Despite a wall of doubt, Gold Fields is likely to get its $6.7bn, all-share bid for Yamana Gold over the line, say investment analysts. “Yamana shareholders will probably take the money and run,” says one. “It’s a good way for them to crystallise some of the upside.”
As for Gold Fields shareholders, there’s a view that compared with rejecting the deal, supporting it would be the lesser of two evils. That backhanded assessment argues that if Yamana’s production and projects are off the table, they will have the capital allocation risk of whatever CEO Chris Griffith might do instead to reverse a production decline.
New assets are expensive, tend to be in remote places far from infrastructure, and are more complex geologically. “We are of the view that the highest-margin mines have already been developed,” says investment bank UBS. It, too, thinks investors, worried about alternatives, will vote in favour of the bid.
Does Griffith risk embarrassment at the vote, planned for November 22? Probably not. It’ll most likely be abandoned
Griffith flew off for meetings with shareholders this week. They have had about 10 days to absorb the contents of the firm’s transaction circular published on October 24. While the FM believes the deal will succeed, it’s worth wondering what happens if Griffith encounters transaction animus. Does he risk embarrassment at the vote, planned for November 22? Probably not. It’ll most likely be abandoned.
Speculation aside, much will depend on the steer of proxy-adviser companies ISS and Glass Lewis. These companies assist institutional shareholders, especially the passive funds, on how to vote. An estimated 40% of the 10.79% stake BlackRock has in Gold Fields is thought to be passive, according to RMB Morgan Stanley.
Sven Lunsche, spokesperson for Gold Fields, says results from the proxy advisers are imminent. According to one analyst, who declined to be named, ISS and Glass Lewis will look kindly on Gold Fields. “We understand the meetings have gone really well,” he says. “The reality is if ISS or GL go for the deal, the vote should be fine [for Gold Fields].”
A significant portion of US-based investment firm VanEck’s 5.7% in Gold Fields is passive, which puts a spin on recent comments from its portfolio manager Joe Foster. He made a withering assessment of the Gold Fields bid for Yamana in an interview with The Globe & Mail in Canada last week. Too expensive and lacking rationale, he commented. Interestingly, VanEck also owns about 10.6% of Yamana.
An analyst based in Toronto, where Yamana is headquartered, describes Foster’s comments as “bizarre”. “He is unhappy with the premium Gold Fields is paying, but the deal is all about NAV vs NAV rather than some random premium paid on day one,” the analyst tells the FM. The ratio — 0.6 Gold Fields’ shares for each Yamana share — is “very much in line with NAVs and historic trading ranges”.
UBS agrees with this assessment. “The exchange ratio and valuation stack up from a net present value perspective,” it says. It adds that the new dividend policy Gold Fields announced in July, aimed at sweetening the deal following its initial negative market reaction, offsets the medium-term dilutionary impact from a cash-flow returns perspective. Investors may also find the creation of a new top-four gold major irresistible.
Foster’s criticism is mild compared with the observations of Redwheel, which holds 2.3% of Gold Fields. John Malloy, the fund’s co-head of emerging and frontier markets, piled in to the risky nature of Yamana’s Mara project in Argentina. “Argentina today is basically uninvestable,” he said. “The currency market is a mess. The equity market is a mess. It’s a high-risk location.”
We are in a position of strength at the moment, but there are other options out there
— Chris Griffith
The project, an undeveloped gold/copper ore body requiring huge investment, is an important issue in the transaction. In an independent valuation of Yamana conducted by investment bank CIBC for Gold Fields’s circular, Mara comprised up to $1bn of the $7bn imputed to the company — largely in line with Gold Fields’s $6.7bn-$6.8bn valuation. Some shareholders may shudder at the prospect of Mara’s technical and jurisdictional risk, but Griffith tells the FM it is exactly what makes Yamana a prospective target.
Glencore recently bought Newmont Mining’s 18.75% minority stake in Mara, says Griffith. Including deferred payments, this adds up to an $800m transaction. “You can get most of your value for Mara today,” he says. “Once it’s developed, the value is significantly more. I don’t think shareholders would consider it risky that CIBC attributed so much value to Mara.”
Griffith acknowledges, however, that current market conditions haven’t been helpful. The 25% plunge in the Gold Fields share price after the deal was announced on May 31 has been largely recovered, but investors have seen huge commodity equity liquidations amid this year’s market turmoil. Investors might be influenced by short-term considerations instead of acknowledging the long-term strategy behind the proposed acquisition, argues Griffith.
Long-term strategy might be something Allan Gray, which increased its Gold Fields shareholding to above the 5% threshold on October 5 (5.04%), can warm to. However, its portfolio manager Sandy McGregor has been critical of buccaneering M&A in the past. Gold Fields’s other major local shareholder is the Public Investment Corp, with a 9.48% stake.
At the time of writing, Griffith and his team are probably getting early indications of which way the vote will go. Holders of Gold Fields’s American depository receipts, owing to the way the administration works, vote earlier. The stakes couldn’t be higher for Griffith, who is not yet two years at Gold Fields, though he made it plain in an interview on Bruce Whitfield’s The Money Show that he had no intention of falling on his sword if the deal fails.
“We don’t have to jump off the balcony if this deal doesn’t go through,” he said. “We are in a position of strength at the moment, but there are other options out there.”
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