Gold Fields (GFI-N) is lowering its South African risk by spinning out a wholly owned subsidiary — which holds the country’s KDC and Beatrix gold mines — 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 that it does 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 a big enhancement in current value,” CIBC mining analyst Leon Esterhuizen writes in a research note.
Sibanye, the new South African company, would be listed on the Johannesburg Stock Exchange with a secondary listing on the New York Stock Exchange. The company’s shares would 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 would have six mines in its portfolio: South Deep in South Africa; Cerro Corona in Peru; Agnew and St. Ives in Australia; and Tarkwa and Damang in Ghana.
Neal Froneman, the current CEO of Gold One International (GDO-A), would take the helm of the new company, with Nick Holland remaining as Gold Fields’ CEO.
Froneman says that Sibanye wiwould focus on maintaining “profitable, stable and low-cost operations,” and look for acquisition opportunities to consolidate South Africa’s troubled gold sector.
But the former may prove difficult, 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 would take time and capital.
While the transaction allows Gold Fields to improve average cash costs by around 7%, it doesn’t 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, Esterhuizen says, pointing out that South African miners tend to trade at a large discount to their global peers.
But the company could 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, and Gold Fields plans to take South Deep to a run-rate of 700,000 oz. per year by the end of 2015. The plant expansion to 330,000 tonnes per month from 220,000 tonnes per month is under construction, with commissioning expected shortly.
But Esterhuizen remains cautious about Gold Fields’ ability to deliver growth.
“The biggest problem with the company at this stage is its track record of under-delivery and serious doubts about its future growth. The company’s target of 5 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 reviewing the target, the analyst predicts the figure could be reduced.
This year the miner lowered its full-year guidance to no more than 3.3 million oz. gold equivalent from 3.4 million oz. earlier, mainly due to prolonged labour strikes at the KDC and Beatrix mines, which were resolved on Nov. 6.
In New York, Gold Fields closed Nov. 30 down 2%, at US$12.28 a share.
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