Analyzing the recent call to action for an SA gold champion company through M&A activity

According to Neal Froneman, CEO of Sibanye-Stillwater as cited in Seccombe, (2021) states that “SA’s top gold miners should consolidate and create a world champion gold business or risk being bought by foreign entities”. He further adds that he believes his company Sibanye-Stillwater, Gold Fields and AngloGold Ashanti should be put together to create a company that can compete head on with the large-cap producers on scale, asset quality, operational metrics and returns, including dividends.

McKay, (2021) citing Arnold Van Graan emphasizes that the valuation gap between SA gold miners compared to major producers had widened lately after a period of discount-reduction and believes this discount could widen even more if the gold price falls further. The prospect of these could see SA gold companies again looking attractive on valuation metrics and thus a Mergers and Acquisition(M&A) perspective. Figure 1 shows the market cap of SA gold companies against global gold leading companies as of end of March 2021;

Figure 1:Gold companies market cap as of March end 2021 (Mining.com, 2021)

The prospect of SA losing any of the gold companies to the large entities through M&A activity would most likely be a hard pill to swallow considering the country’s industry was once revered globally as a leader but now a shadow of its former self. With all this in mind, one begs to ask the question,’ What’s the likelihood of consolidation by the three companies through M&A activities? An attempt seeking to answer this question addresses a non-exhaustive list of the following;

The formation of Sibanye-Stillwater in February 2013 as Sibanye Gold limited following the unbundling by Gold Fields Limited off a South African subsidiary company which owned Kloof, Driefontein and Beatrix gold mines serves as an important event in history (Sibanye-Stillwater, nd). This is because the unbundling by Gold Fields Limited was a strategic move to minimize its exposure to the declining SA gold industry marked by relatively high All-in sustaining costs (US$/oz) per gold mine compared to mines from rest of the world as seen in figure 2;

Figure 2:Cost curve in AISC for gold mines per region

The unbundling by Gold Fields to minimize exposure to SA gold industry has seen the company remain with only its flagship operation, South Deep. AngloGold Ashanti followed the same path as Gold Fields of reducing exposure to SA gold industry, which saw the company completely exiting the country’s industry with the sale of its last SA projects namely Mponeng and its surface operations through a deal concluded on 30 September 2020.

The minimization of exposure to SA gold industry by Gold Fields and AngloGold Ashanti has seen the companies relying on other regions for production contributions as opposed to Sibanye-Stillwater which has all gold operations in the country as seen in figure 3;

Figure 3: Production comparison by region

It is worthwhile noting that AngloGold’s South African production contribution was for the nine months before the sale of its last SA operations on the 30 September 2020. Figure 3 reveals the difference in gold production contributions per region for Gold Fields and AngloGold Ashanti which contrasts vastly that of Sibanye-Stillwater. Again, reiterating the strategy by both companies to reduce exposure to SA gold industry.

Sibanye-Stillwater as shown in figure 1 is the most valued SA company with gold operations ahead of AngloGold Ashanti and Gold Fields, respectively. It is at this juncture worth mentioning my belief that majority of the value retained by Sibanye-Stillwater is not directly due to its gold operations but however from its Platinum Group Metals (PGM). These is because Sibanye-Stillwater produces roughly a million ounces (Moz) of gold annually inclusive of its Subsidiary DRDGOLD compared to about 3.2 Moz and 2.2 Moz produced annually by AngloGold Ashanti and Gold Fields, respectively. This sees the company’s gold operations contributing roughly 20 percent (%) of the group’s total revenue and the remainder by PGMs operations. AngloGold Ashanti and Gold Fields differ to Sibanye-Stillwater in the revenue breakdown by source in that a large percentage of their revenue is directly from gold operations.

Outlook

It is my belief that the likelihood of merger of all three companies based on the above factors in the short to medium term future is very low. This is because for all three to create a merger, it would mean AngloGold Ashanti and Gold Fields would divert from adopted strategies of reducing the risk of exposure to SA gold industry and also see the return of AngloGold Ashanti. Secondly, the fact that Sibanye-Stillwater is predominantly a PGM’s producer and not a gold producer as seen by the low percentage contribution of gold operations to the group’s revenue, would mean that the companies would now take on exposure to the PGM market.  The PGM basket price has seen increased market value over the last half decade with astronomical rise in Palladium and Rhodium prices. Despite all this a commodity diversified portfolio strategy for the two gold producers has not been entertained as their strategy has always been to be gold producers.

What seems to be most likely however is the merger between AngloGold Ashanti and Gold Fields due to the almost similar adopted business strategies that influence where they mine. The companies have resorted to having operations offshore where relatively low cost of operating mines prevail as seen in figure 2. Secondly, the gap in market cap between the two is small meaning both companies are not far off in-terms of valuations which bodes well in M&A activity. Thirdly, the merger between the two would result in an entity with combined annual productions of 5.4Moz annually which exceeds the 4.8Moz of Barrick Gold and challenge the 5.9Moz annual production of Newmont Corporation. This would mean the potential merger can create an entity with the second big market share in terms of production and most likely in terms of valuation. Thus, serving well for investors and all stake holders involved in terms of returns and value creation through the deal.

The downside to the merge however would be the potential return of AngloGold Ashanti’s to the SA gold industry. This is because the future of Goldfields in terms of where their dominant region of operation as described by the company’s latest mineral reserve update, shows strong reliance on South Deep as depicted in figure 4;

Figure 4:Attributable gold mineral reserve for Gold Fields

As it stands as much as 61% of Gold Fields gold reserves are at South Deep, their only operation in the country. Even though South Deep has the highest AISC and lies at the top of the cost curve of Gold Fields operations, the company however still has confidence in it as seen by the recent approval of the renewable energy project which will satisfy about 20% of electricity needs and in the process cushion operations from intermittent power disruptions and offset to some degree spiraling electricity costs (Phokungoane, 2021).Thus, it seems most likely that any merger between the two would see the return of AngloGold Ashanti to the SA gold industry due to exposure to South Deep from the new portfolio than without it.

We remain to see how the potential downturn in the gold price and the need to have increased market share could be a major catalyst for M&A in the gold industry beyond the obvious or recent call to actions.

References

Mckay, D., 2021. Miningmx. [Online]
Available at: https://www.miningmx.com/news/gold/45601-sa-gold-company-mergers-likely-but-market-should-look-beyond-the-obvious-says-analyst/
[Accessed 18 April 2021].

Mining.com, 2021. The top 50 biggest mining companies in the world. [Online]
Available at: https://www.mining.com/top-50-biggest-mining-companies/
[Accessed 18 April 2021].

Phokungoane, M., 2021. Industry cost curves for SA gold mines and companies. [Online]
Available at: https://resourcescorner.com/2021/03/industry-cost-curves-for-sa-gold-mines-and-companies/
[Accessed 19 April 2021].

Seccombe, A., 2021. BusinessDay. [Online]
Available at: https://www.businesslive.co.za/bd/companies/mining/2021-03-08-sibanyes-neal-froneman-calls-for-mega-merger-to-create-sa-global-gold-champion/
[Accessed 18 April 2021].

Sibanye-Stillwater, nd. History. [Online]
Available at: https://www.sibanyestillwater.com/about-us/history/
[Accessed 18 April 2021].