Harmony targets Gold Fields, top spot (October 25, 2004)

Fresh from a failed merger with Wheaton River Minerals (WRM-T), Iamgold (img-t) now sees its new plan to join with Gold Fields (GFI-N) threatened by a competing all-stock reverse-takeover bid for its South African-based “white knight.”

This time the interloper is Harmony Gold (HMY-N), which is looking to acquire all of Gold Fields’ issued share capital at the rate of 1.275 Harmony share for each Gold Fields share. Harmony says the offer represents a 29% premium over Gold Fields’ weighted average share price over the 30 trading days through to Oct. 14. In all, the deal values Gold Fields at US$8.1 billion.

Gold Fields is still waiting for the opinion of its financial advisors, Goldman Sachs International and JP Morgan, but has said the proposal “significantly undervalues” its assets and “completely disregards the significant value that will be created from the Iamgold transaction.”

Gold Fields CEO Ian Cockerill says the exchange ratio “vastly overvalues” Harmony’s asset contribution, noting that Harmony’s costs per kilogram have been higher than its own over the past year. He goes on to describe Harmony’s bid as “an opportunistic and desperate attempt by a company in dire straits that has been hemorrhaging cash at the operating level for some time.”

Harmony counters that its offer represents near-term “tangible value,” rather than relying on “a dubious re-rating scenario, which is the foundation of the Iamgold transaction.”

Harmony’s bid comprises an early settlement offer to buy and take up a maximum of 34.9% of Gold Fields’ shares within 30 days, followed immediately thereafter by a compulsory follow-on offer to acquire the remainder of its rival’s shares.

Harmony Gold CEO Bernard Swanepoel says the early settlement portion of the offer allows Gold Fields shareholders to realize the premium inherent in the offer quickly. That quick turnaround, coupled with the offer’s expiry date of Nov. 26, is seen by many as a scheme designed to impede any competing bids.

Harmony’s offer requires the approval of the South African Competition Authorities, among others. Harmony does not anticipate any problems in obtaining approval from the competition authority.

To complete the deal, Harmony would need to issue 626.7 million newly minted shares, or nearly twice its current share count; in the end, Gold Fields’ shareholders would own two-thirds of the new company.

“This transaction represents tremendous opportunities for stakeholders of both companies,” says Swanepoel. “The merger of Harmony and Gold Fields will create the world’s leading gold mining company based on production, reserves and resources, and the second-largest by market capitalization.”

He says his company intends to apply to Gold Fields’ South African assets (which include the Driefontein, Kloof and Beatrix gold mines) Harmony’s business model of acquiring older mines cheaply and rejuvenating them into productive operations. The company figures a 15% reduction in costs at those mines would justify the premium being offered. Harmony expects to have the costs trimmed within 18 months.

“We need to achieve a 15% reduction per annum in Gold Fields’ South African cost structure in order to achieve payback on the premium. That’s the minimum we need to break even in terms of this offer,” says Swanepoel. The savings will be achieved by reducing corporate overheads, closing corporate offices, improving operating efficiencies, and streamlining procurement practices.

On the flip side, Swanepoel says the Iamgold transaction represents significant value destruction for Gold Fields shareholders and that the company has undervalued its own international assets.

“They are selling them on the cheap; they are selling them at a discount to their own rating.”

Cockerill counters that the planned deal with Iamgold has already proved its worth in that the implied market capitalization of the international assets has increased by about US$500 million since the deal was announced. “To say that this transaction has been dilutive to Gold Fields shareholders is clearly a distortion of the truth,” he insists.

Combined, Harmony and Gold Fields would displace Denver-based Newmont Mining (NEM-N) as the world’s largest gold miner, with annual production of 7.5 million oz. and reserves totalling around 138 million oz. Based on market capitalization, Harmony-Gold Fields would rank second to Newmont at just more than US$11 billion.

Swanepoel says the combined company would have greater access to investors and add a significantly increased index weighting and liquidity.

Harmony’s offer hinges on Gold Fields shareholders’ rejecting the proposed acquisition of Iamgold. Russia’s OAO GMK Norilsk Nickel, Gold Fields’ biggest shareholder, with a 20% stake, has already agreed irrevocably to vote its share block against the all-stock Iamgold transaction and accept Harmony’s proposal. If the Iamgold deal were nixed, Gold Fields would be on the hook for a US$20-million break fee payable to Iamgold.

Norilsk acquired its stake in Gold Fields by paying Anglo American (AAUK-Q) US$1.16 billion in cash earlier this year. Many believe the Russian miner was upset that it was not consulted before the Iamgold plan was announced. Others suggest Norilsk also frowns on the transaction as it infringes on its own plan to become an international gold producer with Gold Fields.

At the end of September, Iamgold and Gold Fields signed a definite deal to combine Gold Fields’ assets outside of the “Southern African development community” with those of Iamgold to create Gold Fields International. The $2.1-billion all-stock deal would end with Gold Fields owning about 70% of the new company; Iamgold shareholders would hold the remainder. Iamgold shareholders would also receive a special cash dividend of 50 per share ($75 million in all) on closing.

That deal came about after proposed nuptials between Iamgold and Wheaton were quashed by simultaneous and competing bids from Golden Star Resources (GSC-T) (for Iamgold) and Coeur d’Alene Mines (CDE-N) (for Wheaton). Iamgold shareholders eventually voted down the tie-up with Wheaton and were later rescued from Golden Star’s hostile advances by Gold Fields. Wheaton remains unwed after a lengthy and acrimonious battle to fend off Coeur.

The proposed Iamgold-Gold Fields deal will face shareholder votes in mid-December; it needs the OK from a simple majority of each company’s shareholders. Gold Fields’ vote is slated for Dec. 7; Cockerill says regulatory concerns mean it is unlikely the meeting could be rescheduled to take place before the expiry date of Harmony’s offer.

Says Iamgold CEO Joseph Conway: “It comes as no surprise that the Gold Fields board has rejected the Harmony offer. It seems desperate that Harmony would attempt this transaction in the face of the overwhelming support of the Iamgold-Gold Fields transaction.”

In related news, Lord Robin Renwick has resigned his post as one of Harmony’s non-executive directors to eliminate a conflict of interest that arose out of his other position as European vice-chairman of JP Morgan, the investment bank that is advising Gold Fields.

Shares in Harmony ended US$1.06, or about 8.4%, lower at US$11.50 in New York following the news of the bid on Oct. 18; Gold Fields’ issue slipped US65, or 4.3%, to US$14.29. Meanwhile in Toronto, Iamgold lost 87, or 8.7%, to finish at $9.08.

At presstime on Oct. 19, the premium in Harmony’s bid had fallen to about 2.8%, based on each company’s share price on the New York Stock Exchange.