Breakingviews: Gold Fields shells out to beat the ageing process

Gold Fields’ long history is a present-day headache in more ways than one. The $9 billion South African bullion producer is reluctant to talk about its roots, which trace back to its founding by rapacious British imperialist Cecil Rhodes in 1887. These days the company has only one set of operations in South Africa. But Chief Executive Chris Griffith has to deal with the problem of ageing mines. That explains why he is paying up for Canadian rival Yamana Gold in a $6.7 billion deal.

With the gold price riding high at $1,800 or more an ounce since the start of the pandemic, it’s hard to feel sorry for Griffith or his rivals at behemoths like $54 billion Newmont or $37 billion Barrick Gold. Last year, the trio dug out the precious metal at an all-in cost of around $1,050 an ounce. Any proceeds above that figure flow pretty much straight to the bottom line. Gold Fields’ EBITDA has doubled since 2019, as has its market value.

The temptation for miners is to start digging new, bigger holes, or hit the acquisition trail. Both are risky. By the time a new mine opens in, say, four years, the bullion price may have retreated, leaving the project in the red. And scooping up a rival when prices are high means locking in an elevated valuation.

Griffith has partly avoided the latter pitfall by paying for Yamana in shares. However, the financial jury remains out. Gold Field’s offer implies a premium of 33%, using both companies’ volume-weighted average share prices over the 10 days before the announcement, or about $1.6 billion. That compares with savings of $40 million a year, which have a net present value of about $350 million, after deducting tax. Little wonder that Gold Fields’ share price fell 20% on Tuesday.

However, there may be a deeper logic. At current production rates of 2.3 million ounces a year, Gold Fields’ mature mines in Africa and South America will be exhausted in 21 years. Adding in Yamana’s more youthful operations in North and South America will extend that day of reckoning to 25 years, longer than Barrick and Newmont. Extending the company’s existence is sensible, but not if it gives shareholders grey hair.

_______________________________________________________________________

BREAKINGVIEWS