SA’s three biggest listed gold companies paid down debt and started to pump cash in the first half of the year, while gold prices and local currencies were favourable.
With fatter purses, they may develop an appetite for acquisitions.
AngloGold Ashanti, Gold Fields and Harmony Gold boosted profits in the period to June as strong dollar gold prices were accompanied by weaker currencies in the countries where they own mines, reducing their operating costs.
AngloGold has reduced its net debt to US$2.1bn from $3.1bn over the past year and its net debt to adjusted earnings before interest, taxation, depreciation and amortisation (Ebitda) was at 1.44 times by end-June, well below its bank covenants of 3.5 times.
AngloGold had $1.8bn of undrawn facilities at end-June.
AngloGold’s SA and African mines together accounted for two-thirds of total production of 1.745moz in the six months to June, when its all-in sustaining cost (AISC) was $911/oz. It generated $108m of free cash against $31m last year.
Gold Fields’ net debt fell to $1.16bn at the end of June, from $1.4bn at end-December. It recently refinanced its credit facilities, which are now $1.3bn, with a maturity of June 2019. Its net debt: Ebitda ratio was 1.05:1 and it expected to be at its target of 1:1 by year-end. It generated $60m of cash in the six-month period, compared with only $1m in the same period last year.
The highlight for Gold Fields was a solid performance from the long-troublesome South Deep mine in SA, which contributed 140,000oz to total group production of 1.04moz in the six months.
Gold Fields’ AISC was $992/oz.
Harmony has halved its net debt to $74m over the past year and the net debt: Ebitda ratio was below 0.5 at end-June. To create cash certainty, it has entered into a short-term hedge for about 20% of its production, which, though limited, is still a bold move considering the deep difficulties that gold miners experienced from hedges 10-15 years ago. So far it has paid off.
Harmony’s gold production was flat at 1.08moz for the year, but easing cost pressures reduced AISC to $1,003/oz from $1,231/oz last year.
Although there are plenty of buyers chasing a few good-quality companies, driving up prices to unrealistic levels and making it hard to conclude deals, there are some possibilities.
Gold Fields was reported by Bloomberg in June to be considering buying AngloGold’s Iduapriem mine in Ghana, which is close to its existing operations. In July, Reuters quoted sources saying Barrick Gold had approached SA gold companies that might be interested in buying its 64% stake in Acacia Mining.
Acacia, which has three gold mines in Tanzania — Bulyanhulu, Buzwagi and North Mara — and exploration projects in Burkina Faso, Kenya and Mali, expects to produce between 750,000oz and 780,000oz of gold this year at a cost of $950-$980/oz. Acacia’s market capitalisation on the London Stock Exchange is about £2.4bn, which means 64% could cost about R26bn.
A premium for a controlling stake is usually required.
Gold Fields CEO Nick Holland says the group is looking in different places for acquisitions, but he did not wish to be drawn on specifics, including how much Gold Fields has available to spend.
He says any acquisition would be opportunistic, and it would have to lower the group’s costs and add upside.
AngloGold appears to have a particular fit with Acacia because its Geita mine is in the vicinity of Bulyanhulu and Buzwagi, so there may be synergies, and it has an established presence and relationships in Tanzania. Acacia COO Mark Morcombe, appointed in February, was previously a senior vice president at AngloGold.
AngloGold’s senior vice-president of investor relations, Stewart Bailey, says AngloGold is not interested in buying Barrick’s stake in Acacia. It has a strong internal pipeline of projects, both brownfield and greenfield, that will allow it to extend mine lives and, in some cases, increase production. That makes it less likely to look at acquisitions to replenish or improve the quality of the portfolio.
The company with a stated interest in acquisitions is Harmony Gold. In the next five years, three mines — Kusasalethu, Unisel and Masimong — will be reaching the ends of their lives, which means the loss of about 220,000oz of annual gold production.
CEO Peter Steenkamp says Harmony’s target is to be a 1.5moz/year producer at an average cost of $950/oz within the next three years.
It produced 1.08moz of gold in the year to June.
If Harmony were to buy Acacia, it would immediately make its 1.5moz target, although it may be too big a bite for a company whose market capitalisation on the JSE is only R23.8bn. Steenkamp says Acacia is "something we will look at as part of our total scan".
Harmony is interested in mines that are already in production, with at least 1m-2moz of reserve, more than 100,000oz of production/year and at least a 10-year life of mine. There are potential targets in SA, Africa and Papua New Guinea, Steenkamp says.
Apart from acquisitions, Harmony also has immediate growth prospects from a first-phase development at Golpu in Papua New Guinea, for which it will shortly lodge applications. Permissions could take up to two years, and the first gold production would follow about five years later. Other growth opportunities lie in the integration of Tshepong and Phakisa, mining tailings in the Free State and, in the longer term, development of other Papua New Guinea resources.
Nic Stein, gold analyst at Coronation Fund Managers, says that given the run-up in gold companies’ share prices, the firm’s view is that it would not be a sensible use of their capital for gold companies to use cash to make acquisitions. Issuing shares for acquisitions, when the shares are well valued, is a better strategy.
But if Barrick were seeking to exit its stake in Acacia to repay debt, it would probably be unwilling to do an all-scrip deal.
Stein says the gold companies no longer have alarming levels of debt after recent gold price strength, but given gold price volatility they should probably have even less on a "through the cycle" view. After repaying debt, excess cash should be returned to shareholders, Coronation believes.
In general, a net debt to Ebitda ratio of about 0.5-1 would be desirable, unless a company were gearing up for a particular project or acquisition. Coronation has reservations about the success of large, expensive greenfields developments like Harmony’s Golpu project. A lower-capital, lower-risk expansion for Harmony would be to mine its tailings dumps.
Meryl Pick, who manages the Old Mutual Gold Fund, says though gold companies are in a stronger financial position to make acquisitions, the valuations of potential gold targets have risen at the same time.
The best time to make acquisitions was last year and the year before, which was when Sibanye Gold seized the opportunity to buy Gold One and Wits Gold.
Pick says the spending priorities for gold companies should be paying off debt, developing brownfields or mine-deepening projects around existing operations, and then returning surplus cash to shareholders.
Gold companies’ shares have become increasingly attractive to investors because low-risk assets such as bonds are offering low or negligible yields, while gold companies offer exposure to gold, a safe-haven asset, and are increasingly positioned to pay dividends, she says.
Since early January, Harmony’s shares on the JSE have risen three and a half times, AngloGold’s two and a half times and Gold Fields’ have doubled. Gold was about $1,345/oz this week, 27% higher over eight months.