Harmony targets Gold Fields, top spot (October 18, 2004)

Fresh off a failed merger attempt with Wheaton River Minerals (WRM-T), Iamgold (IMG-T) now sees its new plan to join forces with South Africa’s Gold Fields (GFI-T) threatened by a competing all-stock takeover offer.

This time the interloper is Harmony Gold Mining (HMY-N), which is looking to acquire all of Gold Fields issued share capital at a rate 1.275 of its own shares for each Gold Fields share. The deal represents a 29% premium over Gold Fields’ weighted average share price over the 30 trading days through Oct. 14. In all, the deal values Gold Fields at about US$8.1 billion.

Gold Field’s is still waiting for the opinion of its financial advisors, Goldman Sachs International and JP Morgan, but has said that the proposal “significantly undervalues” its assets and “completely disregards the significant value that will be created from the Iamgold transaction.”

The company also says the exchange ratio “vastly overvalues” Harmony’s asset contribution, noting that Harmony’s costs per kilogram have been higher than its own over the past year.

Harmony counters that its offer represents near-term “tangible value,” rather than relying on “a dubious re-rating scenario, which is the foundation of the Iamgold transaction.”

Harmony’s bid comprises an early settlement offer to buy up to 34.9% of Gold Fields’ shares, followed immediately thereafter by a follow-on offer to acquire the remainder of its rival’s shares. It requires more than 50% of Gold Fields shares to be tendered, and approval by, among others, the South African Competition Authorities.

To complete the deal, Harmony would need to issue some 626.7 million newly minted shares, or nearly twice its current share count; in the end Gold Fields’ shareholders would own two thirds of the new company.

“This transaction represents tremendous opportunities for stakeholders of both companies,” said Harmony’s chief executive Bernard Swanepoel in a prepared statement. “The merger of Harmony and Gold Fields will create the world’s leading gold mining company based on production, reserves and resources and second largest by market capitalization.”

Swanepoel says his company intends to apply to Gold Fields’ South African assets its successful business model of acquiring older mines cheaply and rejuvenating them into productive operations. The company figures a 15% reduction in costs at those mines would justify the premium being offered.

Combined, Harmony and Gold Fields would displace Denver-based Newmont Mining (NEM-N) as the world’s largest gold miner, with annual production of 7.5 million oz. and reserves totalling around 138 million oz. Based on market capitalization, Harmony-Gold Fields would rank second to Newmont at just more than US$11 billion.

Iamgold on the bubble

Harmony’s offer is also contingent upon Gold Fields shareholders rejecting the proposed acquisition of Iamgold. Russia’s Norilsk Nickel, Gold Fields’ biggest shareholder with a 20% stake, has already agreed to irrevocably vote its share block against the all-stock Iamgold transaction, and to accept Harmony’s proposal. If the deal is nixed, Gold Fields would be on the hook for a US$20-million break fee payable to Iamgold.

Norilsk picked up its stake in Gold Fields by paying Anglo American (AAUK-Q) US$1.16 billion in cash earlier this year. Many believe the Russian miner frowns upon the Iamgold transaction as it infringes on its own plan to become an international gold producer with Gold Fields.

At the end of September, Iamgold and Gold Fields signed a definite deal to combine Gold Fields’ assets outside of the “Southern African development community” with those of Iamgold to create Gold Fields International. The $2.1-billion all-stock deal would end with Gold Fields owning about 70% of the new company; Iamgold shareholders would hold the remainder. Iamgold shareholders would also receive a special cash dividend of 50 per share ($75 million in all) on closing.

That deal came about after planned nuptials between Iamgold and Wheaton were quashed by competing bids from Golden Star Resources (GSC-T) (from Iamgold) and Coeur d’Alene Mines (CDE-N) (for Wheaton). Iamgold shareholders eventually voted down the tie-up with Wheaton, and were later rescued from Golden Star’s hostile bid by Gold Fields. Wheaton remains unwed after a lengthy and acrimonious battle to fend off Coeur.

The proposed Iamgold-Gold Fields deal will face shareholder votes in mid-December; it needs the okay from more than 50% of each company’s shareholders.

Shares in Harmony were off about 8.5% at US$11.50 in late-afternoon trading in New York following the news on Oct. 18; Gold Fields’ issue was 4.4% lower at US$14.29. Meanwhile in Toronto, Iamgold was more than 8.7% lower at $9.08.