Anglo forms top gold company

For decades, South Africa-based mining house Anglo American has been a huge, complex organization in which dozens of mines were held by dozens of publicly traded operating companies. This is no more.

Prompted into action by the precipitous and ongoing fall of the gold price — gold being the company’s primary product — Anglo American has effected a contraction of its multi-level organization. As a result, the myriad divisions and subdivisions of the mining house have been replaced with a simple, commodity-based structure built on just five independently managed companies: De Beers Consolidated Mines (DBRS-Q) (diamonds), Amcoal (COALcoal), Amic (industrial minerals), Amplats (platinum) and Anglogold.

Anglogold begins life as the world’s biggest gold producer (7 million oz. in 1996, representing 9% of world production), and number one reserve holder (about 4,479 tonnes of gold). In terms of maket capitalization, however, it ranks as the third-largest gold company.

Anglogold’s acquisition of the target operating companies (which, while under the Anglo American umbrella, were not wholly owned by the house) will be effected on the basis of the average closing share prices for the 30 trading days up to Nov. 21 on the Johannesburg Stock Exchange, on which each of the companies is listed. Anglogold has stated that its intention is to attain near-total ownership of the mines involved.

Anglo Chairman N.F. Oppenheimer will also chair Anglogold; most of its directors will be independent of Anglo American.

Anglogold will end its management contracts with parent Anglo; it will not pay turnover or profit-related fees, but it will continue to buy purchasing and technical services if Anglo offers them competitively.

Anglo American will acquire De Beers’ small interest in Anglogold and hold more than 40% of Anglogold shares. The arrangement is dependent on the valuation of certain mineral rights and any new financial arrangement made with Minorco, Anglo American’s exploration arm in the Americas and Asia.

Anglogold will conduct all of Anglo American’s gold prospecting; its 1998 exploration budget is pegged at roughly US$50 million.

The change at Anglo will see operating company Vaal Reefs renamed Anglogold, and then seek to buy 100% of the equity of Anglo’s five operating gold producers in South Africa — Vaal Reefs itself, Freegold, Elandsrand, Western Deep Levels and Ergo — and of its gold investment firms, Eastvaal and Southvaal.

The new Anglogold will also incorporate Johannesburg Consolidated Investment’s (JCI’s) interests in the Western Areas and HJ Joel gold mines, giving Anglogold a total market capitalization of US$4.2 billion. In exchange, JCI will receive Anglo’s 26% stake in United Kingdom-based conglomerate Lonrho.

Anglogold is seeking to acquire 100% of Lonrho.

JCI, which is left with few valuable gold assets, says it plans to become a base metals-focused mining group.

Also included in the deal are JCI’s interest in the Beatrix gold mine and Anglo American’s and Anglo American Gold Investment Company’s (Amgold’s) 19.1% interest in Driefontein Consolidated, owner of a promising new gold mine.

Drie Cons. also figures in the merger, proposed in October, of South Africa-based mining houses Gold Fields of South Africa (GFSA) and Gencor into a new firm called Goldco.

Goldco and Anglo jointly report that they are working on an agreement regarding control of Drie Cons., which is owned 19% by Anglo and 37% by the Goldco. partners. A recent attempt to use Dreifontein as the vehicle by which the two houses could be merged was foiled by Anglo American, when the latter firm got 30% of Driefontein’s shareholders to vote against a Goldco-related proposal.

Says Anglo American Chairman J. Ogilvie Thompson: “We did so because we did not have sufficient information to persuade us that it was to our advantage to reduce our interests, direct and indirect through GFSA, in Driefontein for a smaller interest in Goldco. In fact we believe that the development of the West Wits area (where Anglogold owns most of the mines) in conjunction with Driefontein would be in the best interests of all shareholders.” He said Anglogold and GFSA are actively discussing the issue.

The new Anglogold will also buy Anglo American and De Beers’ interests in Namibia’s Navachab mine and the Sadiola mine in Mali. Anglogold plans to explore with Minorco the inclusion of Minorco’s gold operations and prospecting activities.

Anglogold plans to sell seven shafts at Vaal Reefs to a black-owned mining company, and possibly sell shafts or contract out mining at part of the Freegold’s operations.

Following the changes at Vaal Reefs and Freegold, Anglogold expects to have average cash production costs of US$260 per oz. gold, down from the current US$280 per oz. Says new Anglogold’s chief executive officer Bobby Godsell: “We want our cash costs below the US$245 [per oz. gold] mark within two years.”

Anglogold will have virtually no debt and net assets of US$1.7 billion, while cash resources will exceed US$200 million.

The creation of the company takes effect Jan. 1, 1998, though all the details are unlikely to be worked out until mid-1998.

Godsell adds: “We want a company which combines the best features of North American gold [companies], with their emphasis on growth, with the best features of South African gold companies, with their emphasis on strong earnings and dividends.”

Other changes announced by Anglo American include the acquisition by Amcoal of Anglo’s coal mining rights. In the platinum sector, Anglo is to increase its interest in Amplats to about 46%.

In diamonds, the rationalization of Anglo and De Beers’ industrial holdings is being considered, and De Beers may also surrender its traditional right to be involved in Anglo’s new business activities. Anglo is to sell its 7% direct interest in De Beers to Anglo American Investment Trust (Anamint) for new shares and will acquire from De Beers its 10% interest in Anamint. As a result, Anglo will hold a 70% interest in Anamint, and Anamint, in turn, will hold 32.5% of De Beers.

Thompson says the restructuring would give focus to the operating companies and allow new business to be dedicated to the appropriate companies, while clarifying and simplifying the companies’ structure.

“I believe all these moves make good strategic sense, are in line with investor wishes and will result in enhanced shareholder values and an exciting future for the Group in the next millennium.”

Concurrent with the announcement of the structure change, Anglo American announced that net earnings for the six months ended Sept. 30 (including surpluses on investment income) were R772 million, up 29.9% from the same period in 1996.