November 29, 2012 7:09 pm

Gold Fields unbundling heralds deep change

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Gold Fields' Nick Holland©Bloomberg

Nick Holland, chief executive: 'Investors are clearly sending us a message'

When Nick Holland announced that Gold Fields planned to spin off its main South African assets the mining company’s chief executive said it was starting something that would “change forever the face” of South Africa’s gold industry.

It was a bold statement. But given the problematic state of South Africa’s gold mining sector few would disagree that it is set for a fundamental shake-up as companies grapple with the twin challenges of spiralling costs and declining production.

Gold Fields

Gold Fields

The sector has only recently emerged from weeks of illegal strikes that have cost billions of rand in lost production, battered the country’s image among investors and claimed the lives of more than 50 people, including 34 miners shot dead by police at Lonmin’s Marikana platinum mine.

Industry experts say the violent industrial action is only likely to hasten the shake-up that was already under way in South African gold mining, potentially accelerating the closure of marginal mines and job losses.

Gold Fields’ decision to unbundle its Beatrix and KDC mines and spin them off into a new company, Sibanye Gold, was taken before the wildcat strikes erupted. But earlier this week Mr Holland warned that if “we don’t do something different these assets are going to hit the wall pretty soon”.

For decades after the 1886 gold rush in the Witwatersrand Basin, South Africa was able to lay claim to being the world’s top gold producer. At its peak in 1970, it produced 1,000 tonnes, more than two-thirds of global production. But as its mines have become deeper, more expensive and technically challenging to mine, the country’s production levels have fallen dramatically to less than 200 tonnes a year.

Policy uncertainty, infrastructure bottlenecks and the wildcat strikes have compounded the mining companies’ woes – causing their share prices to languish even as gold prices soared.

The Beatrix and KDC mines account for about 45 per cent of Gold Fields total production. But they are also among its oldest – some shafts have been in operation for 70 years – and their production levels have fallen 5-7 per cent a year over the past decade, while production costs have risen 10-15 per cent a year.

The conundrum for mining houses has been how to stem the declines and heed the concerns of investors who have been selling off South African mining companies’ shares, partly because of perceived risks in their domestic market.

From Mr Holland’s perspective, doing the splits provides an answer to some of these challenges. One benefit, he says, is that the old mines will gain a dedicated management team and be able to use cash flow for dividend payments and reinvestment rather than having it siphoned off to finance other projects in the group’s portfolio. The hope is it will enable Sibanye to extend the lives of the mines, which at the moment are estimated to have another 16 years in them.

At the same time, the restructuring will enable investors to choose whether they want exposure to South Africa, the global business or both. Sibanye will be listed on both the Johannesburg and New York stock exchanges.

The only South African mine Gold Fields will retain is South Deep, a flagship project under development that is mainly mechanised and seen as crucial to its future production growth.

“Investors are clearly sending us a message – they want alternative investment choices and if we don’t provide them with that then there’s a serious risk that investors can sell down their interest in the entire company,” Mr Holland said.

The pressing question now is whether other South African gold producers – notably AngloGold Ashanti and Harmony – will follow suit.

Mark Cutifani, chief executive of AngloGold, which derives about a third of its production from South Africa, has said the group “retains the option” to separate out its South Africa business, but has not announced any plans to do so. The group is engaged in a review of its operations in the country.

But Mr Holland firmly believes he is a trendsetter. “It’s not only Gold Fields. I think this is a signal for consolidation and restructuring in the industry, and our decline is actually no different from the decline that you see at AngloGold’s South African operations and Harmony’s South African operations,” he said. “I think we all are struggling with the same challenges so it needs a different response.”

Gold Fields’ decision was generally welcomed by analysts and shareholders, though investor appetite for Sibanye will only be tested once it lists.

Joe Foster, who manages about $2bn in the Van Eck gold fund, said he had no South African companies in the funds he manages because of perceived investor risk. But he said Gold Fields would now become “a viable, potential investment for us”.

“The risk of mining in South Africa has increased not decreased,” said Mr Foster. “We had reached an inflection point. They are isolating the South Africa risk in one company, for investors who are willing to tolerate that risk or others who may want to trade around that risk.”

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