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10 Jan 2014 00:00
Easy pickings: Gold Fields and Gold One have surface dumps that still have a lot to offer. (Delwyn Verasamy, M&G)
It seems there's still gold in them thar hills and South Africa's largest gold producer, Sibanye, believes that, with gold miners in the doldrums, now is the time to make acquisitions and consolidate.
Neal Froneman, an experienced engineer who headed Gold One and is credited for his involvement in the turnaround of Harmony Gold, believes that mining is far from being a sunset industry and that there are bargains to be found among struggling mining companies.
He is not alone. Graham Briggs, the chief executive of Harmony Gold, the second company rated as a good investment for 2014 by mining analysts, said in Business Day that it expects its next mine to be an acquisition of another company's mine that has the potential to be turned around.
Froneman, who just made sizeable deals with two mines, is upbeat about South Africa's gold sector and believes there is still a lot of untapped value.
"Perceptions that South Africa has second-rate assets and workers is nonsense," he said.
"I have worked all over the world and we have top-grade gold and skills, and we are blessed with simple geology.
"I am not suggesting there are not challenges like the labour issues but there are challenges mining in North America too."
The right market to be buying in
Pan African resources, which bought Evander Gold Mines from Harmony for R1.5-million to double its gold output to 200 000 ounces annually, agrees.
Jan Nelson, the chief executive of Pan African, said at the time that the transaction met the firm's objective of acquiring "high-grade, high-margin, quality assets on the low end of the cost curve".
"This is the right market to be buying in," said Froneman.
"In the mining sector, you need to look long term, four or five years, and our focus is on dividend yield and our ability to be the benchmark gold-yield vehicle worldwide."
This week analysts speaking to Bloomberg predicted a rise in global gold mining deals from a near-decade low "as producers target assets at fire-sale prices after the metal plunged".
According to data compiled by Bloomberg, gold mining companies "are close to their cheapest relative-to-book value in at least two decades" with $10.1-billion deals involving gold producers last year, 4.4% less than in 2012 and the lowest since 2004.
A chance for a potentially better asset
"Majors who have done portfolio optimisation will look at some of the juniors and say: ‘Here's a chance for us to acquire a potentially better asset than we've sold and to mitigate the loss of production'," according to Paul Knight, Barclays vice-chairperson and co-head of global metals and mining.
Sibanye, formed out of the unbundling of three deep-level mines by Gold Fields last February, is buying the majority stake in West Rand-based Cooke gold mines and tailings belonging to Gold One, and is making a R400-million bid for the cash-strapped Wits Gold exploration company on the East Rand, which holds mines that border Beatrix Mine.
Sibanye currently produces about 1.2-million ounces of gold a year and has done a land swap with Harmony Gold's Joel and Beatrix mines in the Free State.
Peter Major, of Cadiz Corporate Solutions, said deals of this kind were desperately needed. "Sibanye is the perfect acid test and it needs to be supported by the powers that be, or this may be our last chance to attract acquisitions or investment. We cannot afford to blow it."
Major believes that concerns about labour and government policy may be discouraging foreign investors. "The environment is perfect — we have the weak rand and gold price and people with lots of money and nowhere to invest it."
South Africa is now the sixth-largest gold producer, behind Russia, China and Australia, among others, but gold still makes up 60% of the country's exports.
Hard time for investors
Investors in gold shares had a hard time last year with the JSE gold index closing down 54.6%, after losing 18.4% in 2012, although Major said there is still a lot of unrecognised value in the shares.
The gold price at R420 000/kg is just R80 000 below the record level seen in 2012 and well above most mines' all-in costs, analysts said.
At the time of Sibanye's unbundling, announced at the Mining Indaba last February, there was little optimism that the company was likely to deliver any impressive return with two ageing assets — Beatrix and the Kloof Driefontein Complex (KDC).
But in one year the company has concentrated on transforming itself from a deep-level, expensive gold miner to taking on much shallower resources to reduce costs.
Sibanye spokesperson James Wellsted said there were significant synergistic opportunities in the deals with Wits Gold and Gold One. The deals are intended to save money, increase yield and benefit shareholders.
Froneman said Sibanye looked at first rationalising its existing operations to cut costs.
"The first six months of the company's operations were reviewed, with the intention of sustaining the 1.2-million ounce gold output in the long term," he said. "Sibanye has taken lots of costs out of the system and implemented improved productivity limits with union assistance."
Froneman said consolidating operations and management synergy had helped to cut costs and, in the present market, this was essential if companies were to survive and jobs to be retained.
He was critical of the present labour system, saying that mines had not cut back on labour despite a drop in production and the gold price.
"We need more interaction too between workers and the mines to try to solve the high indebtedness and duplicate families and we need to rework schedules to ensure that productivity is improved.
"We are presently working on a schedule that gives workers time off to return home, which is being implemented in other countries. We need to work in a more modern way," he said.
Wellsted said companies will need to implement greater mechanisation to bring down costs.
Taking over the mines
Sibanye, in buying Gold One, which Froneman formerly headed, will take over Cooke mines and tailing dumps near Randfontein. Those mines, which are situated close to Sibanye's Kloof and Driefontein mines, are expected to push Sibanye's annual gold output to two million ounces.
"Both Gold Fields and Gold One have surface dumps, which, indications show, still contain a lot of gold. It makes good sense and will extend the lifespan of these mines," Wellsted said.
"The only problem is that the mine dumps [tailings] contain uranium, which presents a future environmental liability."
Sibanye realised that building its own uranium processing plant would be costly. Gold One, which is nearing the commission of a uranium plant at Cooke 4 mine, presented the perfect solution.
"Initially it was decided to consider a joint venture but it was decided that, with Sibanye funding the bulk of the project, it made more sense to have complete control."
Gold One will receive 150-million shares in Sibanye, which amounts to a 17% stake.
R400-million offer for Wits Gold
The R407-million bid for Wits Gold only includes the underground operations because, as Wellsted said, it's hard to put a value on surface operations.
Sibanye is offering R400-million for Wits Gold, a premium on its current market capitalisation of R282.82-million.
Its interest is the "significant exploration and project areas in the Wits Basin containing approximately 157-million ounces of gold resources", he said.
More importantly, the Bloemhoek and De Bron-Merriespruit projects in the Free State, which are next to the ageing Beatrix mine, which has an estimated lifespan of 10 to 15 years. But high-grade uranium in the Beatrix west section may see it being developed into a uranium mine.
A year ago, analysts were already speculating that a deal between the two companies made sense because of their proximity.
Sibanye is also looking at acquiring Burnstone, which Froneman sees as a low-cost production mine. The transaction is conditional on approval by the department of mineral resources, the Competition Commission and the shareholders of both companies.
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