Seismic changes have been underway in South Africa’s gold industry, forced mainly by low prices. Speculation has been rife this past week that a merger or takeover deal between AngloGold and Gold Fields was imminent. Whether it is true or not, market consolidation is changing the face of the industry forever, according to a media company’s analysis of the situation.
Rumors of a major move in the South African gold industry have swirled around Johannesburg for the past week. The most popular story is that AngloGold, the world’s largest gold miner, was in talks to merge or acquire competitor Gold Fields, according to a report by eCountries, an international media company. Some versions include AngloGold getting help from Canada’s Barrick Gold to complete the deal. All three companies have denied that any such development is imminent.
Yet the markets seem to believe that something is afoot. Shares of both companies shot up by more than 10% this week. Whether the report is true or not, major changes are certainly ahead in the gold sector. South African mining has shed more than 100,000 jobs over the past three years as gold mining houses rationalize their operations. The main culprit is the low gold price. But this is also part of a long-term structural contraction. Since the mid 1990s, South Africa’s mining sector has shrunk by 0.5% per year on average.
Gold is no longer king. Once one of the economy’s largest sectors, mining fell to less than 4% of South African GDP last year. Output has been on a steady decline for decades. As late as 1980, the country produced 24m oz or more than 70% of global output. By 1999, that figure had fallen by a third and global market share shriveled to just 17%.
In this climate, all mining firms are looking around for ways to trim costs and boost earnings. But there are reasons why these specific companies might be looking more aggressively than most. AngloGold chairman and chief executive Bobby Godsell has been particularly vocal in urging the sector to adapt to the negative global environment for gold prices. Gold Fields has been seen as a potential take-over target for some time. South African firms have been sniffing around since regulators blocked a proposed merger of Gold Fields and Canadian Franc Nevada last September. Then in December UK-listed Anglo American, which holds a 54% stake in AngloGold, raised its holdings in Gold Fields from 6% to 17%. Although this kind of incestuous cross-holding is typical in South Africa, the move has been viewed as a stepping stone to a larger deal of some kind.
The potential involvement of Barrick is also no surprise. It has reportedly been looking for a foothold in South Africa. AngloGold’s financial circumstances mean that it would need to turn to a foreign partner with deeper pockets to complete the acquisition. AngloGold has a debt burden of some R5bn ($625 million), while the financial press has been reporting that the Gold Fields buy price could be as high as R20bn.
Both South African companies are scheduled to release results soon-AngloGold on January 31, Gold Fields the following day. But whether a deal between these two mining firms ever comes off or not, more gold sector consolidation is coming soon.