BY SPINNING off most of its troubled South African operations after strikes at its domestic mines, Gold Fields, whose rating was cut to junk last month by Standard & Poor’s (S&P), may benefit from lower borrowing costs that may encourage other miners to follow suit.
Gold Fields will cut the contribution to output from South Africa, where strikes has crippled output over the past four months and cut economic growth. AngloGold Ashanti, the nation’s biggest producer of the metal, may consider a similar plan, says Percy Takunda, an analyst at Imara SP Reid.
"In that downgrade, the risk was in South Africa," Mr Takunda says. "Isolating the assets and packaging them has been their strategy in this move. If it turns out to be a stroke of genius, there’s no reason why AngloGold wouldn’t follow suit."
Last week, yields on Gold Fields’ dollar bonds due in October 2020 slipped to their lowest since S&P reduced the rating on November 15.
The company said it was placing its older, labour-intensive South African mines into a company called Sibanye Gold. Rates on the April 2020 dollar debt of AngloGold also fell.
South Africa’s economy grew an annualised 1.2% in the third quarter, the least since a 2009 recession. Mining output plunged about 13% as operations were idle in September and October because of the strikes. The Treasury estimates growth of 2.5% this year from 3.5% last year.
S&P cut South Africa’s sovereign rating one step to BBB on October 12, putting the country in line with Brazil, Russia and Mexico, "to reflect the deterioration in the social and economic environment." S&P rates Gold Fields BB+, its highest junk rating.
Elad Jelasko, S&P’s primary analyst for the mining companies based in London, declined to comment when called about developments at Johannesburg-based Gold Fields.
Gold Fields’ actions may discourage outside investors from buying South African assets, says Jason Lightfoot, who helps manage the equivalent of $12.6bn of fixed-income funds at Cape Town-based Futuregrowth Asset Management.
It is " a huge concern," he says. "Given the issues that have arisen over the last couple of months, I’d approach any potential investment that is fairly labour-intensive with a jaundiced eye," Mr Lightfoot says.
The country’s five-year credit default swaps have jumped 28 basis points to 151 since reaching a 14-month low on August 7, nine days before police killed 34 striking miners at Lonmin’s Marikana mine, indicating a deterioration in perceived creditworthiness.
The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower breaks debt agreements.
Sibanye, which means "we are one" in Xhosa, will trade in Johannesburg and New York. Sibanye includes the Kloof-Driefontein Complex, Africa’s largest gold operation, and Beatrix. About 29,000 workers walked out at those mines in the past two months, winning pay gains that added to rising power costs for the company.
Gold Fields will keep South Deep, its second-biggest facility, and mines in Peru, Ghana and Australia, and will not retain a stake in Sibanye, it said last week. The proportion of the company’s gold output coming from South Africa will drop to 13% from 47%, CEO Nick Holland said.
That proportion would then rise to 28% in 2016, as production from the South Deep mine, its mechanised underground operation, rose to 700,000 ounces annually by 2015, Gold Fields said. Gold Fields will have to reconsider its financing arrangements following the spin-off as cost guarantees change, chief financial officer Paul Schmidt says.
"We need to bed down this deal and look how the spreads trade on our existing bond and then need to make a decision," he says. "The debt capital market is one of the options we will look at. The rating agencies will come out with their view on the split, but I don’t think anything is going to change," he says.
AngloGold is rated one step higher than Gold Fields at BBB-by S&P, its lowest investment grade, with a negative outlook.
The option for AngloGold to spin off the South African operations remains, CEO Mark Cutifani says. About a third of AngloGold’s metal comes from South Africa, where it employs about 35,000 people.
"The risk of operating in South Africa has increased and the move from Gold Fields may indicate that management in the gold sector is trying to limit country risk for their bond investors," Bronwyn Blood, an asset manager at Cadiz Asset Management in Cape Town, says.
"AngloGold’s bond investors would see this as favourable."
The rand has weakened 8.4% against the dollar since the August 16 shootings at Lonmin, the worst performer of 16 major currencies.