There’s gold in them thar hills ... just a pity it’s all overseas
As gold companies ditch their mines in SA to chase cheaper ore abroad, they have become takeover targets
SA’s large gold companies have and will pare their exposure to SA to the minimum as their international assets become their core focus – and it could open them to takeovers.
The trend in the flight to offshore assets is not sudden, with companies like AngloGold Ashanti and Gold Fields building international portfolios using cash flows from their SA mines to make them serious players on the international stage, with the former holding onto its position as the world’s third-biggest gold miner.
What has changed in recent years is the rate of exodus from SA, as companies either sold or closed gold mines as operations aged, sank into unsustainable losses because of continued above-inflation electricity and wage increases, and board decisions of where to invest growth capital increasingly excluded SA.
Electricity and wages, the biggest cost elements on gold mines, contributed to the closure of marginal mines, while an uncertain regulatory environment coupled with years of upheaval in the Department of Mineral Resources all served to push SA down the ranks of investment destinations.Employment in the gold sector has fallen to 112,000 from more than 390,000 in 1994. Over the same period gold output fell to 138 tonnes from 583 tonnes as SA plunged from its dominant position as the global source of gold for decades to eighth place.
In SA, the cost of producing gold shot up by 18% in 2017 to $1,010/oz, well above the global average of $878/oz, which was $41/oz higher than in 2016, GFMS said recently.
The exodus from SA’s gold sector is plain. Gold Fields and AngloGold Ashanti have cast off the bulk of their mines in SA and are down to one underground mine each in the country. The reduction in exposure to SA, with the country providing about 10% of each company’s gold, and their relatively low valuations because of a perceived risk, means they trade at discounts to their international peers. This makes them takeover targets, says Nedbank mining analyst Leon Esterhuizen.
He argued the SA discount, measured on a range of metrics, was unlikely to be narrowed because of “reasons that had almost everything to do with returns on capital, rather than anything political”.
An international predator could make an offer including a sizeable premium for either AngloGold or Gold Fields, ditching the SA assets and still generate “substantial upside”, he said.
Harmony Gold expects a precipitous drop in gold production from SA in the next five years and, according to its own forecasts, Papua New Guinea will quickly become its largest source of production, dwarfing that of SA.AngloGold, for years one of the giants of SA’s gold sector, had the option at its Moab Khotsong mine to invest in the geologically complicated Zaaiplaats project, which has 10 million ounces of resources. However, it opted to not spend nearly R12bn on developing and running the 12-year project at Moab, a mine described by consultants SRK as SA’s newest deep-level gold mine, coming into production in 2003.
There have been no new deep-level mines built since then, with the other deep-level mine that came into production around the same time, South Deep, has proved deeply problematic for owner Gold Fields, which has spent R32bn in buying the mine and trying to mechanise it since 2006.
The lack of investment in large new mines means the slide in SA gold production is unlikely to be curbed let alone reversed as more companies turn to relatively cheap, safe tailings retreatment operations that employ fewer people.
Harmony Gold, which bought the Moab operations from AngloGold for $300m cash, mentions Zaaiplaats as one of the possible projects it could trigger to address a steep drop in production by almost two thirds to below 500,000oz of gold a year by 2026 from 1.5-million oz. Harmony is conducting a feasibility study into Zaaiplaats, building on the work done by AngloGold, but any multibillion-rand development project in SA will come as Harmony, with a capitalisation of R11bn, has to find R20bn to fund its half of the Wafi-Golpu copper and gold project in Papua New Guinea.
Sibanye-Stillwater CEO Neal Froneman said the “SA discount” for gold mining shares made it expensive to issue equity to fund growth and tough to raise well-priced debt.
Sibanye is heavily exposed to SA, with all its gold mines and projects as well as a large platinum group metal footprint in the country. But it has taken the bold step of buying the US palladium and platinum miner Stillwater for $2.2bn, giving it critical geographical diversity.
Sibanye will continue investing in its SA mines, but any future growth is likely to be purchases of offshore assets, with Froneman talking of the need to expand its gold portfolio with foreign mines, with a focus on modern, mechanised, productive mines to balance the deep-level, labour-intensive mines operations in SA where productivity has been declining.