| Mon 10 Nov 2003, 11:03 | | Aflease's Kalgold buy is first step in ambitious p |
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GOLD MINER Afrikander Lease (Aflease) has taken the first step in an ambitious five-year plan to produce a million ounces of gold a year, buying Harmony Gold's Kalahari Goldridge (Kalgold) gold mine for R275m and immediately doubling existing output.
Currently Aflease has only one operating mine, west of Johannesburg, that produces 74000 oz/year.
Kalgold's profitable North West mine producing 80000oz will immediately double that.
As part of the R275m deal, Harmony will take 10% of Aflease, with the remaining R137,5m to be settled in cash. Aflease CEO Neal Froneman said the confidence of gold heavyweight Harmony was important as it would give his junior mining company "greater credibility" in the marketplace.
Estimates based on Aflease's halfyear results suggest that the Kalgold deal will add 62% to earnings a significant boon considering its large losses recently.
Aflease has clearly been struggling. During the first half of this financial year, the company had already racked up a net loss of R46,5m, and it was set to post a loss for the full year.
At the same time its total debt now tops the R100m mark, which includes a R50m loan from Nedcor.
Froneman said the answer to this lay largely in Aflease's two new mining operations in the Bonanza South mine and the Modder East mines, but the problem was that these mines were expected to get going only by the end of next year.
The Kalgold deal will immediately provide Aflease with profit and buy it some financial leeway until the Bonanza and Modder East mines are launched next year.
Froneman said this was part of the thinking behind the Kalgold deal.
"We are waiting for those high-margin operations to come together next year, but Kalgold is already cash positive and this will give us some breathing space," he said.
And while Froneman has slashed the costs of mining from R65 a ton to R45, it is becoming increasingly difficult to get sufficient gold to compensate for the falling rand gold price.
"Clearly, we can't do very much about the falling grade, and it does look horrific at the moment.
But this Kalgold deal will allow us to diversify and move away from relying on just this one source," he said.
At the same time, Aflease will be restructuring its existing Klerksdorp mines to reduce costs further, while also making use of the Aflease infrastructure in its efforts to mine Kalgold.
But when it comes to cutting costs, questions still remain over what is being paid to the new team of executives assisting Froneman.
The three executive directors, including Froneman, joined Aflease this year, and none of their salaries has yet been disclosed publicly an important consideration in a mine that needs to watch its costs.
But Froneman said that Deloitte & Touche had done a survey to ensure the executive salaries did not exceed the industry norm.
"If we continued to run Aflease as a one-mine operation, then clearly we wouldn't need half the executives we have now. But we have a strategic growth plan that needs a solid team behind it," said Froneman.
