Toronto-based royalty company
Shareholders of Franco-Nevada and Gold Fields will each hold a 50% interest in the new company, which will be named
The board of directors will include four Franco-Nevada appointees, four from Gold Fields and four management personnel. Franco Chairman Seymour Schulich and President Pierre Lassonde will serve as co-chairmen of the new company and devote their time primarily to acquisitions, while Gold Fields Chairman Chris Thompson will become president and chief executive officer. Other officers will include Franco’s Craig Haase and David Harquail, and Gold Fields’ Ian Cockerill and Nick Holland.
The new company will have a primary listing on the Toronto Stock Exchange and will apply to have its shares listed on the New York, Johannesburg, Paris, Brussels and Swiss exchanges.
To execute the merger, Gold Fields shareholders will receive 0.35 shares of Franco-Nevada for each Gold Fields common share, resulting in the issuance of about 159 million Franco-Nevada common shares. The new company will thus begin its life with 317 million shares outstanding.
Franco brings to the merged company its lucrative royalties in over 16 gold mines, including
Gold Fields, formed in January 1998 through the merger of the gold assets of Gold Fields of South Africa and Gencor, owns seven major gold mines in South Africa’s Witwatersrand basin, including the venerable Driefontein, Kloof, Beatrix and St. Helena underground mines. Its only major asset outside South Africa is its Tarkwa open-pit gold mine in Ghana.
On their own, the massive Driefontein and Kloof operations each produce in excess of 1.4 million oz. gold annually and host reserves of 68.4 million tonnes grading 10.4 grams gold per tonne (23.3 million contained oz.) and 45 million tonnes of 13.4 grams gold (19.5 million contained oz.), respectively.
Second only to
Since its formation, Gold Fields has put considerable effort into shedding its outdated, traditional mining-house administration system in favour of a more modern, integrated approach to management. While it has had to lay off thousands of workers in the process, the company has managed to dramatically lower costs and boost productivity at most of its operations.
At today’s prices, Gold Fields International would have a market value of about US$3.5 billion, or fourth place behind Barrick (US$7.5 billion), AngloGold (US$4.6 billion) and
Producing 4.4 million oz. gold annually, the new company would rank third behind AngloGold (about 7.5 million oz.) and Newmont (about 4.6 million oz.). The partners also estimate that the new company will have the lowest total-production and break-even costs among the majors, at US$232 per oz. and US$242 per oz., respectively.
Gold Fields International will have a clean balance sheet, with just US$30 million in long-term debt and US$766 million in cash and equivalents. Using figures from the first quarter of 2000, the new company would post annual revenues of US$1.3 billion, net income of US$154 million and cash flow of US$277 million.
Among its peers, Gold Fields International will be highly geared towards the gold price. Production will be unhedged and the company will return half its earnings to shareholders in the form of dividends — a continuation of a policy followed by both Franco and Gold Fields.
“The real reason we’re doing the deal is the leverage we’d pick up,” says Franco-Nevada Chairman Seymour Schulich. “We’re doubling our shares outstanding yet we’re increasing our production elevenfold, our reserves twelvefold, our revenue 8.7 times, our cashflow 3 times and our earnings 2.4 times. So, if gold moves up, we think we’re going to make a lot more money for our shareholders with this structure than we are previously.”
Asked about the added country risk of doing business in South Africa, Schulich responds, “We always felt that we couldn’t go in small in South Africa like we did in Australia. If we went in, we had to be big because of the entrenched forces there.”
One of the starkest differences between the two companies is in the number of employees: Franco has only about 45 while Gold Fields has 51,000. Schulich comments that the merger will cause little attrition among Franco’s employees.
He stresses that the merger is only the first of two or three deals the company would like to carry out over the next year, and that any such deals would be made using only cash or long-term debt.
Apart from their shared bullishness on gold, another area of common ground between Franco and Gold Fields is a strong desire to expand their presence in platinum and palladium. Franco already owns royalties on
As for Franco’s non-precious metal assets — such as its oil and gas royalties, its 14.3% stake in
Asked how the new management team can prevent a tug-of-war from developing between the Toronto and Johannesburg offices, Schulich replies: “Well, we’ve already established that our broad philosophies are very similar. It’s a process similar to getting married: You date and you find out whether you have a commonality of interest. As in marriage, there aren’t any guarantees in life, but we’ve dated, we certainly like each other and we think there’s going to be a great marriage.”
On the other side, Chris Thompson said in statement that the merger “is a leap for Gold Fields into the international arena that could not be achieved through organic growth alone. It provides our existing shareholders with an offshore component to their investment, much-improved liquidity, and participation in the growth and success of one of the largest and strongest gold companies in the world.”
The merger, due to take effect in September, must still be approved by shareholders from both companies as well as by such regulators as the South African Reserve Bank.
The merger agreement provides for a US$70 million break-up fee and a 5% option on each company’s stock payable only in the event that either board withdraws their endorsement of the merger or if a superior proposal is consummated within twelve months.
Franco has hired National Bank Financial and Merrill Lynch & Co. to review the merger while Gold Fields has enlisted Deutsche Bank and HSBC Group.
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