Paulson-Endorsed South Africa Split Weighs on Gold Fields

In the months following more than 40 deaths in protests over South African mineworkers’ pay last year, Gold Fields Ltd. Chief Executive Officer Nick Holland hatched a plan to spin off his company’s mines in the country.

The strategy, endorsed by billionaire hedge-fund manager and Gold Fields investor John Paulson, has been a success -- though not yet for Holland.

The South African assets, moved into a new company called Sibanye Gold Ltd., have outperformed Gold Fields by 57 percentage points since the split in February. Meanwhile, Holland is confronted by investor criticism over his pay, missed production targets and the timing of an Australian acquisition. His company is also the subject of a Securities and Exchange Commission investigation over a deal with local black investors.

“The pressure has been on Holland for a long time,” said Charl Malan, a who helps manage about $8 billion at Van Eck Associates Corp. in New York. “Do I think he has generated returns for shareholders? At this time, no, he has not. Some of those things are in his control and some are not.”

Holland intended the creation of Sibanye to insulate Gold Fields from the labor risks, falling production and rising costs plaguing its mature South African operations. Sibanye would be run for dividends, while Gold Fields would retain higher-growth mines in Peru, Australia and Ghana as well as South Deep, a mechanized mine in South Africa where output is being expanded.

Marikana Killings

“It’s certainly been a surprise” that Sibanye has outperformed Gold Fields to the extent it has, said Daniel Sacks, a fund manager at Investec Ltd., which owns shares in both companies. “It’s been a massive success for Sibanye. Those assets are being maximized now.”

The split was announced in November last year, three months after 34 protesters were killed by police in a single day at Marikana, near a platinum mine owned by Lonmin Plc. Sibanye began trading in February. That month, Paulson, the hedge-fund billionaire who made $15 billion for investors in 2007 betting against U.S. subprime mortgages, encouraged AngloGold Ashanti Ltd., Africa’s largest producer of the metal, to spin off its South African mines.

Paulson said there had been “some value creation” from Holland’s decision to split the South African assets, in his first-quarter report to investors. Armel Leslie, a spokesman for Paulson & Co. with WalekPeppercomm, didn’t comment when contacted by e-mail.

Union Negotiations

Gold Fields has fallen 50 percent since the split, while AngloGold is down 41 percent in Johannesburg and Toronto-based Barrick Gold Corp., the world’s biggest producer, is 43 percent lower. Sibanye, led by CEO Neal Froneman, has advanced 3.2 percent as it slashed costs, increased production and successfully completed wage negotiations with unions.

The performance of Sibanye, which Holland said had “inherent quality” when announcing the split, has cushioned losses for holders of both shares. A $100,000 investment split equally between the two stocks would now be valued at $79,125, a drop of 21 percent. The FTSE/JSE Gold Mining Index is down 42 percent since the spinoff.

Under Holland’s five-year tenure, Gold Fields investors have lost 42 percent, including dividends, compared with AngloGold’s 32 percent reversal and the FTSE/JSE Gold Mining Index’s negative 38 percent return. Bullion has risen 45 percent in the period.

Create Value

“As a shareholder you look to your executives to create value for you and the evidence is to the contrary at this point in time,” said Craig Kleu, who helps manage 1.4 billion rand ($138 million) at Personal Trust International Ltd., which owns Gold Fields and Sibanye stock.

Holland, who wore a lime green shirt and tie with gold collar tips when he announced the split plan in November, has come under criticism from investors including Mike Schroder at Old Mutual Plc for his pay. He accepted 45 million rand in salary, bonuses and long-term incentives accumulated in previous years in 2012, 39 percent higher than a year earlier.

The company’s management, including Holland, has taken a pay freeze for the 2012-2013 financial year.

“The strong share-price performance of Sibanye Gold in recent months against all other major gold equities worldwide -- not only Gold Fields -- speaks to the rationale for the unbundling as outlined by Gold Fields at the time of the announcement in November last year,” Gold Fields spokesman Sven Lunsche said by e-mail. “This has been a good deal for Gold Fields shareholders.”

Price Slump

Gold Fields reports third-quarter results tomorrow at 8 a.m. in Johannesburg.

Having previously used cash from its South African mines to fund growth overseas, Gold Fields has been hurt by a bullion price that’s down 23 percent this year, said Van Eck’s Malan.

Holland has also run into problems at South Deep, which was due to become the company’s biggest mine within three years. Gold Fields said it is unlikely to achieve the annual target of 700,000 ounces set for 2016 in August.

“They supposedly kept the golden child, South Deep, but it’s now the problem child,” Malan said. “It will take a lot of capital being sunk into that asset to get it running properly.”

Holland agreed to buy three Australian mines from Barrick Gold for $300 million in August, after Gold Fields posted a loss and scrapped its dividend for the second quarter.

Waived Bonus

“Buying marginal assets when you’ve cut your dividend -- that’s not what I want to see in my companies,” said John Moorhead, who helps manage $6.5 billion at Pictet & Cie. in London and owns Sibanye shares.

Holland offered to waive his bonus this year because of “concerns” relating to the 2010 sale of a stake in South Deep to black South Africans, under the country’s empowerment laws.

Gold Fields conducted a probe into the deal and said it needed to increase transparency in August after Johannesburg-based Carte Blanche reported that the transaction benefited influential people who helped it win a mining license. The SEC is now investigating the deal in the U.S., where investors can trade Gold Fields stock through American depositary receipts.

Froneman, Holland’s counterpart at Sibanye, has been impressing investors by boosting production, cutting costs and paying dividends.

Shareholder Returns

“I was quite skeptical when Sibanye first came out,” said Pictet’s Moorhead. “You want to be outside South Africa when the cost inflation is high and mine lives are short. It doesn’t tick the boxes. What it does tick is cashflow generation and returns to shareholders.”

Holland’s objective was to create value for shareholders for the long term, so it may be too early to tell if he has been successful. Holland foresaw and can claim credit for unlocking Sibanye’s potential.

Sibanye’s mines “still have significant inherent quality and extensive resource and reserve potential,” Holland said in November 2012. “Under the current structure, this potential has not been ideally exploited.”

While Sibanye has been a success, Holland still has to deliver for Gold Fields investors, said Van Eck’s Malan.

“Look across the entire mining industry and how many mining CEOs have left in the past few years?” he said. “The reason for this sea change is previous executives didn’t deliver on promises. If you don’t deliver on promises as a CEO then I’m sorry but you have to move on.”

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