Ashanti Firmly Linked to Gold Fields

A senior South African industry source on Monday confirmed to Miningweb that Gold Fields [GOLD] is pursuing a merger with Ashanti [ASL], which terms were broadly agreed during December.

The whisper factory within the local banking sector says Gold Fields would merge with, rather than acquire, Ashanti despite the latter's diminutive value in such an arrangement. That suggests Gold Fields is seeking to downplay its status in order to soften nationalist sentiment against a desperately needed listing in London or New York, or both.

Ashanti chief financial officer Srinivasan Venkatakrishnan emphatically denied any deal with Gold Fields: "All companies are talking to each other and Ashanti is no exception. However, there has never been a deal on the table with Gold Fields."

Gold Fields chief executive Chris Thompson took a similar stance whilst being interviewed on Miningweb's sister radio show, Classic Business: "We've had discussions with Ashanti in various guises for perhaps the last year, looking at whether we could put the two companies together - that's a fact. But I understand also that they've also been talking to a number of other people. We don't have a deal and, in fact, trying to construct something that would conform with South African foreign exchange requirements and Reserve Bank requirements; and conform with the Ghanaian requirements is quite difficult to do. So whether we ever get there or not, I don't know. By no means is there a deal on the table at the moment."

The source, who asked to remain anonymous, said specific proposals for a merger had been drawn up for the consideration of the respective governments.

Ashanti is only a fifth of Gold Field's market cap, but it has stronger operating earnings and sales are reasonably matched. As a combination, Gold Fields-Ashanti would have an enterprise value of $3.7 billion; annual revenues of approximately $1.5 billion; EBITDA of $350 million; annual production of 6.1 million ounces; and reserves in the 100 million ounce range.

By production it would challenge Barrick [ABX] for second place in the global rankings; trailing Newmont [NEM] once it has merged with Normandy [NEM], but displacing AngloGold [AU] which will mine less than 6 million ounces this year without an acquisition.

Obvious suitor

Gold Fields has long been the most obvious suitor for Ashanti with its systematic expansion into Ghana, spearheaded by the half million ounce a year Tarkwa mine. The most recent deal saw Gold Fields take control of the Damang Mine, while exploration is focused on a 10,000 square kilometer parcel of the Sefwi gold belt.

There are twin thrusts driving the mooted Gold Fields-Ashanti merger. Firstly, both companies suffer by not having a primary market presence in New York or London. Gold Fields needs to escape the suffocation of South African exchange controls, while Ashanti could do with a less meddlesome government.

Second, Gold Field's cash is rather lean at around $114 million ? not enough to wrap up a deal in the league of Normandy [NDY]. More importantly, much of that cash is tied up in Tarkwa. Adding yet more African assets is not going to be overly popular with analysts and fund managers, but Gold Fields has few alternatives beyond Ghana, whether it leaves its money under a mattress or buys a mine.

Political minefield

Merging a South African and Ghanaian company will not be easy, as Thompson alluded to. There are nationalist sensitivities that must be finely played, primarily Ghana's nanny statism and South Africa's bruised ego on capital controls.

The Ghanaian government appears inclined to relax its hold on the industry generally, and Ashanti particularly, after seeing regional mining investment siphoned away by the likes of Mali which has liberalized its mining code with considerable success.

Gold Fields can make a compelling offer to the Ghanaian state via Gold Fields Ghana. The government has a ten per cent stake in the subsidiary (Repadre Capital [RPD] owns 18.9%) and it should see obvious value in exchanging its stake in Ashanti for one in a much larger enterprise.

South Africa's administration, having turned down Gold Fields's merger with Franco-Nevada [FN] without any explanation, must find a way to untie the noose thrown over the local industry. AngloGold's [AU] loss of Normandy illustrates the threat ill considered capital controls pose to miners confined to the Johannesburg Securities Exchange. They may succeed in keeping mines South African, but they will equally succeed in making them less than world class.

By presenting an "African" company in search of a foreign listing, Gold Fields has a powerful lever to convince the government that a greater good is at stake. A reasonable comparison is China which does not have a single Fortune 500 quality company. A combined Gold Fields-Ashanti would immediately be a substantial global company with an undiluted "Africaness" that would appeal to ideologues. Once a New York or London listing is secured, the company could grow to diversify its asset base in search of the peer group rating in those markets.

South Africa may be the toughest nut to crack since Thompson, who doesn't suffer fools gladly, is reported to have a strained relationship with officials at the finance ministry and central bank.

Geita is key

Assuming that Gold Fields clears its political hurdles, it must negotiate Ashanti's tricky balance sheet. It has been tidied up, but clearing all the obstacles including bond redemption triggers and a hedge book possibly subject to margin calls from next year, will take some doing.

That's where AngloGold could lend assistance. It may be willing to help Gold Fields bulk up if it can get a firm option on the remaining 50 per cent of the Geita mine in Tanzania. AngloGold is far more interested in Tanzania and rationalizing the assets between the two groups would make eminent sense. The problem is that Ashanti management is so attached to Geita and sees it as critical to the company's future, whether independent or not.

An obvious alternative is to merge Gold Fields, Ashanti and AngloGold. That would create a 12 million ounce a year company with revenues exceeding $3 billion and market capitalization approaching the sought after $10 billion mark.

Getting there would be treacherous though, not the least of which is the inevitable race for corner offices.