South Africa puts brakes on industry consolidation

Earlier this year, Franco-Nevada Mining (FN-T) described its proposed merger with Gold Fields (GOLD-Q) as a process similar to getting married. All seemed to be going well until the South African government exercised its parental right to object on the grounds that the “precedent-setting nature” of the nuptials might open the floodgates to other foreign alliances and a steady erosion of the country’s tax base. The government also took exception to the merged company’s plans to have its primary listing in Toronto, rather than in Johannesburg.

Shareholders of Franco-Nevada heard the news hours before they had packed a Toronto conference room for the company’s annual meeting. Chairman Seymour Schulich and President Pierre Lassonde made the best of the occasion by highlighting the company’s record revenues and earnings but didn’t hide their disappointment.

“We had great plans for what we could have done together,” Schulich said, after describing the US$3.7-billion merger deal — which would have created one of the world’s largest gold companies — as “dead.”

Vice-President Sharon Dowdell echoed the sentiment, while still leaving the door open to “theoretical possibilities” for another deal. “It would be difficult,” she conceded, “because we don’t see how we can deal with [the government’s concerns] about tax erosion.”

given the political nature of the current impasse, it’s likely that gold fields and the south african government will have to make the next move if the merger is to get back on track. franco-nevada officials have indicated that they are willing to listen to whatever might be proposed.

However if those negotiations fail, analysts predict that Gold Fields and other South African companies will be hamstrung in their efforts to grow internationally through mergers with foreign companies.

Mike Jones, analyst for Canaccord Capital, said the ramifications of the breakdown are likely to be far-reaching. “This essentially means that, in the short- to medium-term, the South African government is unlikely to approve the acquisition of a South African company, with predominantly South African assets, for foreign paper.”

Other analysts speculate that the government’s decision may have been prompted by the recent emigration of several large companies, which also had overwhelmingly South African asset bases. Whatever the case, some are openly questioning the merits of holding South African gold stocks, which they had acquired as a play on industry consolidation.

Franco-Nevada, meanwhile, intends to continue its search for quality acquisitions in the precious metals sector. It still holds cash and marketable securities of almost US$1 billion, with no debt.

The company posted record results in the past year, helped by rising prices for petroleum and platinum group metals, which offset low gold prices. Net income was $97.6 million on revenue of $218 million for the fiscal year ended March 31, 2000, compared with net income of $68.5 million on revenue of $135.5 million a year earlier. The increase was attributed to the Ken Snyder mine in Nevada, which produced more than 230,000 oz. gold-equivalent (at a cash cost of US$98 per oz.) in its first complete year of operation. The bulk of the company’s income is from royalties, including ones covering the vast Goldstrike mine complex in Nevada.