Gold Giants Shrink to Fit as Paulson Pushes Breakup: Commodities
The 10 biggest gold companies led by Barrick Gold Corp. (ABX) spent more than $100 billion in the past 20 years buying new mines and projects around the globe. Now they’re feeling pressure to throw the strategy into reverse.
Gold Fields Ltd. (GFI) spun off most of its South African assets in February. Billionaire hedge-fund investor John Paulson is calling for a breakup of Johannesburg-based AngloGold Ashanti Ltd. (ANG) Barrick, which has 27 mines, is selling assets after an acquisition and cost overruns helped erase $26 billion of the Canadian company’s market value.
A Bloomberg Index of 14 large gold miners has lost 26 percent in the past year, worse than the 7.1 percent drop in a similar gauge of global oil companies. The gold industry, which underperformed the metal for five of the last seven years, has tried to stop the slide by ending gold-price hedges, raising dividends, building new mines and, most recently, pledging spending discipline. Spinning off or selling assets may be its next option.
“The next fad is going to be the unbundling of the majors,” said Mark Bristow, chief executive officer of Randgold Resources Ltd. The Jersey, Channel Islands-based company believes the optimal number of mines is “four or five, six at a push,” he said.
Such moves would follow the example of international oil companies that have split up to unlock value. ConocoPhillips, the largest independent U.S. oil and natural gas producer, spun off its refining unit in May, less than a year after Houston- based Marathon Oil Corp. listed its refinery network as a separate company.
Shareholders have grown cold on further expansion as valuations in the industry declined. The ratio of the largest gold miners’ enterprise value to their earnings before interest, tax, depreciation and amortization dropped to 6.3, less than half the multiple at the end of 2010, data compiled by Bloomberg show.
The gold-mining strategy of bulking up was led by Barrick, which became the industry leader in 2006 when it bought Placer Dome Inc. for $10.2 billion. Now operating across four continents, Barrick saw the estimated cost of its Pascua-Lama mine on the Argentina-Chile border more than double to as much as $8.5 billion and it took a $3 billion writedown on a Zambian copper mine last month.
“It’s like herding cats to manage something like that,” said George Topping, a Toronto-based analyst at Stifel Nicolaus & Co. “It’s very difficult across all those different time zones, different cultures, tax regimes, politics.”
Investors, weary of operational setbacks and soured takeovers, have turned to gold-backed exchange-traded products that track the price of the metal.
SPDR Gold Trust, the largest gold ETP, has lost 2.5 percent in the past year, a smaller decline than gold equities. The S&P 500 rose 10 percent and the gold price dropped 2.2 percent in the period. Gold equities are now trading at a discount to the broader stock market.
“The mining industry has lost a lot of appeal, of interest, because of poor guidance, poor delivery, over- promising, cost overruns,” said Gerald Panneton, a former Barrick executive who’s CEO of Detour Gold Corp., the operator of one mine in Ontario. The global gold-miner “is not a model that is sustainable,” he said in a March 5 interview.
To win back investors, Barrick and competitors including Newmont Mining Corp. (NEM), the second-biggest producer by sales, are promising they’ll focus on margins and containing soaring costs, rather than boosting output.
Returns will drive production, rather than the other way around, Barrick CEO Jamie Sokalsky said Feb. 25. Barrick says it will defer, shelve or sell assets that don’t meet his requirements for returns and cash flow.
“Our overriding objective is to translate the company’s strengths into higher shareholder returns and we’ll always consider opportunities to advance that objective,” said Andy Lloyd, a Barrick spokesman.
Breaking up the biggest gold producers could result in higher valuations for the parts compared with the whole, according to Stifel Nicolaus’s Topping. It would also make it easier for companies to expand output and replenish reserves, said Jorge Beristain, an analyst at Deutsche Bank AG in Stamford, Connecticut.
“There is a logic in sort of shrinking to grow, if you will, as the type of growth that they would be able to tackle would be less risky and more digestible in size,” Beristain said in a phone interview March 15.
Paulson, the biggest shareholder in AngloGold, last month told investors in his firm Paulson & Co. that the miner might unlock value if it were to split its business between South African assets and those outside the country, according to a letter obtained by Bloomberg News.
Armel Leslie, a spokesman for Paulson & Co., and Stewart Bailey, a spokesman for AngloGold, declined to comment on the potential split of assets. AngloGold is looking at a “range of options” to improve the business, CEO Mark Cutifani said on a Feb. 20 conference call.
Paulson’s firm is the biggest investor in the SPDR Gold Trust, according to data compiled by Bloomberg. His $900 million Gold Fund, which is invested mainly in gold stocks and derivatives, fell 26 percent this year through February, according to a client update obtained earlier this month by Bloomberg News. The fund declined 25 percent in 2012, two people familiar with the matter said in February.
Still, there’s no unanimity that the answer to the gold industry’s plight lies with the breakup of established producers.
Gold Fields has fallen 20 percent in Johannesburg since it spun out its South African assets through the listing of Sibanye Gold Ltd. Feb. 11. The combined market capitalizations of the two companies is 17 percent less than Gold Fields’ value on the last trading day before the split. The Bloomberg Industries index of the largest producers fell 12 percent in the same period.
African Barrick Gold Plc (ABG) has also disappointed since it was spun off from Barrick in March 2010, dropping 61 percent. The African unit has been dogged by operational setbacks and struggled to meet production targets. Barrick said in January it ended talks on the sale of its majority stake in African Barrick to China National Gold Group Corp. after no agreement was reached.
Randgold, which owns mines and projects in Africa, has risen 17 percent in New York in the past 24 months, compared with a 34 percent decline in the Philadelphia Stock Exchange Gold and Silver Index of 30 producers. The company may sell one of its smaller assets if it found or acquired “another Kibali,” Bristow said, referring to the Democratic Republic of Congo gold mine that Randgold and AngloGold jointly acquired in 2009.
“That’s a perfect value creation,” Bristow said in a March 6 presentation in Toronto. “We want to have four or five mines, we think 1.5 to 2 million ounces, and focus on the quality.”
There would probably be investor appetite for more regionally focused companies if some of the biggest miners were to split along geographical lines, Deutsche Bank’s Beristain said. That’s partly because of heightened concern about geopolitical risk in developing countries as governments seek increased royalties, taxes and other commitments from mining companies.
Barrick could improve the valuation of its shares by spinning off assets in Australia and Papua New Guinea and selling its remaining 74 percent stake in African Barrick, said Tony Lesiak, a Toronto-based analyst at Macquarie Capital Markets.
Both Barrick and Greenwood Village, Colorado-based Newmont could unlock value by splitting off assets or listing mines separately and retaining a stake as a holding company that receives dividends, said Caesar Bryan, a portfolio manager at Gabelli & Co. in Rye, New York. Newmont and Barrick could also generate savings by combining their Nevada operations, he said.
Newmont declined to comment on speculation about the sale or purchase of specific assets.
“The mantra even until probably as recently as two years ago was, get out of the U.S., get out of Canada, get out of Australia, get out of the safe geographies and chase growth in emerging markets,” Beristain said. “The pendulum is really swinging back toward people questioning the value of this kind of international, almost over-diversification that we’ve seen.”
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