NEW YORK (ResourceInvestor.com) -- The mining industry merger and acquisition merry-go-round gathered more passengers again on Monday when Harmony Gold [HMY], with the support of Norilsk Nickel [NILSY], launched a hostile all-scrip takeover bid for Gold Fields Limited [GFI]. That threatens the latter's proposed takeover of Iamgold [IAG].
The deal is a further derivative on the Wheaton River [WHT] - Iamgold transaction that was derailed in July. Golden Star [GSS] and Coeur d'Alene [CDE] played the spoiling role by launching their own bids for the merger candidates. Neither raider succeeded in its objective, but they did scupper the original transaction and opened the door for Gold Fields to present itself as a white knight to Iamgold.
Shareholders and arbitrageurs especially will, as a result, take many of their cues in the latest developments from the twists and turns of the previous deals.
Gold Fields's swift and abrasive rejection of Harmony's overtures is somewhat surprising. Many investment professionals expected Gold Fields to tread softly given the substantial threat to the Iamgold transaction. That was borne out in early market reaction as Iamgold was taken down 10% on Amex before recovering before the close.
Management and board reaction proved critical in breaking up the Wheaton River - Iamgold deal. Disgruntled investors mobilise required support to block the deal by citing intransigence and featherbedding as a cause for action.
Gold Fields was expected to take a lesson from that, but it came out swinging immediately in response to harsh baiting by Harmony CEO Bernard Swanepoel. That does not rule out Gold Fields postponing its shareholder vote to allow Harmony sufficient time to present its offer to stock owners and avoid a repeat of the Iamgold - Golden Star court showdown, but it does set the tone for battle which is likely to be every bit as raucous and rancorous as Wheaton's parting shots with Coeur were.
Having paid a handsome price to take 20% of Gold Fields off Anglo American's hands, NorNickel found itself outsmarted and sterilised by the proposed deal with Iamgold. Its investment would have been split and diluted, rendering it a passive shareholder which would always be intolerable.
NorNickel has been criticised for not being more aggressive in asserting itself in the relationship with Gold Fields; in fact for not immediately moving toward a controlling interest. The reality is that the rapid execution of the deal prevented a well formed strategic thrust and it had to tread lightly because of its $800m loan from Citigroup. Execution became circumstantial.
That has been resolved to some extent with Harmony interposing itself as the lion tamer.
Does the bigger picture include Stillwater?
Harmony and NorNickel must have formulated a much broader context for the Gold Fields encirclement. It would be senseless for NorNickel to throw in its lot with Harmony for the same result - a sterile minority stake.
There is no substantiation for the speculation, but a New York equity analyst we spoke to had a similar view that saw Harmony and NorNickel pooling gold assets with an eye to a new "international" - which means not-too-South African and not-too-Russian - vehicle.
Ironically, Gold Fields laid the groundwork for doing this with the South African authorities by securing approval for a primary North American listing for the mines and projects to be combined with Iamgold.
The obvious vehicle for a Harmony-NorNickel replica of Gold Fields International would be Stillwater Mining [SWC], the full NYSE listing controlled by NorNickel. NorNickel has turned a fortune on that distressed investment, but leveraging it strategically remains a problem, as does ironing out some legacy operating issues.
Stillwater has its problems and hurdles, but there is sound logic to injecting some Harmony assets, some NorNickel gold assets and the putative Gold Fields International mines into a primary NYSE listed precious metal play.
The main reason for doing so is that there would be nothing comparable except for Newmont [NEM]. The world's number one gold producer by production and market value has a vise-like grip on the resources market as far as restricted American investments go. With secondary metal revenues becoming attractive to investors, a blend of profitable PGMs would not go amiss.
Profitable ounces is the denominator, but a larger merger transaction would provide the reasonable, politically sensitive basis to rationalise Stillwater that NorNickel has been looking for.
Harmony must first succeed
Long before structuring a deal with Stillwater, Harmony must succeed.
The conventional view is that it cannot because non South African investors - who will have the final say on this vote - don't want a concentration of SA paper and risk.
"Who wants more exposure to SA?," a Canadian equity analyst wondered, adding that Harmony was coming to the window with "assets that are somewhat more marginal and a less respected management team."
He went on: "The only thing they are offering is more production and who wants that? The promised synergies from these big deals never materialised... not Newmont [Normandy/Franco-Nevada], not Barrick [Homestake]." The added concern is that buying out Gold Fields management will be mightily expensive as golden parachute ripcords are pulled.
A New York based equity analyst said much the same thing, noting that it was almost impossible to find a reason for Gold Fields investors to assent to Harmony. It was also noted that Harmony shareholders are paying through the nose to essentially "reinvent AngloGold [AU]".
"Is Harmony now going to spin off its marginal assets to an empowerment company?," scorned the analyst.
Yet Harmony is presenting its deal mostly as a management talent contest. Even though a successful transaction would really be a reverse takeover, Harmony CEO Swanepoel has not shied away from stressing management competence as an overriding reason to effect a change.
"We can do more for less," would be an appropriate campaign theme as far as Harmony goes even as some of its valuation arguments are left a little tenuous.
Were Harmony to succeed, one of the most interesting issues for resolution would be the black empowerment rivalry between Patrice Motsepe and Tokyo Sexwale, both of whom would preside over large stakes.
It could presage the first meaningful "black-to-black" transaction in the sector, and whomever buys rather than sells will be very telling for the future.