Gold Fields (GFI-N) is lowering its South African risk by spinning out its wholly-owned subsidiary that holds the KDC and Beatrix gold mines in the country into a new firm called Sibanye Gold. While this may sound like a step in the right direction for the world's fourth-largest gold producer, some analysts argue it will do little to boost the company’s share price.
“Unbundling the old South African assets is a bold move, but outside of reducing South African risk exposure, there is little that points to big enhancement in current value,” writes CIBC mining analyst Leon Esterhuizen in a research note.
Sibanye, the new South African company, will be listed on the Johannesburg Stock Exchange, with a secondary listing on the New York Stock Exchange. The company’s shares will be distributed on a one-to-one basis to existing Gold Field shareholders.
Gold Fields says the proposed transaction doesn’t require shareholder approval but it expects to receive regulatory approval and conclude the spin out in February 2013.
Once completed, Gold Fields will have six mines in its portfolio. These include the following: South Deep in South Africa, CerroCorona in Peru, Agnew and St. Ives in Australia, along with Tarkwa and Damang in Ghana.
Neal Froneman, the current CEO of Gold One International (GDO-A), will take the helm of the new company, while Nick Holland will remain Gold Fields’ chief executive.
In a statement, Froneman said Sibanye will focus on maintaining “profitable, stable and low-cost operations” while also looking for acquisition opportunities to consolidate South Africa’s recently troubled gold sector.
But the first part may prove to be more difficult than said as the KDC and Beatrix mines have been experiencing lower production and higher costs over the last five years, Esterhuizen says, noting that turning around these operations will take time and a lot of capital.
For Gold Fields, while the transaction allows it to improve average cash costs by around 7%, it still doesn’t fully eliminate the South African risks of labour strikes, safety and power, since the South Deep mine will represent 60% of Gold Fields’ reserve base going forward, says Esterhuizen, pointing out South African miners tend to trade at a large discount to their global peers.
That said the company could now have a better chance of delivering lower-cost growth with a smaller asset base. The South Deep mine is set to be the main contributor of growth in the coming years. Gold Fields plans to take the mine up to a run-rate of 700,000 oz. a year by the end of 2015. It says the plant expansion to 330,000 tonnes per month from 220,000 tonnes per month is under construction, with commissioning slated to start shortly.
But Esterhuizen still remains cautious about Gold Fields’ ability to deliver.
“The biggest problem with the company, however, at this stage, is its track record of under-delivery and serious doubts about its future growth. The company’s target of five million oz. ‘in production or construction’ by 2015 was always a ‘wide’ target and we doubt the market gave the company full credit for that. Still, the market has priced in some of that growth potential,” he says.
With Gold Fields currently reviewing that target, the analyst predicts that figure could be significantly reduced.
For 2012, the miner recently lowered its full-year guidance to no more than 3.3 million oz. of gold equivalent from 3.4 million oz. earlier mainly due to prolonged labour strikes at the KDC and Beatrix mines, which were finally resolved on Nov.6.
In New York, Gold Fields closed Nov. 30 down 2% at US$12.28 a share.
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