Ed Stoddard and Silvia Antonioli
SOME of the lowest valuations in decades and rising pressure on Africa’s gold producers to restructure or perish are likely to spur a wave of acquisitions in a sector attracting a growing number of potential buyers.
Most gold companies failed to cash in on rising gold prices in the decade to 2011, overspending instead on costly growth projects and loading up with debt. The perception that they mismanaged their businesses in the good times has scared away investors after a steep bullion price slump in 2012 and 2013. It has pushed company valuations far below their peers in other commodities such as base metals.
Gold producers are now being forced to shape up to stay afloat and their focus has switched to cutting costs and cleaning up their finances.
Selling non-core mines, and doing it quickly, will be key for many to ensure their survival. And given the large number of forced sellers, valuations are starting to look tempting.
“I think it’s a buyers’ market at the moment so conceivably you will see some of the assets come out at a discount,” Andrew Breichmanis, an analyst at BMO Capital Markets, said.
After a botched attempt last year to split the company into two and raise capital, AngloGold Ashanti has outlined a plan to sell assets and pay back debt, for example.
Cash-starved smaller companies or explorers may have to take more drastic decisions, especially as traditional sources of funding dry up.
“It is pretty hard for a lot of juniors to raise capital so they either go out of existence or they need to do things like joint ventures, acquisitions, putting themselves up for sale,” Rajat Kohli, Standard Bank’s global head of mining and metals, said.
Brave new world
Unlike prices for most other commodities, the gold price does not hinge largely on demand and supply fundamentals. Instead, it is tied more to global economic factors such as interest rates and inflation and is more sensitive to investor sentiment.
John Biccard, the portfolio manager for the Investec Value Fund, said also due to uncertainties over prices, bullion producers were near historic lows based on various valuations such as price to book, a ratio comparing a stock’s market value with its book or asset value.
“If you look at the price to book and enterprise value to revenue, they are at 30- to 40-year lows and are close to where they were at in 2000,” he said. “But in 2000, the gold price was $250 (R3 080) an ounce,” he said. Gold prices are now hovering around $1 100 to $1 200 an ounce.
Unlisted Chinese asset manager Heaven-Sent has offered to buy local junior gold producer Village Main Reef in a deal that values the target at R637 million. The offer is for R12.25 a share, compared with its record high of R72.
The head of bullion producer Gold Fields has said he will be willing to spend between $300m and $500m on acquiring operating mines.
The head of Sibanye has called for consolidation in the local gold sector and Africa-focused Randgold is also on the lookout for a deal.
Buying interest has also picked up among private funds.
Lloyd Pengilly, the head of mining fund QKR, which in October bought the Navachab Gold mine in Namibia from AngloGold, has said gold remains his preferred sector for acquisitions.
Mining companies are warming up to the interest from funds and private equity too. A survey of 50 leading individuals from the mining industry carried out by law firm Berwin Leighton Paisner last month, showed 94 percent of respondents were open to a private equity investment or disposal to private equity funds in the next 12 months. – Reuters