The benefits of further merger and acquisition activity by South African gold producers are not so obvious to major banking group. Deutsche Bank, in its recently published gold book, says accelerating cash flow can translate into higher share prices in the short-term; but the longer reinvestment risks are increased. This is particularly true of Gold Fields and Harmony Gold.
These companies can deploy the cash by increasing dividends, reinvesting in new projects, acquiring other firms, or in the worst case scenario waste the money through increasing 'maintenance capex', poor cost control and other unnecessaries. The risk lies with the last three options.
Deutsche reckons Gold Fields will grow organically through its own projects or through more bite-sized acquisitions including in the platinum industry where the gold producer already has a promising platinum prospect, Arctic. One expectation is that Gold Fields co-operates with AngloGold including unlocking the synergies between west rand mines, Driefontein and Western Deep Levels. Gold Fields' shelved Driefontein 9W shaft could be used to access some of the more distal ore reserves at AngloGold's Mponeng and Tau Tona mines by way of the shaft, a joint venture, or a tribute mining arrangement, Deutsche says.
Similarly, Deutsche believes Harmony Gold could grow by making acquisitions in the maturer parts of the platinum industry where its cost effective mine management franchise could be turned to effect. The opinion that the opportunities in the PGM industry will render excellent returns in time, returns that most gold projects could not compete with at gold prices under $420 per ounce.
There is little doubt that the 'base effect', given the large size of the big three South African gold companies, is making profitable growth more and more difficult. If companies are going to continue adding value this may require a rethink about the relevance of size; perhaps growing smaller will be an option. ©
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