Buyers take a shine to cheap gold assets
Johannesbug-S.A. (Mar 22) Some of the lowest valuations in decades and rising pressure on Africa’s gold producers to restructure or perish are likely to spur a wave of acquisitions in the sector.
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 those of their peers in commodities such as base metals.
Gold producers are now having to shape up to stay afloat. Their focus is on cutting costs and cleaning up their finances.
Selling noncore mines, and doing it quickly, will be key for many of them. And, given the large number of forced sellers, valuations are starting to look tempting.
“I think it’s a buyers’ market at the moment so conceivably you will see some of the assets come out at a discount,” said BMO Capital Markets analyst Andrew Breichmanis.
After a botched attempt last year to split the company in two and raise capital, 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.
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 moves harder to predict.
John Biccard, portfolio manager for the Investec Value Fund, said bullion producers were near historic lows based on various valuations such as price to book, a ratio comparing a stock’s market value to its book or asset value.
“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,” Biccard said. “But in 2000 the gold price was $250 an ounce.”
Gold prices are now hovering around $1 100 to $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 R637-million. The offer is for R12.25 a share, compared to its life high of R72.
The head of Gold Fields has said he would be willing to spend $300-million to $500-million on acquiring operating mines.
The head of Sibanye, a spin-off of Gold Fields, has called for consolidation in South Africa’s gold sector, and Africa-focused Randgold is also on the lookout for a deal.
Interest has lifted among private funds.
Lloyd Pengilly, the head of mining fund QKR Corp, which in October bought the Navachab Gold mine in Namibia from AngloGold, has said gold remains his preferred sector for acquisitions.
Mining companies are warming up to the interest from funds and private equity, too.
A survey of 50 leading individuals in the mining industry carried out by law firm Berwin Leighton Paisner last month found that 94% are open to a private equity investment or disposal to a private equity fund in the next 12 months.
“Nearly half are looking for expertise as well as the money a private equity investment can bring,” said Alexander Keepin, a partner at the firm.
Source: bdLive.za
