oligarch Vladimir Potanin, wants to escape the Kremlin’s icy grip, and buying Anglo’s Gold Fields for $1,2-billion offered a way.
From the Kremlin, President Vladimir Putin wants to bring the oligarchs to heel and is manoeuvring to force Norilsk to repatriate the cash if it sells its Gold Fields shareholding.
In South Africa, Harmony and Gold Fields have started to comply with the new laws requiring 26% of the country’s mining industry to be in black hands by 2014. Harmony has tied up with the elegant Patrice Motsepe, one of South Africa’s new oligarchs, who parlayed his own gold mining interests, acquired in line with the new black-ownership legislation, for a quarter shareholding in Harmony.
Motsepe’s struggle credentials are deeply buried. He is, though, a big funder of the African National Congress, with sound party connections.
Gold Fields went a different route. It agreed to transfer direct interests in its South African mines (not in the overall group itself) to Mvelaphanda Resources, controlled by Tokyo Sexwale, another oligarch with struggle credentials and an ANC background.
The upshot is that, while President Thabo Mbeki might complain in Europe that Harmony and Gold Fields should sort out their differences, the ANC will find it difficult to come down on one side in this takeover battle.
All is fair in love and war. Well, in love anyway. Wars these days have to be fought by rules and in the full glare of instant publicity. So, while Swanepoel and his crew are using all sorts of carefully crafted means — the early acceptance device and Norilsk’s “irrevocable” promise to transfer its Gold Field shareholding to Harmony next year — Cockerill and his team are resorting to blocking action in South African and United States courts, in addition to their direct appeal to Gold Fields’s shareholders. Both groups are working on Gold Fields’s institutional shareholders here and abroad.
Harmony’s shareholder gave overwhelming support to their company’s bid for Gold Fields. And Gold Fields’s this week re-elected their chairperson and non-executive directors, tacitly endorsing the rejection of Harmony’s bid.
Much now depends on how Norilsk jumps. Potanin wants to break out of Russia. A deal in which all Norilsk’s non-Russian assets are lumped together with those of Gold Fields and (perhaps) IAMGold to create a group able to raise development capital in freely convertible currencies could be more attractive than owning a diluted stake in a merged Harmony/Gold Fields. The latter’s assets would be largely in South Africa’s declining gold sector, whose revenues are defined in poorly convertible rands and whose assets may in future have to be shared more generously with black South Africans.
Potanin and Putin understand how opportunistic oligarchs can be. And the billionaire oligarchs in post-Soviet Russia have their parallels in post-apartheid South Africa.
The outcome of the bid is likely to be decided publicly in the US courts and secretly in the Kremlin. What happens in South Africa could, for the while, be largely irrelevant. — Â