At the time of writing, the gold price was ascending again, up more than 5% to $3,381. This price scurry was well timed for Gold Fields — which confirmed it would be taking out Australia-based Gold Road Resources in a premium-priced deal valued at about R44bn.
It’s a sizeable transaction, representing about 12% of Gold Fields’ market value on the JSE. I have spoken before — slightly warily — about commodity counters’ capital allocation at the top of a cycle, and I suppose one might question whether Gold Fields might be better off capitalising on generating strong cash flows from its current portfolio to pay bumper dividends.
Harmony Gold Mining Company’s just-released nine-month update to end-March showed the impact of the higher gold price. Harmony’s revenue jumped 20% to R51bn ($2.8bn) on a gold price that averaged R1,454,291/kg or $2,497 an ounce. The next quarter should be another revenue windfall, with the average gold price up markedly.
At the end of March, Harmony’s balance sheet showed net cash up by R3.5bn to close to R11bn. The message from CEO Beyers Nel seems prudent: “While the gold price is near a record high, we remain focused on maintaining the good mining discipline underpinning our consistent operating performance and strong free cash flows. By maintaining a balanced and disciplined approach to capital allocation and managing those factors in our control, we will continue rewarding our shareholders and other stakeholders with meaningful returns and long-term value creation.”
Regarding the Gold Fields deal, the key consideration is whether this is the top or near-top of the cycle for gold. Geopolitically speaking, I’d not wager on a settled world order in the short term, so there seems no imminent likelihood of gold beating a hasty retreat from these jittery highs. That said, AngloGold Ashanti is taking the opportunity to flog two gold projects in Ivory Coast.
There are, however, a couple of things that might reassure shareholders in Gold Fields. The group is familiar with Gold Road’s main assets, and it is buying a profitable business that will soon yield a fairly sumptuous special dividend.
Gold Fields also stressed its well-reinforced balance sheet and strong cash flow generation
Gold Fields also stressed its well-reinforced balance sheet and strong cash flow generation — which will be enhanced by the prevailing bullion price. The group highlighted its net debt to earnings before interest, tax, depreciation and amortisation of 0.73 and cash position of $860m with $620m in undrawn debt facilities.
Moving on to matters more grimy, I was keen to peruse the annual report of electrical cable maker South Ocean Holdings (SOH) — which recently saw a US investment firm take up a major shareholding. While the change in ownership structure is not specifically addressed in the annual report — save for a passing mention in the list of directorships — the annual report is refreshingly long on operational detail.
Before discussing some of the more significant developments, it’s worth remembering SOH is trading at less than half its last stated “hard” NAV of 335c a share. To remind readers, 2024 was a tough year for SOH — which still paid a 5.5c a share dividend — with seemingly encouraging turnover gains shredding operating margins.
Thankfully, it had been tough for everyone, with chair Johannes van Rensburg noting several competitors had been placed in business rescue or shut down. He says: “This has enabled us to acquire some fairly new plant and equipment to expand our production capacity — kindly note the growth in tons manufactured.”
There have been small but significant structural changes, with SOH divesting its holdings in distributor Global Cables by the end of 2024, and reducing its holdings in Icembu to 70%, Icembu Services to 49%, and Icembu Cables to 49%. The Icembu changes came after a “significant setback” in the sales of special products developed for the telecoms industry. The effort initially yielded positive results in the previous period, but sales tumbled in the third quarter of 2024 when cellular network operators switched to other manufacturers.
As a result, sales dropped to zero in the fourth quarter. According to the annual report, perhaps the most serious threat to SOH’s prospects is the unregulated inflow of imports — some of which are of poor or unreliable quality. SOH is working to address this through the Association of Electrical Cable Manufacturers of South Africa, in co-operation with the department of trade, industry & competition. But efforts to stanch these unregulated imports “seem to be making little progress”, which is worrying.
SOH estimates that about 26% of the R10bn low-voltage cable market is now accounted for by cheap imports. Considering the challenges ahead and with a new significant shareholder on board — SOLV Holdings with a 20% stake — it’s difficult to see the merit of SOH remaining listed on the JSE.
The tough decisions needed to ensure the group remains viable with a more reassuring margin (not the 2.5% sliver held in 2024) are probably best taken away from the scrutiny of a large shareholding body. The current share price must offer some leeway for the prime movers to pitch a takeout offer that appeals to minority shareholders and still offers decent longer-term upside.
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