Gold’s push to exit SA

2014-09-14 15:01

The gold mining multinationals born in Johannesburg in the 1990s are being decisively dismantled, signalling a new chapter in the South African gold industry’s 110-year history.

AngloGold Ashanti this week announced it was splitting into two companies. One will keep all the South African gold mines, and the so-called Newco will relocate to London with two thirds of the group’s assets.

This almost exactly duplicates rival Gold Fields’ unbundling of its traditional South African mines early last year.

It also follows shortly after BHP Billiton announced that it would demerger all its South African assets into a new company alongside less valuable assets from other countries.

Both AngloGold and Gold Fields (under the guise of Sibanye Gold) have now basically returned to where they were in 1998 before they spent a decade building up international gold mining empires that put them in the top five gold mining rankings globally (see timeline).

The SA Reserve Bank has set an expensive condition to make sure the AngloGold deal does not result in capital flight (see box).

The rationale for the demerger is that South African gold mines do not sit well with other assets in a single company.

AngloGold explained this week that it’s all about the different kind of management that is needed, but analysts have long pointed out that the shares of gold companies with South African mines trade at lower prices than other global gold companies’ shares.

When Gold Fields unbundled Sibanye, it was described as a severe judgement on South Africa, but since the split, it has been Sibanye that has made the serious money – Sibanye’s market value has gone from R10?billion to R22?billion.

The rest of Gold Fields, on the other hand, has gone from R68?billion to R36?billion.

The case for the remainder of AngloGold doing equally well is relatively easy to make, especially if the Reserve Bank-imposed condition that it be relieved of all debt is met.

AngloGold’s South African mines subsidise the rest of the group’s mines. When they stop doing that, the money will either go to dividends or new acquisitions.

They produce 32% of AngloGold’s gold, but contribute 40% of earnings.

More importantly, they are old and require less capital expenditure.

That means that they are producing more than half of AngloGold’s free cash flow – the crucial measure of a mine’s real profitability.

Like Sibanye, which has announced that it wants to buy platinum mines, AngloGold’s intention is to create a “multicommodity” company.

A recent Goldman Sachs report speculated that a leaner AngloGold could try to buy Harmony Gold, or Anglo American Platinum’s Rustenburg mines.

Strangely, however, AngloGold says it will look at buying new non-gold international assets – after splitting off all the current international assets.

This is the “longer-term vision,” said AngloGold CEO Srinivasan Venkatakrishnan.

AngloGold Ashanti is the latest mining company to split its assets, heralding a new chapter in the country’s history of gold mining

Silicosis

Lawyers for former mineworkers suffering from silicosis are scratching their heads after AngloGold’s announcement.

Richard Spoor, one of the lawyers trying to get a potentially massive silicosis class action certified in the South Gauteng High Court, told City Press that he’s not quite certain what it means for the massive silicosis claims that AngloGold, among others, are facing.

On the face of it, the demerger could provide the silicosis lawyers with the ultimate trump card, similar to the one they used to force an asbestos settlement of R460?million out of the former Gencor in 2002.

Back then, Gencor was trying to unbundle its unwanted South African mines before becoming part of what is today BHP Billiton.

Spoor spearheaded that case too and interdicted Gencor’s disposal of Impala Platinum, arguing that the restructuring could be a way to evade liability for asbestos damages by dissipating the assets that would have to fund the eventual damages.

The interdict succeeded and Gencor settled the case soon afterward.

According to Spoor, the silicosis lawyers “do not have a lot of insight into the sales agreements” that go with the AngloGold deal.

Most importantly, they don’t know if liabilities, like a potential silicosis liability, are carried over.

An AngloGold spokesperson told City Press that it is unlikely that the demerger could help AngloGold escape any potential silicosis liability.

This is partly because AngloGold says it will only distribute 35% of Newco shares to shareholders and keep the rest for “the medium term”, meaning it retains the assets that damages may be claimed against.

The country’s gold mining companies, including AngloGold, have filed thousands of pages of court papers in a bid to squash the case before it begins, arguing that a class action is not feasible.

Capital flight

AngloGold’s demerger comes with one major string attached – the Reserve Bank approved the deal on condition that the remaining South African company starts with a clean slate in the form of zero debt.

In order to do that, AngloGold is going to try to raise $2.1?billion (R23.1?billion) from its shareholders in a rights issue to reduce its more than $3.6?billion debt before the demerger goes through.

That part of the deal caused AngloGold’s share price to drop 14% on Wednesday.

Goldman Sachs analyst Eugene King says that R23.1?billion is not going to be enough to meet the condition of a debt-free AngloGold.

The debt is “unsustainable, whether or not there is a restructuring”, AngloGold CEO Srinivasan Venkatakrishnan said on Wednesday.

AngloGold needs to get $1?billion from shareholders anyway, he said. To meet the Reserve Bank condition, this has now gone up to $2.1?billion.

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