For every pessimist there is an optimist it seems. While David Shapiro is critical of the motives behind Anglogold Ashanti’s decision to sterilize its South African assets into a focused listing, top mining analyst Peter Major believes it offers an opportunity. He reckons investors are to be offered another Sibanye. After a slide soon after listing as SA-pessimists baled out, the share price of the SA-focused rump of GoldFields Limited has rocketed, more than doubling in the past year. That’s what makes a market. – AH
ALEC HOGG: Welcome back to Power Lunch. AngloGold Ashanti proposes a corporate restructuring and capital raising and it’s also issue a ‘cautionary announcement’. Joining us on the line, to unpack all of this rather complex information is Peter Major, who’s a Mining Consultant at Cadiz Corporate Solutions. Okay…Pete, I’m not sure that you were following our conversation that David Shapiro and I had, but we’re saying, first Gold Fields Limited dispatches its non-South African assets. Then BHP Billiton dispatches its non-South African assets and now, it looks like AngloGold Ashanti is doing the same thing. Are we taking too negative a look?
PETER MAJOR: Yes, I think we are Alec. I’d like to think this is good news and I know the markets caned this thing, and I don’t quite know why. I haven’t had a chance yet to really look at it and unbundle it like it should be but the immediate reaction here is overdone. This is good news. Unbundling is almost, always good news, your default is you buy something when it unbundles and it falls because now management is going to be more focused. The workers are going to be focused. Investors are going to have a much better idea what they’re buying, instead of buying these ‘mesh-mashes’ of assets all over the world, and Derek… What did Derek achieve by getting assets all over the world? It’s been one of the worst performing gold shares ever, New Mark, and what did you get when you used to buy South African gold shares?
A very focused operation, a focused management team; you had high dividends, all the cash they made went to shareholders or back in that operation. That all got turned upside down in the 90’s…the cash went all over the place, even management didn’t know where it was going, and here’s AngloGold that always had the best gold assets. With $2bn debt in the highest gold prices we’d ever seen. $2bn in debt, 20bn debt, and you had the best gold assets, so they’re in a bad way. I think this is a way of helping them get cleaned up. As an investor, I really like it. I have a much better choice now on what I’m buying.
ALEC HOGG: They are looking to raise that $2bn to liquidate the debt. I guess that would make the South African operation more appealing.
PETER MAJOR: Yes, it definitely would. I haven’t gone through this in detail to see where the debt is going to be eliminated the most, and I think we all know where most of that debt came from. It was a horrible hedging program, although I don’t think there is such a good…there isn’t such a thing as a ‘good hedging’ program. They are all bad but this was horrible. This was one of the worst hedging programs ever, outside of that debacle that American Berry had.
ALEC HOGG: It’s a R60bn company that’s a big number for a gold company (in anybody’s language), but after the split, do you know how much will be left in AngloGold Ashanti, given that it will just be a South African business?
PETER MAJOR: Probably, on a market cap, it is probably going to be about a third of what it currently is but on the ‘free-cash-flow’, it is going to be much better. I think free-cash-flow from South Africa – we’re still about 60-percent.
ALEC HOGG: So we could have another Sibanye opportunity here?
PETER MAJOR: We could Alec…we definitely could. In fact, there’s a better than 50/50 chance we could.
ALEC HOGG: So your play on this would be what?
PETER MAJOR: I’ve got to see and work through all the details here, and I’m going to let this settle a little bit, but I think this could be a Sibanye too. I don’t think it’s got the upside potential of Sibanye but it definitely has upside from where it is now. I think it will be a Sibanye light, and I would be more inclined to get this one and the South African Government now, is going to have a big role in this because they are going to play a big part in how to re-value South African (pure South African) gold shares.
ALEC HOGG: Yes, it could go back to what it was in the apartheid era, perhaps (hopefully not). However, do you remember then that everybody knew that there was going to be a train smash? They just didn’t know when, so you needed money out of South African gold assets very quickly. Do you think we could go back to those kinds of, very poor ratings?
PETER MAJOR: Look, I don’t know if those were necessarily poor ratings. I think they were fair ratings and there was a lot of hype with these overseas ratings and almost all of them ended in disaster, because it allowed the companies to raise money fairly cheap (a lot cheaper than debt) and what did most of them do what that money? They wasted it. They bought over-priced assets, in a diversified way out of their spectrum (out of their league), so you can call this apartheid, if we go back to high dividends and focused assets. But, boy that’s what pension funds around the world put into their funds for decades. Maybe it’s the only way a pension fund will ever buy a gold share again, is if it’s focused and based in South Africa and it actually pays out its earnings to shareholders.
ALEC HOGG: Pete…David Shapiro was saying that this is a message to the Government (another message) to get their act in order. Are you interpreting it differently?
PETER MAJOR: No, I don’t think it’s a ‘message sticker’ in as much as an ‘opportunity’. I think whatever country these assets were in, this should have happened and I don’t know how much of the South African rating was in Gold Fields before they un-bundled and how much of it was in this, but now we’re going to have a good idea because you will have a ‘pure South African asset’. It’s not just the Government that’s going to get rated here. These are pretty deep mines and we know that this country is at four deep-level mines (and employ lots of people) and maybe it will give the country, the Unions, and the Government a chance to try and spice up or spruce up that deep-level underground mines do have a future here. That they are not looking to shut them down and they’re not looking to penalise them and maybe they’ll even give tax breaks (like they did years ago) to promote deep-level mines, to get those ‘hard to get at’ resources.
ALEC HOGG: That was Peter Major looking at the ‘glass half-full’ – the Mining Consultant at Cadiz Corporate Solutions.
