The dust will soon settle on Harmony’s bid for Gold Fields, but its consequences are a parable for corporate South Africa in general and the declining mining industry in particular.
No sooner had the Competition Tribunal given a conditional green light for the hostile bid to proceed, than Harmony and its spin doctors were preparing shareholders for its failure.
After the tribunal’s ruling on Tuesday, CEO Bernard Swanepoel made it clear there would be no increase in the current offer of 1,275 Harmony shares for each Gold Fields, despite the fact that one Gold Fields share was trading at 1,6 times the price of a Harmony. In other words, the bid is being allowed to die.
Swanepoel said that Harmony was ”… committed to taking our medicine and completing our restructuring programme to create an operating platform ensuring the long-term profitability of the company even in the current low rand gold price environment. Operationally we are in better shape than before the Gold Fields bid in October 2004.”
But gold mining is a sunset industry. Last year the country’s total production of 341,5 tons was the lowest since 1931 and one-third of the 1 005-ton peak of 1970. There will be no more new gold mines and, short of takeover opportunities, there is nowhere for this country’s gold miners to go but abroad.
Proof was available at the tribunal. When Harmony launched its bid last October, it reckoned that it had gold reserves totalling 62-million ounces.
By last week, a ”competent person’s report” put the actual level at 33 million ounces that can be mined profitably now, and 52 million ounces that could viably be taken from the ground, given a convergence of favourable circumstances.
Harmony insists the question of reserves has been misrepresented by Gold Fields, and threatened legal action, but that doesn’t change the general prognosis for the industry.
Some argue that the gold mines’ present misery is owing to the ”strength” of the rand against the dollar. Though the government and the Reserve Bank are to meet to discuss exchange and inflation rates, no conceivable currency shifts will lead to the establishment of new mines here.
And Harmony’s bid underscores one immutable fact of corporate life in South Africa: hostile bids are doomed to fail, particularly if they are all-paper with no cash alternative. Think of Nedcor’s failed run at Stanbic, Altron’s grab for Reunert and, going back 20 years, Anglo American’s attempt to take over the old Gold Fields of South Africa.
The rules have been changed, perhaps involuntarily, by the tribunal’s ruling that a merger of Harmony and Gold Fields could not for two years lead to more than 1 000 job losses — and those would be confined to management. Rock-face employees could not be retrenched. If that sort of ruling is made in future, one rationale for many takeovers — efficiencies through job losses — could be eliminated.
Now, Harmony’s top brass have to seek a new direction for their company — they cannot seek growth or salvation through acquisitions of mines with better resources than Harmony’s own.
Harmony is burning cash at its loss-making mines. Forget any corporate niceties and lip service to black-white partnership — Harmony has already sold its shareholding in Patrice Motsepe’s ARM, and it is now preparing to sell the 11,5% of Gold Fields that it attracted in the first stage of its now-abortive bid. On Tuesday Swanepoel reckoned that investments carried on Harmony’s balance sheet were worth R6,5 billion and that they would not be retained for sentimental reasons.
But cash them in, and what does the company do with the proceeds? Use some to cover the costs of closing endemically unprofitable South African mines would be the first sensible move. Then, an option might be to return the cash to shareholders. But most likely, even though the issue has not been publicly addressed, will be a new foreign initiative.
Gold mining skills and capital accumulated in South Africa since 1886 are now destined to develop mines anywhere but here. The sun is setting on gold in South Africa. It is rising in Papua New Guinea, Mali, Mexico and Burkina Faso.