Gold mine sales on the horizon for Africa – as expected
This year's Mining Indaba hosted in Cape Town set the tone for the year ahead and it seems that expectations of corporate action in the mining sector are beginning to circulate, as was proffered by many in the know at the Indaba. Reuters' Ed Stoddard always provides fact-filled, hard hitting insights on the mining sector and this article is no different. It seems that as predicted Africa's mining sector is set to be filled with the highs and lows of buys and sells as the year plays out. – Lucienne Ferreira
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.
After a botched attempt last year to split the company into two and raise capital, South Africa's AngloGold Ashanti has outlined a plan to sell assets and pay back debt, for example.
Cash-starved smaller companies or explorers might 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," said Rajat Kohli, Standard Bank's global head of mining.
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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, which make its moves harder to predict.
"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 told Reuters.
"But in 2000 the gold price was $250 an ounce," he said.
Gold prices are now hovering around $1,100-1,200 an ounce.
There are already signs of bargain hunting.
Unlisted Chinese asset manager Heaven-Sent, for example, has offered to buy junior South African gold producer Village Main Reef in a deal that values the target at 637 million rand ($56 million). The offer is for 12.25 rand per share, compared to its life high of 72 rand.
The head of bullion producer Gold Fields has said he would be willing to spend $300-$500 million on acquiring operating mines.
Buying interest has picked up among private funds.
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 our by law firm Berwin Leighton Paisner (BLP) last month, showed 94 percent of respondents are open to a private equity investment or disposal to a private equity funds in the next 12 months.