Why Gold Fields’s bid has the market all aflutter

The market on Thursday took most of the session to digest the news that Gold Fields was making a R2.4bn offer for half ownership of a mining operation in Ghana and taking a 9.9% stake in Asanko, the Canadian parent company.

Gold Fields shares were deep in the red for most of the day as the market fretted that the mining company was going to spend that much money at a time when its capital bill for 2018 stood at $830m, with two large projects under way at Damang in Ghana and Gruyere in Australia.

By the close, Gold Fields, with a R39.5bn capitalisation, was 1.9% down, off the session low of more than 5% below Wednesday’s closing price.

Gold Fields CEO Nick Holland stressed that the deal was affordable and that the Asanko mining project, 100km north of its two mines at Damang and Tarkwa, needed no more capital to move into production of 250,000oz a year at an all-in sustaining cost of $860/oz.

The transaction would in no way affect the Damang and Gruyere projects, and Gold Fields had $40m coming in from the sale of its Arctic Platinum Project, cash on its books of $400m and $1bn of unutilised debt facilities, making the payment for the $203m transaction achievable, he said.

The investment would provide a return of 15% at a gold price of $1,300/oz and it would be paid back within five years at the mine, which has a life of at least 15 years excluding the vast exploration potential at the tenement, he said.

One analyst said the transaction was poorly timed and expensive, while another said it was a decent transaction.

"While the market tends to view capital allocation by gold companies with suspicion given the sector’s poor track record, this transaction does appear NPV [net present value] accretive," Patrick Mann from Deutsche Bank said in a note.

Johann Steyn of Citigroup called the deal expensive and said it was out of proportion to the value of the deal against the market capitalisation of Gold Fields when considering the amount of gold it would add to the company’s production.

"A declining production profile and limited greenfield exploration prospects make Gold Fields reliant on bolt-on acquisitions to try and sustain production, in our view," he said in a note.

Gold Fields will pay $165m upfront to acquire a 50% stake in Asanko subsidiary Asanko Gold Ghana, which owns 90% of the Asanko gold mine and exploration tenements in the West African country.

The Ghanaian government owns the remaining 10% of the mine. Gold Fields will pay $20m later towards the Asanko Gold Ghana transaction.

Gold Fields is also buying the 9.9% stake in the parent company for $17.6m.

Holland has long spoken of Ghana as a growth area.

There had been speculation that there could be a deal with AngloGold Ashanti around the Iduapriem gold mine, but AngloGold repeatedly said it was not interested.

Holland said on Thursday the transaction with Asanko had taken two years and was the most affordable option for the company to gain access to the mine in a largely unexplored part of northern Ghana.

Analysts quizzed Holland on why Gold Fields did not buy the whole of the company, but he was blunt in his assessment that with the projects the company had under way there was no way Gold Fields could afford it.

Joint ventures of this nature were becoming more normal, he said.

seccombea@bdfm.co.a