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All roads lead to Western Areas

The battle for South Deep, billed as the last piece of gold real estate on God’s green earth, could get a lot more interesting should AngloGold enter the fray alongside Harmony and Gold Fields.

All three mining houses already own pieces of the gold mine through Western Areas, which has a 50% share of the mine, the other 50% being held by Canadian gold producer Barrick.

In March, Harmony announced that it had acquired 29,2% of Western Areas, giving it an effective 14,6% stake in South Deep.

Then, in May, Gold Fields — which last year fended off a hostile takeover bid by Harmony — announced it had increased its stake in Western Areas to 15,47%, giving it an effective 7,7% in South Deep.

AngloGold owns just short of 7% of Western Areas, or about 3,5% of South Deep.

Further complicating the picture is that JCI, a once-proud mining house brought to the brink of ruin by murdered mining magnate Brett Kebble, owns 24% of Western Areas.

While Harmony and Gold Fields have staked their claims on South Deep, there is an eerie silence from AngloGold, which earlier this year started to wean itself from the Anglo American teat to pursue a more aggressive acquisition strategy. AngloGold will not comment on whether it will join a bidding war for South Deep, which is the principal asset in Western Areas.

But some analysts believe it cannot stand by and let this whale swim away. “South Deep is a great ore body,” says Coronation Fund Mana-gers mining analyst Henk Groenewald. “I think, in principle, would be interested. It’s hard to rule them out of the picture.”

Another analyst believes AngloGold may be more interested in bidding for Barrick’s half share in the mine, rather than scrumming down with Harmony and Gold Fields for the Western Areas share.

All three mining houses are on the market for quality gold assets, of which South Deep is probably the best South Africa, indeed the world, has to offer. The mine has a reserve of 29million ounces, sufficient to keep it going for about 80 years at current rates of production.

The problem is that the mine was two years late in getting into production, and was forced to hedge its gold production forward at low gold prices to finance development costs. That left it with a R2-billion liability on its hedge book, while the spot gold price has sailed past $650 an ounce. South Deep is getting nothing like this from its gold production. It would cost the company dearly to unwind this hedge book.

Another option proposed by Harmony is to inject its Target mine into Western Areas, which would dilute the effect of the hedge book. Harmony CEO Bernard Swanepoel says Target has championed many of the operational problems now facing South Deep, and this experience could be put to use at South Deep.

Harmony may have to split its higher-quality gold assets from the lower-quality ones to make any deal more palatable to Western Areas.

From an operational point of view, Gold Fields probably makes a more logical suitor for Western Areas. Its Kloof mine abuts South Deep and it could sink a decline shaft underneath the mine boundary to access rich ore bodies lying nearly 4km below the surface. This would accelerate phase two of South Deep’s mine development and improve its commercial viability.

Investec Securities precious metals analyst Leon Esterhuizen says that, despite talk of Harmony and Gold Fields cooperating in some way in South Deep, “only one of them will walk away with the prize”.

In Groenewald’s view, the most likely winner is Gold Fields.

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Ciaran Ryan
Guest Author

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