Gold Fields has a new leader with a golden opportunity. Mike Fraser, who was named as the new CEO on Monday, inherits a company that is swimming in cash thanks to elevated gold prices and low costs. But he also faces the challenge of replenishing its reserves and extending its mine life.
A big mergers & acquisitions deal may be tempting for Fraser, a seasoned mining executive with a global track record.
Fraser, who is South African, joins Gold Fields after a brief stint as the boss of Chaarat Gold, a small London-listed producer with assets in Kyrgyz Republic. He has more than two decades’ experience in the mining industry, having worked in various regions and commodities, including as an executive at BHP and CEO and president of the Australian mining giant spin-off South32.
He replaces Martin Preece, who took over the reins temporarily in January after Chris Griffith stepped down last year after a failed attempt to buy Canada’s Yamana Gold — a R120bn-plus deal that would have propelled Gold Fields into fourth place among the world’s gold producers and would have ticked a key performance indicator for Griffith.
The sting of the failed deal, which had been slammed by some shareholders as lacking commercial logic, was so painful for the board and the executive team that Preece tweaked the company’s growth blueprint. Preece has steered clear of big-ticket M&A, focusing instead on smaller transactions.
In the first week of May, Gold Fields teamed up with Osisko Mining to develop the Windfall project in Québec, Canada, securing a 50% stake in one of the world’s best gold discoveries, with significant exploration upside and a clear path to production. The deal also gave the company a foothold in a coveted mining jurisdiction.
Secured support
Weeks later, Gold Fields announced a joint venture with AngloGold Ashanti in Ghana to create Africa’s largest gold mine with a combined annual output of more than 1-million ounces. The joint venture combines AngloGold Ashanti’s Iduapriem mine and Gold Fields’ Tarkwa mine, which are among the most profitable in the region with an all-in sustaining cost of less than $1,000/oz for the first five years.
What’s more, the cautious approach to M&A has secured the support of investors. Gold Fields has outperformed the top three global mining companies: Barrick Gold, Newmont and AngloGold Ashanti, which moved its primary listing to New York recently to tap a deeper pool of capital. The stock is up about 50% over the past year, outpacing a nearly one-third rise in AngloGold and declines of 3% and 11% in Barrick and Newmont, respectively.
Still, there is strategic merit in extending the existence of Gold Fields, which was founded in 1887 by British imperialist Cecil John Rhodes, with a transformational acquisition. For one thing, a megadeal with a number of working mines as well as a pipeline of development projects and exploration properties would immediately solve ageing mines’ problems. That is what Yamana Gold, which was snatched from under Gold Field’s nose by a rival bidder to the delight of investors who felt Griffith was too gung ho, would have done.
For another, the company reported an 11% drop in net income in the six months to end- June, citing lower output from its 10 mines in Chile, Ghana, Australia and at home. The mines will be exhausted in about 20 years, potentially heaping pressure on Fraser to find a mega-acquisition in an industry that has entered a consolidation phase.
The company also has a strong balance sheet, with net debt of just more than $1bn, or 0.4 times its earnings before interest, tax, depreciation and amortisation (ebitda). It generated nearly $500m cash from operations. That gives Fraser plenty of firepower to pursue acquisitions. He may need to use it.
Alternatively, Fraser will have to build on the cautious momentum by Preece and navigate the challenges facing the gold industry, such as rising costs, regulatory uncertainties, social pressures and geopolitical risk.
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