South Africa’s gold miners are ready for mergers and acquisitions as the falling price of bullion forces companies to cut costs and repay debt.
“Maybe there’s some smart consolidation that can take place on a regional basis,” Sibanye Gold Ltd. (SGL) Chief Executive Officer Neal Froneman said last week. “I think there will be. I think it’s the right time. I think it’s necessary. I don’t think my counterparts in the industry are on completely different pages either.” The company is the country’s biggest producer of the metal.
Gold’s 27 percent drop since the start of last year has prompted executives to consider deals as a way of cutting costs in South Africa’s aging mines and insulating investors from risks such as labor strikes in the country that’s the world’s sixth-biggest producer of the metal. AngloGold Ashanti Ltd. (ANG) failed in its attempt last month to split its local mines from its international operations only because investors balked at the accompanying $2.1 billion share sale.
“We’re probably a good target right now,” Graham Briggs, CEO of Harmony Gold Mining Co. (HAR), South Africa’s third-largest bullion producer, said in an interview last week. “A low share price, we’re fairly good with our cost control. If we had bigger management fees to take out it would be even more of an advantage. We have low debt.”
Sibanye Gold, a collection of mature South African mines spun out of Gold Fields Ltd. (GFI), has risen 75 percent by boosting cash flow and dividends since it was created in February 2013 giving it firepower for acquisitions. Froneman wants to make the company’s dividend sustainable beyond 2028, when his mines begin to expire, by acquiring assets, including in platinum.
“The gold industry has to do something so we can benefit from a combination of regional and overhead structures,” he said. “We’re all spending probably 1 billion rand ($91 million) a year on regional overheads. I haven’t done the exact work, but I imagine you could save 60 to 80 percent of that through consolidation.”
Harmony hasn’t had any takeover approaches, Briggs said. “It must be one of those things that arises but you have to have your shareholders supporting you,” he said. “Generally when gold prices are flat to going down the board is probably more cautious on M&A.”
Harmony has dropped 15 percent this year, underperforming the Bloomberg Intelligence Senior Gold Index, which has retreated 5.4 percent. Gold fell 0.1 percent to $1,235.10 an ounce at 7:38 a.m. in Johannesburg today, taking the decline since its 2014 peak on March 17 to 11 percent.
Even so, Harmony is on the lookout for any mines that more indebted companies may be wanting to sell, Briggs said.
AngloGold’s South African operations are “an obvious choice,” Briggs said.
“Almost all of our assets are ex-AngloGold assets,” he said. “The best time to sell those assets is when there’s still some meat on the bone. You don’t want to run it into the ground and then try and sell it because then nobody’s going to buy it. We’ve got that proven track record of squeezing more out of an asset.”
The South African assets are “core” for AngloGold, said Stewart Bailey, a spokesman for the world’s third-largest producer of the metal. “They are high quality and have a long lifespan. There is a huge amount of upside both through ongoing operations and with our new reef-boring technology.”
The company’s South African assets make up a third of its production and are cash-generative, backing a portion of its $3.2 billion of net borrowings. That’s why a $2.1 billion share sale was needed to split the company, a move that was rejected by investors including hedge-fund billionaire John Paulson.
“The gold sector works well together,” Sibanye’s Froneman said. “We have to find ways of being stronger and having better margins at these sort of prices.”
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