South Africa’s gold mining industry has been its own worst enemy. As richer seams were worked out and profit margins squeezed,
corporate managers rarely grabbed the nettle. Instead of adapting to new realities by addressing the underlying issue of continuously declining productivity, every year they buckled to excessive trade union demands. So the labour:capital ratio kept falling and mines that might still be producing have been closed down because labour costs unrelated to productivity have make them uneconomic. Â Neal Froneman, new CEO of the new company Sibanye, is not going with the flow. In this fascinating discussion, he draws his line in the sand – explaining that his business has achieved its objective of building a cash reserve to ensure it can see out an extended strike. A threat voiced by labour unions whose demands in the current round of wage negotiations bear no resemblance to economic reality. These are not idle words. Froneman is a fighter and through the years has shown sufficient grit to suggest he’s up for the fight. Â A showdown between management and labour has always looked likely after a second trade union, AMCU, used outrageous promises to draw members from the previously dominant and more mature union NUM. So Froneman has readied his group for the inevitable. – AH Â Â
ALEC HOGG: Sibanye Gold reported improved production for the six months of this year. That was compared with the immediately prior six month period, but when you have a look at it year on year it doesn’t look quite so good. We will however be getting the insight into that with Neal Froneman, Chief Executive of Sibanye Gold, who is at the Johannesburg Stock Exchange today. Neal, we were having a little joke earlier – Lindsay and I – saying we need to twist your arm to do a little bit more exercise. We’re actually only five minutes away from you.
NEAL FRONEMAN: Ja. No – listen, it would be welcome – the exercise.
ALEC HOGG: The exercise. Ja, but you’re getting enough trying to fix this business up, although I suppose ‘trying to fix’ is a little bit aggressive. You’ve had your background in getting gold mines to produce a lot more efficiently with Bernard Swanepoel – the work that you did back at Harmony, and of course with your own work at Aflease, which you then turned into a uranium business etc. etc. Is this the juiciest plum that you’ve been able to pick?
NEAL FRONEMAN: Alec – absolutely. These are probably still some of the best gold assets in the world (in Sibanye) and when I say best; in gold assets you rate them in terms of quality. These assets are still recovering at 7 to 8 grams a ton and they’ll do so for the next 10, 15 maybe even 20 years. So these are peaches. These are not even plums.
ALEC HOGG: And the names well-known to those who’ve invested in South African gold shares over the years. Driefontein, which was Driefontein Consolidated after it was East and West Dries; of course Kloof, one of the richest mines in South Africa; and Beatrix. Those are the three babies you’ve got.
NEAL FRONEMAN: That’s correct and as you’ve said Kloof and Driefontein: high-quality mines. Beatrix has been known for many years to be the lowest cost producer in the gold industry.
ALEC HOGG: Just to have a look at the way the market is looking at your numbers at the moment Neal, today your share price is up 6¾%. Harmony is down by 4½%. Is there, from the discussions you have with investment analysts, a switching that you’re seeing from Harmony which is still with R10bn more than the R6bn  you’re (Sibanye) worth?
NEAL FRONEMAN: Alec, I’d like to think so but I don’t think that is the case. Harmony was up 20% based on data out of China yesterday. I don’t think it’s really got anything to do with our results.
Certainly there is no reason why Sibanye should be not as highly valued as Harmony. Those are the things we look forward to once we’ve established a delivery record.
LINDSAY WILLIAMS: Neal, Nerina Visser, our previous commentator from Nedbank Capital, made an excellent point. She sort of put forward the idea that perhaps when you first split from Goldfields, overseas investors – maybe even local investors – were unused to being able to invest in a purely South African gold mining operation. Maybe overseas investors didn’t quite understand how to value the Company. Would you agree with that, first of all? And secondly, does your share register back that up? Have you got a good foreign participation now?
NEAL FRONEMAN: Sorry, just repeat your first part again?
LINDSAY: Did you find that when you first split, people were confused about the valuation of the Company?
NEAL FRONEMAN: Absolutely. I think there’s a couple of things. In Goldfield’s hands, these assets were not as visible as they are when they are in Sibanye’s hands. That’s the first thing. The second thing, as assets on their own, they have no real clear history, and certainly under this management team of delivery. So I think investors are first of all finding it difficult to value as you’ve said. But secondly, I think they’re looking for a bit of a track record, the theme of the presentation today was one swallow doesn’t make a summer but I think one swallow does indicate that there’s a change in season coming.
Certainly, we need another two, maybe even three quarters of delivery for analysts first of all, to establish a bit of a track record. We need to work very hard to help them understand the underlying assets. Essentially that will result in analysts coming up with the right price targets and investors also buying into the opportunity.
In terms of your second question; we did see a major change in our shareholders. About 48% of our shareholder was North-American. That had dropped all the way down to 30%. I’m pleased to say that it’s actually come back to about 36% and we’ve seen some value funds, mostly local, buying the stock. So there has been quite a lot of shareholder churn which also obviously doesn’t help the underlying value of your share.
ALEC HOGG: Quite a lot of share price churn as well Neal. But, you talk about putting good quarters together. That’s the immediate challenge isn’t it? Because you are now going into a period where you have AMCU as the major union at Driefontein. It might be a little easier with a more mature union (NUM) on the other two mines, but are you really as confident as you say in the commentary to your results that you’ve made your plans or you’re rather well-prepared for extended strikes?
NEAL FRONEMAN: Alec, I must say first of all, just on AMCU versus NUM, we see them as exactly the same. Perhaps one is a little bit more militant, but they generally come with the same problems.
What we do need in the industry is a strong union with good leadership. Unfortunately at this point in time, we seem to be lacking on both fronts.
Looking forward, at the beginning of the year we actually chose to go into wage negotiations with a target of something like R2bn of cash in the bank. We know that once you have cash in the bank your balance sheet is not under threat and you can sustain a long strike. You are in a strong position and you will not then be bullied or intimidated into – let’s call it short-term decisions – by organised labour. We’ve been able to do that. That was very specifically our target.
We have also at the same time, been working very closely with our workers. We’ve been briefing them on a regular basis. There’s a strong alignment between the gold companies. This vicious cycle of above-inflation wage increases has to be broken. We are not in this business for the short term and therefore we have to break this vicious cycle. We have to get back to normal increases and we have to look at other ways of getting alignment with our workers – we’ve done all of that. What we can see on site is that our workers actually don’t have the appetite to strike. They want a reasonable settlement. As the industry, we want a reasonable settlement, we’re working very hard towards this. I’m actually personally quite optimistic that if there is any industrial action it will be short-lived. But the message is that if it’s not short-lived we can sustain an extended strike and that’s obviously not first price.
ALEC HOGG: For how long, though? How long will that R2bn cash in the bank enable you to not be bullied, as you put it?
NEAL FRONEMAN: Well, you know, it’s our experience that extended strikes normally do not go longer than six weeks.
At these gold prices, that R2bn in the bank will see us through for three months, and of course we’ve got access to debt.
We obviously wouldn’t like to use that but we can certainly withstand a strike much longer than three months, and really, I hope that is not the case. But if you are weak that will be the case. We are not weak and therefore I’m optimistic.
ALEC HOGG: So there’s a line in the sand there, Neal. There’s also quite a lot in your results where you talk about using what you’ve learned in the past to address not just labour, but also management structures. Are you going to be taking out layers of managers at the mines?
NEAL FRONEMAN: Alec, we have, and you know a lot of the history and the developments around The Harmony Way. These are still appropriate today. They are very good modern models of management. We’ve applied what we believe are the good aspects of that. It does mean removing management layers, not getting rid of your most experienced and senior skills, but it’s about getting those skills much closer to the action. In other words, to the face where that experience can be used to coach and solve problems. So we’ve taken out two layers of management.
Unfortunately in a business like this, where you had to deal with a constantly reducing production profile, the organisation has had to be right-sized. The way I explained it to the analysts this morning; it’s a bit like an onion. You can see the first layer of inefficiencies and you deal with it because in the longer run it’s to everybody’s benefit, so you peel that first layer. Once you’ve peeled that first layer you invariably see another layer and that’s where we are today. Unfortunately we still have a number of excess positions mainly in our services function. I think we’ve restructured the rock-breaking function sufficiently for now, and unfortunately there’s another round of right-sizing which is going to affect probably another 1500 people which is very sad, but as I say, we do this for the long term. We have to take some bitter medicine now.
