Inside Chris Griffith’s great gold gamble

On May 31, after almost no consultation with shareholders, SA miner Gold Fields unveiled a $7bn tilt for Yamana Gold, a Toronto-listed firm with gold mines scattered throughout the North and South American continents.

The market didn’t take a shine to the proposal. Shares in Gold Fields fell a quarter in Joburg on day one, with analysts principally concerned about the dilution that shareholders were being asked to absorb. As for Yamana’s investors, they were sniffy about the prospect of swapping Toronto scrip for far-flung Joburg paper.

Astride the deal was Chris Griffith, CEO of Gold Fields for just 13 months. Having arrived at the company with an approach of “listening” to what colleagues had to say about the company’s assets, he quickly landed a strategy with the board that demanded almost immediate, aggressive acquisition.

Griffith’s predecessor, Nick Holland, tended to be cautious on mergers and acquisitions (M&A), though deals he struck for Gold Fields in Australia in 2009 — at the time considered risky gambits — proved to be enormously successful. So, for the new CEO to sweep into the company, quickly locate the coffee machine, then push Gold Fields towards the largest deal in its century-long history was, to say the least, ballsy. Bold Fields, one might even say.

What’s more remarkable is that the Gold Fields post is Griffith’s first as CEO, without the constraints of a strategic overlord. Before his appointment in April 2021, he had been CEO of Kumba Iron Ore and then Anglo American Platinum — listed subsidiaries of Anglo American, where matters of major import are settled in the parent’s London office, not in Joburg.

Griffith disagrees with the notion that personal ambition is driving the Yamana strategy. “This has absolutely nothing to do with me, whether I’m at the company for two or seven years,” he tells the FM this week. Rather, the decision was based on the recognition that, while Gold Fields has executed good strategy, the evolution of the industry demands a dramatic shift in tempo.

As things stand, Gold Fields is forecast to produce 2.8-million ounces of gold a year by about 2025. Then its output is expected to putter, declining to about 2-million ounces  a year before plateauing from 2030. In an industry obsessed with size — informed by the rational concern over the ability to replace reserves — this decline in production is the biggest risk in the Gold Fields locker.

Interestingly, shareholders haven’t seen the production risk quite as urgently. They’ve wondered why Griffith is dealing now — perhaps reflecting the investment community’s tunnel vision for short-term returns. For him, however, it’s been critical for Gold Fields to act without delay. Competition for the world’s dwindling gold resources is only set to intensify, while the cost of buying resources will become increasingly expensive, he says.

As Griffith tells it, the discussion with the board turned on his argument that, while the company bought time with its growth pipeline to 2025, it needs to use that wisely.

“Three or four years in strategy is a short space of time, so we started to look at a few things, including Yamana,” he says. AngloGold Ashanti was also on a list of possible acquisition targets, but Griffith says his team continually returned to Yamana, a company itself built up through acquisition.

The calculation, for Gold Fields, was to bide its time and risk either an interloper moving on Yamana or the deal becoming more expensive, or to play its cards now. Griffith chose the latter. “Sometimes these deals come immediately,” he says. “You need to be agile to deal with them.”

For investors, it was a bolt from the blue.

Anecdotes from US sources, for example, tell of their complete shock, given that they’d seen Griffith at a recent investment conference, where he hadn’t breathed a word of what was to come.

Griffith acknowledges the market was caught off guard. Now he’s hoping a new round of discussions with investors will move the needle in his direction. Given the initial market sell-off of Gold Fields shares, that might be a tough ask. But he is upbeat: “The underlying logic of this deal is really amazing. The way we structured it puts us in a very good place.”

The deal structure is a takeover of Yamana through a share-linked ratio of 0.6 Gold Fields shares for every Yamana share. On offer to Gold Fields, if the deal is approved, is a place among the gold mining industry’s elite. With post-merger annual production of 3.2-million ounces, Gold Fields would be wrestling for control of the armrest with North American giants including Barrick Gold and Newmont.

“The combined company will be competing with the majors and all our metrics will be comparable with the top three [gold producers], so the potential for a rerating is, in our view, material,” he says.

Griffith spoke to the FM shortly after the company announced a sweetened offer for Yamana, increasing the dividend payout to between 30% and 45% of normalised earnings, against its current 25%-35% payout. The first on these terms could start as early as the year-end. Gold Fields will also take a secondary listing on the Toronto Stock Exchange to provide international investors with local paper.

The aim of the sweetener is to demonstrate to Gold Fields shareholders — and probably Yamana’s as well — that the transaction isn’t about sacrificing current returns. That’s a fear for Gold Fields shareholders, because, wrapped up in its offer rationale, is the opportunity to develop the Canadian firm’s project pipeline, which is extensive and expensive to build. Griffith is hoping to persuade shareholders there’s jam for today and jam for tomorrow as well.

“We haven’t changed the structure of the deal,” he says. “What we are doing is sending a message that we are continuing to see strong cash flows from the business so we can increase the dividend range.”

Gold Fields has also committed to a dividend payout of 45% of earnings in its 2023 financial year — 12 months after it proposes closing the Yamana deal — to “show there is some offset to the dilution on the cash metrics”, says Griffith.

It’s not known if this 45% payout commitment can be repeated in subsequent years.

Shareholders are scheduled to vote on the takeover proposal on October 12, with circulars due for posting in the second week of September. For it to fly, Gold Fields needs 75% of its shareholders to support the deal; for its part, Yamana Gold needs just two-thirds of total shareholder approval.

It’s fair to say the transaction still hangs in the balance.

Shifting sentiment

The early judgment of Gold Fields shareholders is that the deal gave up too much. “While we acknowledge Gold Fields’ desire to secure long-term production growth, we believe that the takeover of Yamana is both too expensive and not guaranteed to deliver production growth and profitability,” UK-based asset manager Redwheel said in June. It owns about 3% of Gold Fields.

The view was mirrored by analysts closer to home, who thought the deal might be dead in the water. “In our view, the shift in primary listing for Yamana shareholders from Toronto to Joburg, and relative underperformance of the stock post announcement are not supportive of shareholders voting in favour,” said Standard Bank Group Securities analyst Adrian Hammond.

US fund VanEck, which owns about 5% of Gold Fields, said the transaction was “poorly structured”. It also lamented the apparent passing of nil-premium deal-making that has been a recent feature of the gold mining sector — such as the combination of Randgold Resources with Barrick Gold.

“In many cases, the most value can be created through a merger of equals,” said VanEck’s gold fund manager, Joe Foster. Mergers of equals are conducted on fundamental likenesses between companies whereas premium-rated deals “invite arbitrageurs and speculators that can lead to short-selling, stock overhangs and selling pressure long after the deal closes”.

The vulnerability of premium deals was recently highlighted by Australian research house GMR. It showed investor reaction to gold M&A has tended to deteriorate since the 2019 merger of Barrick Gold and Randgold Resources. Unlike the nil premium structure of the Barrick/Randgold deal, later M&A involving premiums demonstrated underperformance of the acquirer’s share price. In this, the performance of Gold Fields’ share price has been no different.

Sibanye-Stillwater CEO Neal Froneman, a veteran dealmaker of note, says using SA shares — which are perceived to trade at a discount to their North American or UK peers — can be a hazardous business. While he’s reluctant to comment on the Gold Fields transaction, he does say: “Unless you’re using shares in a rights issue or something where all shareholders can benefit, and nobody’s disadvantaged, it’s incredibly difficult for SA companies to use their currency.

 “You’ve seen us use debt, and debt also can be risky as well if you have a sequence of events, and your debt-paying ability is affected. It’s part of the challenge of doing mergers and acquisitions as an SA company.”

However, there are signs of a shift in sentiment towards the Gold Fields deal, at least among SA analysts, and especially following the adjustment to the dividend policy.

Analysts at RMB Morgan Stanley say the adjusted dividend policy “results in existing Gold Fields shareholders not being diluted from an absolute dividend perspective”. The bank also buys into Griffith’s view that Gold Fields must act with urgency, saying “the notion that a dearth of projects/gold discoveries and a relatively short life of mine in the gold industry could result in a scramble for assets”, as well as inflated asset prices.

There’s also a view, shared by other local analysts, that the “damage has been done” to the Gold Fields share price, and that shareholders ought to vote the deal through in order to reclaim value.

“We continue to believe it is best to take the deal [rather] than vote it down,” says Arnold van Graan, analyst for Nedbank Securities. “Voting down the deal would not see Gold Fields rerate, and without the deal we see the stock continuing to derate over time once production starts to come off.”

Investec’s Herbert Kharivhe and Nkateko Mathonsi say the expected dilution stemming from the transaction is already factored into the price, “with unlikely prospects of a rerating to pre-deal levels should the deal collapse. The combined entity has better prospects of a rerating relative to international peers.”

To some extent, the damage inflicted on Gold Fields’ share price has already been repaired as a result of this month’s metals selloff. Shares in Gold Fields are about 17% weaker on the JSE at the time of writing, largely in line with the Joburg gold index. The GDX in New York is also 17% lower, though Gold Fields’ New York Stock Exchange-listed share continues to show some underperformance.

Asked to comment on these market developments, Griffith says: “We are seeing some people buying shares which is a display of confidence either because, as you say, they believe the damage is done and now there is only upside, or they fundamentally agree with the underlying strategy of the company.”

Shortage of exploration

In 2021 alone, 70% of all deals involving the world’s 40 largest companies were in gold, according to a report by professional services firm PwC.

It’s a view supported by Bank of America (BoA), which said earlier this year the gold market was in a “race to replace”. A total transaction value of $21.3bn in gold industry M&A activity was racked up last year, through about 43 transactions. This is  the highest value yet, says BoA, with an estimated 38-million ounces of gold reserves acquired.

“Can it continue in 2022?” the bank asked. “It needs to. Companies that don’t replace reserves risk severe de-rating and are likely to be consolidated on the cheap.”

By BoA’s calculations, limited exploration success meant the sector had only just replaced reserves mined last year.

Says PwC: “We expect gold deals to continue as larger companies look to expand their portfolios and the middle tier looks to consolidate.”

Among the first to push the button on the current round of gold industry consolidation was Mark Bristow, the SA mining executive who merged his company, Randgold Resources, with Barrick Gold in 2019.

The relatively low gold price at the time of the deal has given it a rosy glow today. It was also conducted as the kind of nil-premium deal so admired by VanEck’s Foster. “The 2019 transaction was value-creating because gold was about $1,400/oz (against $1,726/oz today),” says Bristow. “The market was in a bad way in 2018. Everyone was in trouble.”

However, the deal had a long courtship. Bristow says discussions with Barrick chair John Thornton, a former Goldman Sachs executive, began back in 2016.

It helped that there was a genuine match-up in interests between the two companies. Thornton knew Barrick was in need of a refresh, whereas Randgold was bursting its seams. “Barrick really went off for a while,” says Bristow. “If it hadn’t, there wouldn’t have been the logic for the transaction with Randgold.”

A criticism of Gold Fields’ proposed deal is that it lacks any type of synergy. Griffith thinks this is an allusion to “the reduction in overheads” notion that’s been rolled out in past M&A. It’s a view he’s got little patience for. “No-one really believes the gold industry when it talks about corporate synergies,” he says.

However, operational synergies with Yamana Gold are thought to abound. For one, Gold Fields has experience of mining in all the ore body types Yamana mines. “Everything we see in Yamana, in either its mining methods or geology of its mines, we already know,” Griffith says. “There is a compatibility in culture, around ESG [environmental, social and governance concerns] and around technology.”

Citing Luis Rivera, executive vice-president for Gold Fields’ Americas regions, Griffith says the similarity with Yamana’s Jacobina mine in Brazil is so striking it could be mistaken for a Gold Fields mine, were “we to put our badge on it”.

Gold Fields also has a track record in building projects that Yamana doesn’t have, says Griffith. Salares Norte, its $860m Chile project, is in commissioning phase, while it built Cerro Corona, a mine in Peru, before that.

“We can build a mine; they [Yamana] have never built one,” says Griffith. “They have bought things and put them together and fixed them so their assets are in good shape. But we can just do more with them.”

Risky business

Yamana’s Mara project contains proven and probable mineral reserves of 11.7-billion pounds of copper and 7.4-million ounces of gold. Mining could take place there for 28 years. Measured resources — meaning a higher degree of confidence — totals 1.6-billion pounds of copper and 950,000 ounces of gold. It’s an impressive piece of real estate in which Newmont Mining and Glencore, the Swiss-based metals and marketing firm, also have a stake.

Mara is but one in a string of Yamana projects that is, in part, the reason for Gold Fields’ interest. Instead of paying incrementally — and potentially more — for “bolt-on” deals in an effort to keep Gold Fields bobbing at the 2.8-million ounces a year mark, Yamana provides Gold Fields shareholders with a single package of several options long into the future.

That’s why an estimated 38% of Gold Fields’ offer price is for untested projects, according to a calculation by Investec Securities. The concern among some investors, however, is that these projects have an uncertain outlook; they can’t be relied upon to provide Gold Fields with the growth it craves.

They are also expensive. The Wasamac project in Canada is slated to cost $416m; the Odyssey project at the nearby Canadian Malartic, an operating mine in which Yamana has a 50% stake, is estimated to require an outlay of $570m. Most expensive of all is Mara itself: still in prefeasibility, the project carries a capital bill of nothing less than $1.34bn.

And Mara is in Argentina, a country with an economy in such dire straits it makes SA look like Switzerland. It’s tough to repatriate profits from Argentina, and the country is politically unstable. While Yamana offers access to eastern Canada — judged to be among the finest mining jurisdictions in the world — it is in questionable Argentina that most of the upside exists.

Griffith acknowledges that Argentina is an unknown quantity for his company, but the Yamana pipeline is so extensive he doesn’t think it’s a must-do project, especially if the geopolitics sour further. “The deal is not undermined if we choose to defer this project,” he says. “We are not pressed that we have to do this today. We are adding optionality to the business.

“It is a fantastic ore body. Yamana can’t build it; quite frankly, they don’t have the skills and from a construction and doability point of view we think Mara is low risk compared to other opportunities.”

There is a risk, though, that taking on too much capital might crimp the heightened returns Gold Fields has offered to shareholders. Says Investec’s Kharivhe: “The phased approach [to projects] which is widely applied in Yamana Gold causes us to believe that these projects are unlikely to be fast-tracked. And should management fast-track these projects we may see a trade-off between growth in project funding and dividends.”

Jackie Przybylowski, an analyst for BMO Capital Markets, acknowledges that without the strength of Gold Fields’ balance sheet, Yamana may struggle to remain relevant against its peer group, where growth is the word. “We continue to believe Yamana will require larger scale to maintain relevance as its peers grow, and it was clear from management ... that alternative transactions would be less attractive,” Pryzbylowski says.

Whether shareholders of both companies will take the bait remains to be seen. At the time of writing, the SA firm’s shareholders have kept their counsel following a presentation by Griffith this week that focused on the extent to which the merger could result in lower operating costs and on the technical synergies between the companies.

“This was a much stronger presentation in terms of setting out the rationale for the deal,” says Jonathan Guy, an analyst for UK bank Berenberg. Still, Yamana shares continue to trade at a discount to the offer. “There appears to be a need for an ongoing education process for Gold Fields analysts and shareholders on the Yamana assets and projects,” says Guy.

It is possible that Griffith might get his deal over the line. The alternative could be grim for the executive, who will then be committed to the less preferable alternatives of adding expensive bolt-on deals, or allowing production to ramp down, or for time to lapse while the company locates a takeover alternative.

For Griffith, he has played his best cards up front.

Does he think shareholders will come around? “We haven’t asked that question,” he says. “We don’t want to force them to make a decision. The only thing we’ve asked them is to give them an opportunity to talk to us if they’re not over the line. You don’t have to make your mind up now. We are not voting until October.”

Griffith says it’s vital to act now because competition for dwindling gold resources will only intensify, while the cost of buying resources will become increasingly expensive

—  What it means: