Gold Fields buys Canadian Yamana Gold for R100bn

‘We’ve been working on this deal for eight months or so, so we’ve got a deep insight into the value we are paying and the upside that is still available to our shareholders’: CEO Chris Griffith.

This interview was originally aired on RSG Geldsake (in English).

RYK VAN NIEKERK: The South African gold giant Gold Fields announced it will acquire the Canadian group Yamana Gold for US$7 billion, or just over R100 billion.

This will make the group the fourth-largest gold producer in the world and give the group a significant presence in several countries in North and South America. Gold Fields will issue new shares to finance the transaction. Existing Gold Fields shareholders will own 61% of the larger company and the head office will remain in Johannesburg.

On the line is Chris Griffith. He is the CEO of Gold Fields. Chris, thank you so much for joining me. This is a significant transaction for Gold Fields, so just take us through the rationale of this deal.

CHRIS GRIFFITH: This is a work that we’ve been focused on for a number of years. One of the things about Gold Fields is we’ve got a great portfolio and growth in our portfolio for the next few years as we deliver Salares Norte, the project in Chile, and we grow our business from 2.3 to 2.8 million ounces.

But thereafter our production profile starts coming off, and we don’t have a portfolio of projects or portfolio of opportunities in our long-term business.

So one of the things that we’ve been looking at for some time is how we grow both the value and the quality of our portfolio of assets. We have to go and look for the next phase of growth, or the next phase of filling up the pipeline, of course, to look after this business for the long term.

So we’ve looked at all sorts of things from early-stage projects to in-production assets, to bolting on opportunities between the various companies, to be able to both fill up that pipeline, to give us new opportunities, but also to scale up our South American operations.

And we have been trying to get access into Canada, which has been difficult because it’s been expensive over a number of years. So that’s very much a part of our strategy, not because we decided we want to be a certain size company. What we have been able to do is …

Yamana actually ticks all of those boxes in that it does provide us with the huge pipeline of project, and it gives us scale in South America and Canada.

What it does is help us execute our strategy and bring forward all of that in one go, as opposed to doing a number of smaller deals that in all likelihood will cost us cash, and not as an all-share deal like we’ve done today.

RYK VAN NIEKERK: So it’s a question of reserves and the pipeline, as opposed to exploiting synergies.

CHRIS GRIFFITH: It is about the pipeline, more so than the reserves, because we still had a company with good reserves, but few assets. This is not a deal based on synergies. There are some synergies in South America, and with head offices and listing places more than the two stock exchanges we’ll be listed on. So there are synergies.

But this deal is not premised on synergies. That’s just a bonus that comes with the deal, as is the scale.

The size we eventually become is an outcome of what we do, as opposed to being the objective or the essence of why we did this deal.

RYK VAN NIEKERK: The share price took a hit today, and I listened to a part of your presentation today. As you said, it was expected in some ways. But is it a good idea to buy commodity companies at the top of a commodity cycle, because there seem to be concerns that you may have overpaid for this asset?

CHRIS GRIFFITH: We don’t believe that we’ve overpaid for this asset. If you look at the market price of that company today, then it may look like we’ve paid a significant premium because we paid a 30% premium. When you’re taking over a company, that’s not an unusual premium to pay.

Just to give you an idea, before I tell you what we can see: the market’s got a 12-month target price for Yamana of $7 billion; so the market can see that they are going to get to $7 billion over a period of time. So our paying $6.7 billion for this company in our view is not overpaying.

When we look at the underlying value that we can see, we can get to $6.5 billion without using any of the growth projects and without using any of the further synergies or any of the other upside that comes both from in-production assets, as well as from the big projects that we have.

Even if we were to sell some of those big projects and not go and develop them, we would get way above what we are paying for those assets.

We don’t expect our shareholders in the first hour to be able to see that; we’ve been working on this deal for eight months or so, so we’ve got a deep insight into the value that we are paying and the upside that is still available to our shareholders.

It is absolutely expected, when you pay a premium, in the first few days to see your share price reduce and the target share price increase. I think that’s a normal reaction.

The question is whether we genuinely don’t have shareholder support or whether this is just an overreaction, because I guess generally we wouldn’t have expected it to be as big as it is – but quite a sharp drop off in the first day, and an increase in the price of the target is a factor of the premium. We expect that to recover over time.

We, of course, are not asking shareholders to vote today. In the few months that remain between now and when we ask shareholders to vote, we’ll be spending a lot of time helping our shareholders to see the value that we can see and why what we’ve paid for this is not above the value that we can see and will create for this company.

RYK VAN NIEKERK: You’ve said you’ve spoken to Yamana for eight months, but over the past few years there have been a lot of rumours and speculation that you may join forces with AngloGold Ashanti – of course your big rival here in South Africa. Did you look at other companies for a big deal, and why did you choose Yamana?

CHRIS GRIFFITH: We absolutely looked at everything – as I said to you earlier, from even small assets, small projects, in-production assets, and big companies and companies like ourselves, saying: ‘Isn’t there more value in joining up forces with some of those companies?’

We look at this, doing whatever we do, saying it’s got to add value to what we already are. We have over the number of years spent time improving the portfolio of our business. We have [been] reducing the unit cost. What we didn’t want to do is to join up with someone that made us increase unit cost, or make our jurisdictional attractiveness worse – and a number of other metrics.

We didn’t believe that any of the other companies that we looked at, including AngloGold Ashanti, were going to improve our business and therefore increase value to other shareholders of this company.

But Yamana did, and Yamana helps reduce our unit cost. Yamana helps improve our attractiveness into jurisdictions. Yamana helps us get into Canada, a very attractive mining jurisdiction, very similar to Australia. So that’s why it was Yamana and not a number of other companies.

RYK VAN NIEKERK: Gold Fields has expanded internationally over the past few years. You’ve bought into projects in several countries – Ghana, Australia and South America – and now you’ve done this big deal. Do you foresee any more expansion within South Africa?

CHRIS GRIFFITH: We get asked this question often, because the answer is gold in South Africa is a very mature industry, it’s been going for well over 100 years. It’s because most of the gold in the attractive gold deposits in South Africa has been mined out a long time ago. We are not foreseeing further gold investment in South Africa because of the gold industry being mature – not because we don’t think South Africa’s a good destination to invest in.

There’s still lots of investment happening in South Africa, for good reasons.

When I was at Angloplats, we invested in South Africa. So we absolutely see that South Africa is still a good investment jurisdiction, just not for gold, because it’s a very mature market with no opportunities that we can see to invest in, other than in our existing business at South Deep.

RYK VAN NIEKERK: Just lastly, the head office will remain in Johannesburg and Gold Fields will remain listed on the JSE. Was there any talk about maybe moving the headquarters to Canada?

CHRIS GRIFFITH: No, for various reasons. But the change of control taxation makes it very unattractive to shareholders with the dilution that we would suffer. But Canada for us, because of our global portfolio, means that we want to be situated somewhere in the middle between Australian assets and the assets in the Americas. So I think South Africa from that point of view is also practical to be able to manage this global business.

RYK VAN NIEKERK: Chris, thank you so much for your time. That was Chris Griffith, the CEO of Gold Fields.

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