SA gold mining sector may see a large merger in the next year given the inexpensive valuations, according to a report by Nedbank.
In his Gold Sector Industry Insight note considering the merger and acquisition possibilities involving SA’s large gold miners and their international peers, Nedbank mining analyst Arnold van Graan argued that the best outcome would be the joining of AngloGold Ashanti and Gold Fields, which have large international portfolios.
Their combined assets would generate 5.2-million ounces of gold, of which just 4% would come from SA. Both companies have undergone changes at CEO level, and in the case of AngloGold, a new chair.
AngloGold is the world’s third largest source of gold, and Gold Fields the sixth, but their JSE-domiciled valuations compared to their large international peers made them relatively cheap, attractive and, with little to no SA exposure, an easier motivation for offshore companies to buy, Van Graan said.
The exposure to SA of AngloGold and Gold Fields was at a historical low, which made them more “palatable” for offshore buyers, he said.
“We believe the desire to grow, the need to compete on scale, management changes and a potential downturn in the gold price could be major catalysts for M&A. We would, therefore, not be surprised to see big M&A moves in the SA gold sector over the next year,” said Van Graan.
According to Van Graan, “many of the old ideas, approaches and egos may no longer be at play, while new leadership may be looking at new ways to unlock value for shareholders. And in a combined entity of this size, there should be enough management roles and cash available to ensure management egos do not stall what could be a good deal for the SA mining industry, in our view.”
That there will be consolidation appears a given, he noted, and it was a case of big companies gobbling up smaller ones to replenish difficult-to-replace mined out reserves, as the industry struggles to find large new gold deposits in easy jurisdictions.
“We believe increased scale implies a larger balance sheet, which should enable companies to pursue growth projects — many of which have become more challenging and costly over the years. Smaller companies may just not have the capacity to tackle some of these projects,” Van Graan said.
Using a range of metrics, Van Graan noted the valuations between SA gold miners and their peers were widening. These include metrics such as price to cash flow, a ratio that measures the value of a miner’s stock relative to its operating cash flow.
For example, AngloGold’s price to cash flow was three times compared to six times for Barrick, while SA’s gold stocks were at a “near all-time low” of four times against the 10 times of their international peers.
“The reduced SA exposure, coupled with inexpensive valuations, makes the SA gold stocks ripe for M&A, in our view,” Van Graan said.
There have been years of speculation and proposals from the industry, analysts and bankers about SA’s large gold companies, many focusing on an international giant such as Barrick Gold, now headed by SA-born Mark Bristow, making a play for AngloGold.
However, Van Graan argues that perhaps Gold Fields has the firepower, assets and company valuations that make it a suitor, particularly for AngloGold, creating an SA company that can take on companies such as Barrick, the world’s second-largest gold producer.
A combined Gold Fields and AngloGold would “create a company that can compete head on with the large-cap producers on scale, asset quality, operational metrics and returns, including dividends.
“A vehicle of this nature could also lay the groundwork for a rerating of the underlying assets and, thus, drive a large value unlock for existing shareholders,” he said.
Most recently, Sibanye CEO Neal Froneman suggested a consolidation of AngloGold, Gold Fields and Sibanye, but Van Graan said that that would be a difficult sell because of the latter’s heavy exposure to SA in its gold portfolio, but it could be a buyer of South Deep.
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