Western Areas’ new executive chair-person, Gill Marcus, on Monday swapped her trademark kaftan for an overall and took an extensive tour of the company’s South Deep mine near Westonaria, south of Johannesburg.
Western Areas, which has a 50% interest in South Deep, can be thought of as more of a conundrum than a company.
It may have the world’s richest gold reserves — 55-million ounces worth R177-billion at current prices — but the ore is so deep it cost R5-billion to sink the mineshafts and former chief executive Brett Kebble bet the company’s future by selling future production to help pay development costs.
His bet failed, resulting in a hedge book with assets of R709-million and liabilities of R2,09-billion, a net deficit of R1,38-billion in June this year. This has now risen to R1,6-billion.
South Deep’s ore body may be the world’s richest deposit, but it is also one of the world’s deepest, 3,3km underground — twice the distance of Johannesburg’s altitude above sea level.
The South Deep development came in two years behind schedule and at a cost overrun of R1-billion.
Kebble used forward gold sales to part-finance development at South Deep. This contributed $100-million to costs, but left Western Areas exposed on its hedging book, which one insider describes as having turned “toxic”.
Kebble brought in Vancouver-headquartered Placer Dome as a 50% partner in the South Deep venture and awarded it the management contract. Now Western Areas is contemplating suing Placer Dome.
According to Western Areas’ prospectus, issued last month: “During 2004 following the delay in the commissioning of the Twin Shaft complex, and build-up in production at South Deep, the company embarked on discussions with Placer Dome [about] these delays.
“Western Areas has requested information to assess the causes of the delays and losses, overruns of capital expenditure, delays in the commissioning of the South Deep main shaft and related losses.
“Should the response be unsatisfactory and if a negotiated solution is not achieved, Western Areas may institute action against Placer Dome for the material losses incurred.”
Placer Dome, which has 16 operations in seven countries, is the subject of a hostile takeover bid by Barrick, which has 12 operations in seven countries, and so has its attention focused on other issues than its joint venture relationship in South Africa.
Marcus’s job is also not made any easier by Western Areas’ shareholding. JCI is a 39% shareholder in the company but has had a set of its assets, including about 50-million Western Areas shares, ring-fenced by banking group Investec in a special-purpose vehicle as security for a R460-million loan from Investec.
The loan is principally for JCI to be able to follow its rights in a Western Areas R640-million rights issue to fund the mine to profitability.
Investec “owns” both a key chunk of JCI’s assets, those ring-fenced in the special-purpose vehicle, and reportedly about R1-billion of the hedge book.
Key to Western Areas’ future is that it be able to restructure its obligations with the hedging banks, its prospectus says.
This includes the possibility of converting hedge obligations to equity, meaning that the hedge banks could give up their rights regarding the hedge book in exchange for equity in the company.
If this fails, the prospectus warns, “the company may need further funding in 2006”.
It is clear from public statements surrounding Marcus’s appointment that Investec played the leading role in securing her services. It now appears that she and Investec management will face one another across the negotiating table as Western Areas attempts to de-tox its hedge book.
Western Areas says it will not be appointing a chief executive. This position fell vacant when rascal-cum-mining magnate Kebble agreed to step down in August from the top job in three of his companies as part of the R460-million bail-out by Investec.
Kebble was murdered in Johannesburg the following month.
Marcus, from the earliest days of democracy, has apparently relished the challenge of tackling seemingly intractable financial problems — she has been chairperson of the joint standing committee on finance (1994 to 1996), deputy finance minister (1996 to 1999) and deputy governor of the Reserve Bank (1999 to 2004).
She faces similar seemingly intractable problems at Western Areas.
Marcus, who was appointed to her new job on November 17, declined to be interviewed for this article, saying she still needed to get her feet firmly under the desk at Western Areas and would need something fresh to talk about.
When her appointment was announced she listed the priorities for the mine as setting the strategic direction for the South Deep mine in consultation with the joint venture partners, the restructuring of the hedge book, securing the mineral rights position and consideration of empowerment opportunities.
Marcus said she had accepted the appointment after “long and hard deliberation. Western Areas has been through challenging times. I have conducted my own review and am confident that the company has enormous potential.”
Marcus retains her professorship at business school Gibs.
Western Areas’ results released in October show that its average quarterly costs in the year to date were R554 a ton. This compares with Anglogold Ashanti (R447), Beatrix (R451), Driefontein (R465), Harmony (R536) and Kloof (R639).
The average gold price realised improved by 17% to R74 352 a kilogram. Without the hedge obligations the average price would have been R92 229 a kilogram.
At 2 000kg produced during the quarter this is R35-million in profits forgone, more than the R32-million the company earned in the quarter.
“This emphasises the urgent need to restructure the derivative structure and thus improve the company’s cash flow,” says Western Areas’ spokesperson Brian Gibson.
“The directors are paying particular attention to this and we hope to have resolved the matter within the next few months.”
Western Areas’ share price responded to the announcement of Marcus’s appointment, by jumping 11% on the day. It has been trading significantly up this week at R34 compared with R22 in early October, buoyed as well by the higher gold price and speculation that Western Areas’ interest in South Deep may also become a takeover target, perhaps by Barrick should it succeed in its bid for Placer Dome.
The company’s market capitalisation nonetheless was a relatively modest R3,4-billion, tiny when it is considered that it owns 50% of an ore deposit worth R177-billion.
An Investec source says there is not much to say at present either about Western Areas assets or any discussions that may or may not be under way about hedging or swapping for equity.
“Stephen Koseff has already commented widely that Investec’s exposure is part of an international syndicate of bankers [and] this exposure is securitised.
“Investec sees significant upside from the transaction and its downside has been protected by lending money into the structure which is collaterised by a range of assets.
“Koseff believes the company to be in good hands now,” the source said.