The wry Jo’burg adage “save face, not money” is again coming true as Harmony Gold extricates itself from its fast-failing bid for Gold Fields.
The conundrum that Harmony now faces is how to put a positive spin on the expensive and embarrassing consequences of what promises to become an abortive bid, which was masterminded by CEO Bernard Swanepoel and marketing director Ferdi Dippenaar.
Wednesday, one day before Harmony’s December quarter results were released, saw what analysts believe was an exercise in window dressing — the restructuring of Harmony’s executive, in preparation for managing the combined assets of Harmony and Gold Fields. As one stockbroker wondered: “Why didn’t they wait until they had control of Gold Fields?” The sub-text of his question was that the hostile bid was doomed.
Nevertheless, Harmony kept up what the analysts called a charade as the appointments made clear that, if victorious, there would be no place for Gold Fields’s executives in a combined group.
At the same time shareholders became increasingly concerned at Harmony’s failure to disclose a promised evaluation of its ore reserves by a competent person. They also raised questions about Gold Fields’s Russian shareholder Norilsk’s ability to deliver its 20% shareholding as promised.
By late January, things were looking up for a profitable Gold Fields whose mines are richer than Harmony’s. On Monday, it reported that it had cut cash costs by 2% to R64Â 921/kg during the December 2004 quarter and that it had lifted gold production by 4% to 1Â 048-million ounces.
In contrast, Harmony disclosed on Thursday that its cash costs stood at R77Â 415/kg, down 1% from the previous quarter. There was also a 5% gold-production cut to 24Â 604kg, while cash operating profit for the quarter was up 23%, to R163-million.
So, while Gold Fields showed it could increase production profitably, Harmony’s profit advance depends on reducing its production base by cutting unprofitable operations.
There was another tacit indication that Swanepoel and his advisers were preparing for the bid’s likely failure last Friday when they revoked the condition that the exchange of shares depended on acceptances from shareholders who owned at least half of Gold Fields’s equity. Crucially, that released Norilsk from its “irrevocable” promise to swap its shares by this May.
But is this a face-saving exercise? Harmony could not have raised fresh and needed capital through a rights issue of its own shares by any stretch of the imagination. But it has an 11,5% stake in Gold Fields, worth about R3,8-billion at current prices — a stake that is highly saleable and acquired for Harmony’s own paper.
Harmony needs the cash. It somehow has to acquire gold assets that are more profitable than its beleaguered South African mines.
And if the Gold Fields bid has to be set aside, few other mine owners are likely to accept anything but hard cash for their assets.
Some brokers believe Harmony’s scrip has been tainted by the Gold Fields bid, at least for a while.
Now the Swanepoel team will have to concentrate on driving profits from Harmony’s own mines rather than trying to acquire them from the unwilling owners of others.