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Harmony - Potential merger between Harmony and Gold Fields Limited
Harmony Gold Mining Company Limited
(Incorporated in the Republic of South Africa)
(Registration number 1950/038232/06)
Share code: HAR ISIN: ZAE000015228
(`Harmony`)
Announcement regarding a potential merger between Harmony and Gold Fields
Limited (`Gold Fields`)
1. Introduction
The board of Harmony hereby announces the terms of a proposed merger
between Harmony and Gold Fields (the `proposed merger`), under which
Harmony proposes to acquire the entire issued share capital of Gold Fields
in exchange for the issue to Gold Fields shareholders of new shares in
Harmony.
Harmony has conveyed the terms of the proposed merger to the board of Gold
Fields and is hopeful that the proposed merger will be recommended by the
directors of Gold Fields. However, in view of the proposed transaction
between Gold Fields and IAMGold Corporation Inc. (`IAMGold`) (the `proposed
IAMGold transaction`), which Harmony considers to be contrary to the best
interests of Gold Fields shareholders, Harmony believes that Gold Fields
shareholders should be afforded the opportunity to decide on the merits of
the proposed merger at the earliest opportunity. To this end, Harmony will
shortly post to Gold Fields shareholders an offer document containing the
detailed terms and conditions of the proposed merger.
The proposed merger is conditional, inter alia, on the proposed IAMGold
transaction not proceeding and the approval of the proposed merger by
Harmony shareholders.
The proposed merger will be implemented in accordance with the rules of the
Securities Regulation Panel (`SRP`) and the US Securities and Exchange
Commission (`SEC`).
Your attention is drawn to important information at the end of this
announcement.
2. The proposed merger
The proposed merger, which will be on the terms and subject to the
conditions precedent set out in this announcement, will be made on the
following basis:
for each Gold Fields share 1.275 new Harmony shares,
for each Gold Fields ADS 1.275 new Harmony ADSs
(the `proposed merger ratio`) and will value the entire issued ordinary
share capital of Gold Fields at approximately R52.9 billion (US$8.1
billion), based on the closing price of R84.41 per Harmony share on the JSE
Securities Exchange South Africa (`JSE`) on 14 October 2004, the last
practicable date prior to the date of this announcement.
The proposed merger ratio represents:
- a premium of approximately 29%, calculated by comparing the closing
Harmony share price of R84.41 on 14 October 2004, multiplied by the
proposed merger ratio, to the average of the daily volume weighted
average price of Gold Fields shares on the JSE for the 30 business
days ending 14 October 2004; and
- an implied Gold Fields price to net present value (`P/NPV`) multiple
of 2.4x.
The premium of approximately 29% compares favourably to the average premia
of:
- 22% paid in public offers in the South African market between 2001 and
2003; and
- 25% paid in unsolicited all-share offers in the international market
since January 2001.
The implied Gold Fields P/NPV multiple of 2.4x compares favourably to:
- the trading P/NPV multiples of comparable gold companies:
- the average P/NPV of the international gold majors (Barrick Gold
Corp, Newmont Mining Corp and Placer Dome Inc) of 2.4x;
- the average P/NPV of the South African gold majors (AngloGold
Ashanti Ltd, Gold Fields and Harmony) of 1.9x; and
- the average P/NPV of the international mid-cap gold companies
(Agnico-Eagle Mines Ltd, Compania de Minas Buenaventura S.A.A.,
Glamis Gold Corp, Goldcorp Inc, IAMGold, Kinross Gold Corp,
Meridian Gold Inc, Newcrest Mining Ltd and Wheaton River Minerals
Ltd) of 1.9x.
- the P/NPV multiples paid on comparable acquisitions:
- the average of all such transactions since 1999 of 1.4x;
- the average of all such transactions with a consideration of over
US$1 billion since 1998 of 1.7x;
- the average paid for South African targets since 1998 of 0.9x;
- the average paid by South African acquirors since 1998 of 1.3x;
- the multiple paid by AngloGold Ltd for Ashanti Goldfields Co Ltd
of 1.6x; and
- the multiple in the proposed IAMGold transaction of 1.1x.
3. Gold Fields shareholder undertakings to support the proposed merger
Harmony has received an irrevocable undertaking from MMC Norilsk Nickel
(`Norilsk`) to accept the subsequent offer (defined below) in respect of
98,467,758 Gold Fields shares, representing approximately 20.03% of the
entire issued share capital of Gold Fields.
4. Structure of the proposed merger
Harmony has designed a mechanism to allow Gold Fields shareholders to
realise, within as short a time period as reasonably practicable, the
benefit of the premium inherent within the proposed merger. However, in
order to allow all Gold Fields shareholders to benefit from this mechanism,
Harmony must comply with the regulatory requirements in the United States
of America (`US`). As a result, the proposed merger is to be structured as
two immediately consecutive offers, each subject to the respective
conditions precedent set out in paragraph 13.
Through the making of this announcement, Harmony has irrevocably committed
to offer to acquire the entire issued share capital of Gold Fields in the
following manner:
- early settlement offer: an initial offer to acquire up to 34.9% of the
entire issued share capital of Gold Fields on the basis set out below,
not subject to the tender of any minimum number of shares (the `early
settlement offer`); and
- subsequent offer: an immediate follow-on offer on the same terms as
the early settlement offer for the balance of the entire issued share
capital of Gold Fields not already acquired by Harmony under the early
settlement offer (the `subsequent offer`). The subsequent offer will
be subject to the conditions precedent set out in paragraph 13.2.
5. The early settlement offer
Subject to the conditions precedent set out in paragraph 13.1, Harmony will
make the early settlement offer to Gold Fields shareholders on the
following basis:
- Harmony will settle unconditionally valid acceptances received in
respect of up to a maximum of 34.9% of the entire issued share capital
of Gold Fields;
- to qualify for settlement under the early settlement offer, Harmony
must receive valid acceptances, complete in all respects, by no later
than 12h00 (South African time) on Friday, 26 November 2004 (the
`early settlement closing date`);
- Gold Fields shareholders will be entitled to tender for acceptance up
to their entire holdings of Gold Fields shares; and
- in the event that valid acceptances in excess of 34.9% of Gold Fields`
entire issued share capital are received by the early settlement
closing date, Harmony will only settle that number of Gold Fields
shares which equates to 34.9% of the entire issued share capital of
Gold Fields, on a pro rata basis, with the Gold Fields shares tendered
by accepting Gold Fields shareholders scaled back accordingly.
In addition, to the extent that Harmony increases the consideration offered
under the proposed merger after the early settlement closing date, those
Gold Fields shareholders who have already accepted the early settlement
offer and have received the consideration due to them under the early
settlement offer will remain entitled to receive the full benefit of any
increased consideration due under any increased offer by Harmony,
regardless of whether they had subsequently disposed of their new Harmony
shares.
Norilsk has irrevocably committed not to accept the early settlement offer
in respect of its entire holding of approximately 20.03% of the entire
issued share capital of Gold Fields. As a consequence, other Gold Fields
shareholders will be able to maximise their opportunity to participate in
the early settlement offer, and will be able to realise a minimum of
approximately 44% of their Gold Fields holdings under the early settlement
offer. To the extent that any further Gold Fields shareholders do not take
advantage of the early settlement offer, Gold Fields shareholders could
receive settlement for a greater percentage of their Gold Fields holdings,
up to 100%.
Those Gold Fields shareholders who do not accept the early settlement offer
do not have any restrictions on the tradeability of their Gold Fields
shares.
Harmony intends to vote those Gold Fields shares that it acquires pursuant
to the early settlement offer against any resolutions to be proposed to
implement the proposed IAMGold transaction.
6. The subsequent offer
Harmony irrevocably undertakes, following completion of the early
settlement offer, to make an immediate follow-on offer on the same terms as
the early settlement offer for the balance of the issued share capital of
Gold Fields not already acquired by Harmony under the early settlement
offer. The subsequent offer will be subject to the conditions precedent
set out in paragraph 13.2.
7. Background to and reasons for the proposed merger
Harmony is one of the world`s largest independent growth-oriented gold
mining companies, distinguished by the focused operational and management
philosophies that it employs throughout the Harmony group. Harmony`s
strategy is focused on building a leading international gold mining company
through acquisitions (26 over the past six years), organic growth and
focused exploration. This strategy has resulted in the growth of Harmony`s
attributable production from 0.65 million ounces in 1995 to 3.3 million
ounces for the financial year ended 30 June 2004.
Harmony has successfully achieved its growth strategy through evolving and
implementing a set of management systems and philosophies, which Harmony
refers to as the `Harmony Way` and which Harmony believes are unique in the
South African gold mining industry, and applying them to the assets that it
operates. The Harmony Way is underpinned by the concepts of empowered
management teams, active strategic management by the Harmony board,
increased productivity, reduced management tiers, a no-frills, low cost
ethic and the introduction of sophisticated cost accounting systems and
strict ore accounting and ore reserve management systems.
A significant component of the success of Harmony`s strategy to date has
been its ability to acquire under-performing mining assets, including
assets purchased from Gold Fields, mainly in South Africa, and, in a
relatively short time-frame, to transform these mining assets into cost-
effective production units, thereby creating significant value for Harmony
and Harmony shareholders.
Pursuant to its ongoing assessment of the various investment opportunities
within South Africa and the broader global gold mining industry, Harmony
has identified Gold Fields as an attractive merger candidate, with a
compelling rationale from an operational and growth perspective.
Gold Fields is one of the world`s largest unhedged gold mining companies
with annual gold production of approximately 4.2 million ounces for the
financial year ended 30 June 2004, with proven and probable attributable
gold reserves of 77 million ounces and mineral resources of 183 million
ounces as at 30 June 2004. Gold Fields has operations in South Africa,
Australia and Ghana (West Africa). In addition, Gold Fields has a
geographically diverse exploration portfolio, as well as the Arctic
Platinum Project (`APP`), an advanced stage Platinum Group Metals project
in Northern Finland and the Cerro Corona Copper/Gold Project in Peru
(`Cerro Corona`).
The proposed merger will allow Harmony to build on its position as the
premier South African operator and will create a new international major in
the global gold mining industry.
8. Rationale for the proposed merger
The proposed merger is driven by Harmony`s pursuit of a number of key
strategic objectives, including:
- creating significant value through the application of the Harmony Way
to generate cost efficiencies from Gold Fields` South African assets,
together with operational synergies from Harmony`s and Gold Fields`
contiguous assets;
- revitalising Gold Fields` assets within the Southern African
Development Community (`SADC`) (the `South African asset portfolio`);
- accessing the value of Gold Fields` exploration portfolio;
- retaining the true value within Gold Fields` international asset
portfolio for the benefit of its shareholders;
- ensuring a well balanced portfolio of assets spread across the life-
cycle of mines; and
- creating a new international major with a compelling equity story and
enhanced investor appeal.
Substantial operational synergies
Harmony firmly believes that it can achieve significant reductions in Gold
Fields` cost base. Harmony estimates that, in order to justify the premium
offered to Gold Fields shareholders, it only needs to achieve unit cost
reductions equivalent to at least 15% per annum in Gold Fields` South
African asset portfolio cost structure, over and above Gold Fields` current
efficiency initiatives, equating to an estimated improvement in pre-tax
operating profit of approximately R1 billion per annum.
These cost benefits are expected to be achieved, inter alia, through:
improving operational efficiencies;
- rationalising corporate overhead and administrative infrastructures;
- rationalising activities in areas such as procurement and insurance;
- improved capital programme management;
- improved services management and mine planning systems; and
- empowering local operational management.
Harmony believes that its ability to deliver cost savings in South Africa
is borne out by its demonstrable track record in applying its low cost
culture and high productivity mining methods to previously acquired assets:
Asset Net investment Payback period Unit (underground
(R million) mining R/t) cost
reduction (June
2004 terms)
Acquired from
Gold Fields
Evander 452 10 quarters 31%
St Helena (50%) 60 - 27%
Weighted average 31%
Other
acquisitions
Randfontein 854 9 quarters 16%
Freegold (50%) 1,416 11 quarters 27%
Elandsrand 1,053 - 16%
Weighted average of above 22%
acquisitions
A strategy for value and growth, both domestically and internationally
Harmony considers that Gold Fields` management has prematurely accelerated
the exploitation of the South African asset portfolio`s reserves through
mining higher grades and reducing development metreage (`harvest mode`) and
believes that, through the application of the Harmony Way, Harmony can
revitalise this valuable asset base. Harmony believes that the application
of the Harmony Way to Gold Fields` South African asset portfolio will
produce significantly reduced overall unit costs, which, together with the
introduction of improved ore reserve management systems, will lead to
increased operational and financial flexibility. Harmony believes that
this will have the effect of not only increasing profitability but will
also convert below margin areas into economically viable areas. Based on
past experience, this process is expected to increase reserves and extend
and enhance the economic life of Gold Fields` South African mines.
As a result, Harmony believes that it will re-establish the viability and
future competitiveness of Gold Fields` South African asset portfolio,
putting mature assets or assets currently in harvest mode back into growth
mode, transforming current replacement projects into genuine growth
opportunities and allowing projects that were previously abandoned to be
reconstituted as economically feasible.
Harmony believes that its ability to deliver is further demonstrated by its
track record in turning terminal assets back into growth assets. The table
below sets out the details of new reserves created by Harmony from assets
and projects that had been abandoned by previous operators. When
completed, the projects will produce an aggregate of over 1.5 million
higher grade, lower cost additional ounces per annum:
Project Mineable reserve Total funding Production per
(`000 ounces) cost per ounce annum (ounces)
(US$) *
Masimong expansion 2,530 12 315,000
Elandsrand new 6,300 33 450,000
mine
Tshepong decline 1,300 28 167,000
Phakisa shaft 4,100 18 265,000
Doornkop South 3,700 46 330,000
Reef shaft
Total 17,930 27 1,527,000
* Includes acquisition, exploration and capital expenditure figures
Harmony believes that positive socio-economic benefits, primarily from the
creation of further employment opportunities and extending the life of
existing jobs, accrue from applying the Harmony Way to increase reserves
and extend the life of mines. In addition, the resultant increase in
profitability and financial flexibility will enable the enlarged group to
fund capital and development expenditure, offering long term growth
opportunities, improving the overall quality of the enlarged group`s asset
portfolio and maximising shareholder returns.
Harmony believes that a revitalised South African asset base will provide
the platform from which to develop the combined international asset
portfolio. Harmony will continue to explore new business opportunities and
pursue suitable acquisitions both within South Africa and internationally.
Harmony intends to manage actively the combined international asset
portfolio and continue to support and expand exploration activities as
another important avenue for increasing the size of its reserve base.
Harmony will examine the real potential of Gold Fields` APP (Finland) and
Cerro Corona (Peru) projects and plans to continue to further develop the
known potential of its own Hidden Valley (Papua New Guinea) and Wafi/Golpu
(Papua New Guinea) projects. Harmony will also consider, on an ongoing
basis, value creation opportunities for the international portfolio, both
collectively and on an individual basis. Such opportunities might include
a future listing or collective disposal of the international asset
portfolio, or the disposal of participations in an individual asset.
Should Harmony decide to realise the value in, or valorise all or part of,
its international asset portfolio, Harmony would plan to do so only for
full value in a manner that ensured that shareholders fully participated in
the upside and at a valuation that incorporated the full benefit of any
international rating.
Creation of a new international major with enhanced investor appeal
Harmony and Gold Fields are currently the world`s 6th and 4th largest gold
mining companies, respectively, in terms of attributable production,
producing approximately 3.3 and 4.2 million ounces during the financial
year ended 30 June 2004 respectively.
The proposed merger will create a new international major with true global
scale and relevance, an attractive stock for both gold and other investors.
The enlarged group will be:
- the world`s largest gold mining company by:
- attributable production of approximately 7.5 million ounces per
annum;
- attributable reserves amounting to approximately 139 million
ounces; and
- attributable resources amounting to approximately 593 million
ounces.
The above is based on publicly available information as at 30 June 2004.
- the world`s second largest gold mining company with a:
- market capitalisation of approximately US$11.0 billion, based on
the closing prices of Harmony and Gold Fields shares on the JSE
on 14 October 2004, the last practicable date prior to the date
of this announcement, on a pro forma basis, prior to any market
re-rating which may result from the recognition of the benefits
expected from the proposed merger.
The enlarged group will retain an integrated geographic strategy, led by a
strong management team with a proven track record both operationally and in
terms of delivering value-enhancing acquisitions. The combination of the
two companies and the subsequent increase in market capitalisation will
increase the weighting in all relevant investment indices, leading to
greater liquidity and access to a greater universe of potential investors.
As a new international major, Harmony believes that the enlarged group will
have the requisite financial strength and flexibility to continue to
deliver value to its shareholders through:
- profit enhancement at existing operations through the continued
implementation of Harmony`s unique management structure, systems and
philosophy;
- growth in production resulting from organic projects;
- growth from contiguous acquisitions in South Africa and
internationally; and
- continued expansion of its reserve base through its current and future
exploration and development projects.
9. The proposed IAMGold transaction
9.1 Background
In a detailed terms announcement published in the press on 1 October
2004, Gold Fields announced that it had signed a definitive agreement
with IAMGold, a public company listed on the Toronto Stock Exchange,
pursuant to which it is intended that IAMGold would, subject to
certain conditions precedent, acquire substantially all of Gold
Fields` net cash resources and all of Gold Fields` mining, development
and exploration assets located outside SADC.
Under the terms of the agreement, IAMGold would, subject to
adjustment, issue to Gold Fields 351,690,218 shares in IAMGold in
consideration for such assets, which would result in Gold Fields
owning approximately 70% of the fully diluted equity of the enlarged
IAMGold. In addition, prior to completion of the proposed IAMGold
transaction, IAMGold shareholders would receive a special cash
dividend of C$0.50 per IAMGold share.
Gold Fields` stated rationale for the proposed IAMGold transaction is
that it would create an entity that is better equipped to compete with
international gold companies through more direct access to
international capital and debt markets, with increased flexibility to
react more swiftly to acquisition and project development
opportunities as they arise. Gold Fields further contends that the
injection of its non-South African asset portfolio into a separately
listed, independent company could present an opportunity for further
value creation in that the market might be expected to benchmark these
assets against those of an international peer group, which Gold Fields
indicates is rated at a premium to Gold Fields.
9.2 Analysis of the proposed IAMGold transaction
Harmony believes that Gold Fields` rationale for the proposed IAMGold
transaction is unconvincing and difficult to justify from both a value
and structural perspective. In addition, Harmony believes that the
proposed IAMGold transaction has significant negative implications for
Gold Fields, its shareholders, its South African asset portfolio and
all of its stakeholders.
9.2.1 From a value perspective
Disposal of Gold Fields` international asset portfolio at
substantially less than fair value
Gold Fields is disposing of its international asset
portfolio, including almost all of its existing net cash
reserves, at an implied P/NPV multiple of only 1.1x.
This represents:
- a discount of 48% to the current analyst consensus
average P/NPV multiple of 2.1x for Gold Fields. The
extent of the discount is even greater in the context
of Gold Fields` stated rationale for the transaction,
that the relative rating of its international asset
portfolio should be higher than the rating ascribed to
its South African asset portfolio and thus its overall
rating;
- a discount of 42% to the current analyst consensus
average P/NPV multiple of 1.9x for the South African
gold majors;
- a discount of 42% to the current analyst consensus
average P/NPV multiple of 1.9x for international mid-
cap gold companies; and
- a discount of 54% to the current analyst consensus
average P/NPV multiple of 2.4x for the international
gold majors.
The market has recognised this value leakage and has
reflected it through the relative share price performances
of Gold Fields and IAMGold. In the six weeks following the
announcement of the proposed IAMGold transaction on 11
August 2004, the Gold Fields share price only performed in
line with its South African peers, whilst over the same
period, IAMGold substantially outperformed Gold Fields,
Harmony and the HSBC Global Gold Index, moving from C$6.99
to C$10.05 (cum-dividend) as at 14 October 2004, an increase
of over 40%, fully supporting Joe Conway`s (Chief Executive
Officer of IAMGold) statement that the transaction is
`highly accretive to us` (source: management interview with
Joe Conway on 11 August 2004).
Substantial premium paid to IAMGold shareholders on a
relative contribution basis
Based on the metrics used by Gold Fields in its market
presentation on 11 August 2004, Gold Fields is contributing
the following:
- 73% of net asset value;
- 72% of operating cash flows;
- 74% of resources;
- 76% of reserves; and
- 76% of production.
In return, Gold Fields is only receiving approximately 70%
of the fully diluted equity of the enlarged IAMGold, prior
to taking into account the negative impact of the C$0.50 per
share special cash dividend payable to IAMGold shareholders.
Other metrics not examined by Gold Fields, based on 30 June
2004 numbers, imply an even more favourable deal for
IAMGold, with Gold Fields contributing the following:
- 75% of revenues;
- 75% of operating profit before interest, tax,
depreciation and amortisation (`EBITDA`);
- 79% of operating profit before interest and tax
(`EBIT`)
- 87% of net earnings;
- 79% of attributable reserves; and
- 82% of attributable resources (measured and indicated).
Moreover, Gold Fields is contributing its entire exploration
portfolio as well as approximately US$400 million in cash,
representing almost all of Gold Fields` existing net cash
resources.
Gold Fields is clearly paying a substantial premium to
IAMGold shareholders, even before the payment to them of the
US$60 million special cash dividend.
This is recognised by Gold Fields, as evidenced by Chris
Thompson`s (Chairman of Gold Fields) statement: `In the
final determination, we made sure that there was an edge
given to IAMGold on all these determinants. So whichever
way you looked at them, whichever metric you wanted to focus
on, there was an advantage, if you will an embedded premium,
given to IAMGold on all of these things. Then in addition
to that, we threw in a C$0.50 dividend.` (source: management
interview with Chris Thompson on 11 August 2004).
Challenging for Gold Fields shareholders to break even under
the proposed IAMGold transaction
Gold Fields states that the injection of its international
asset portfolio into IAMGold could create value for Gold
Fields shareholders due to a re-rating of the enlarged
IAMGold.
Harmony considers that the basis for a substantial re-rating
of the enlarged IAMGold is not intuitive from an operational
perspective, given that there are no operating fundamentals
to support a re-rating:
- no real addition of critical mass through the inclusion
of IAMGold`s assets;
- IAMGold has no operational control over its principal
assets;
- no apparent upside in the IAMGold portfolio;
- no obvious synergistic benefits; and
- a duplicated corporate structure with a resultant
likely increase in fixed overheads.
Furthermore, there are no market fundamentals to support a
re-rating:
- the enlarged IAMGold will remain a mid-cap producer;
- its shares will face substantial illiquidity due to the
small free-float of the enlarged IAMGold; and
- the enlarged IAMGold will still be impacted by the
Exchange Control requirements applied by the South
African Reserve Bank (`SARB`).
Given the disproportionately low valuation ascribed to Gold
Fields` international asset portfolio, Gold Fields
shareholders are starting from an unnecessarily low relative
value base, requiring a significant rise in the IAMGold
share price to enable Gold Fields shareholders just to break
even. Harmony estimates that, for Gold Fields shareholders
to break even, the IAMGold share price would need to
increase to approximately C$14.54 (cum-dividend).
Put another way, in the event that Gold Fields shareholders
do break even under the proposed IAMGold transaction,
IAMGold shareholders would have received a premium of
approximately 108% or some US$900 million.
9.2.2 Structural issues relating to the proposed IAMGold transaction
The proposed IAMGold transaction will result in a complex and
inefficient corporate structure, which creates potential value
leakage due to:
- the possible holding company discount;
- the non-compete undertaking restricting Gold Fields itself
to a small geographic territory;
- multiple investment entry points into the portfolio through
both Gold Fields itself as well as the enlarged IAMGold; and
- a lack of financial flexibility to allow for the optimal
allocation of scarce financial resources.
Gold Fields is losing control even though it is paying a premium
Post implementation of the proposed IAMGold transaction, Gold
Fields would have only 2 directors out of a possible 10 on the
board of directors of the enlarged IAMGold. In accordance with
directors` fiduciary duties and corporate governance best
practice, the enlarged IAMGold would be a stand-alone company run
by a board on an arm`s length basis that has to be fully
independent of Gold Fields. Accordingly, Gold Fields` ability to
exert influence over the assets of the enlarged IAMGold is
significantly reduced and any attempt to do so would serve to
reduce the rating of the new vehicle.
Gold Fields is left with little cash and is giving away control
of its cash flows
In addition to transferring almost all of its existing net cash
resources to the enlarged IAMGold, Gold Fields has further
reduced its future access to cash flow by disposing of its
international asset portfolio, which, during the financial year
ended 30 June 2004, generated approximately 75% of Gold Fields`
operating cash flows.
Following completion of the proposed IAMGold transaction, Gold
Fields` ability to freely access cash flows from the enlarged
IAMGold would be restricted to dividend flows, which themselves
would be impacted by:
- the requirement for such dividends to be declared by the
independent board of the enlarged IAMGold, which Gold Fields
does not control;
- the fact that mid-cap international gold companies
traditionally do not pay material dividends;
- the cash requirements of the enlarged IAMGold, particularly
in the context of its stated commitment to increase its
production from 2 million to 3.5 million ounces per annum
within a 3 year period;
- the impairment effect of tax inefficiencies; and
- the 30% equity leakage to the enlarged IAMGold`s minority
shareholders.
Harmony believes that completion of the proposed IAMGold
transaction is likely to lead to a loss of financial control for
Gold Fields, potentially prejudicing the optimal allocation of
scarce cash resources with negative implications for Gold Fields
and its South African asset portfolio.
Gold Fields is giving away control of its growth
Gold Fields has given a commitment not to compete with the
enlarged IAMGold for future international growth opportunities,
excluding the SADC region. Limiting Gold Fields` growth
potential to SADC is inadequate for a company of its size and
status, especially given that the non-SADC part of the Gold
Fields asset portfolio has delivered all of its growth over the
past 4 years. In this time, Gold Fields` asset portfolios
achieved the following rates of growth/decline:
- international asset portfolio - compound annual growth in
production of 54%; and
- South African asset portfolio - compound annual decline in
production of 6%.
It appears, therefore, that under the proposed IAMGold
transaction, Gold Fields is transferring all of its growth
potential to the enlarged IAMGold.
In addition, the pursuit of a segregated geographic model further
raises doubt about the future growth potential of Gold Fields due
to:
- the transfer to the enlarged IAMGold of Gold Fields` entire
exploration portfolio. Harmony considers that the timing in
respect of the APP and Cerro Corona projects appears to be
particularly sub-optimal from a value achieved and growth
perspective, as evidenced by Chris Thompson`s statements:
`What we can all agree is that if some of our expectations
do come true over the next five years, or the next six to
eight months frankly, APP might become extremely valuable
indeed.` (source: management interview with Chris Thompson
on 11 August 2004) and `We expect a final feasibility (of
APP) to be completed by the end of 2004 and, if the results
are what I expect, we will be well into construction of
Europe`s largest platinum group mine by this time next year`
(source: Gold Fields 2004 Annual Report); and
- reliance on dividend flows from the enlarged IAMGold to fund
the development of Gold Fields and its remaining South
African assets. As noted above, it is unclear whether these
dividends will be forthcoming.
On the basis of the above, Harmony questions whether Gold Fields
will be able to deliver replacement reserves in South Africa, let
alone growth.
Harmony believes that, following completion of the proposed
IAMGold transaction, Gold Fields shareholders will be left with
control of orphaned, mature, capital expenditure-intensive assets
in South Africa that have been prematurely put into harvest mode.
Aside from this, Gold Fields shareholders will only have a 70%
interest in their own international assets and development
portfolio, with such interest subject to potential further
dilution as the enlarged IAMGold uses its paper to fund
acquisitions.
Gold Fields is jeopardising its ability to pay future dividends
In the event that the proposed IAMGold transaction is effected,
Gold Fields` ability to maintain its historic dividend payout
ratio is greatly reduced in the absence of any substantial
dividend receipts from the enlarged IAMGold.
In addition, prior to Gold Fields being in a position to declare
dividends to its shareholders, it must fund the capital
expenditure requirements of its current South African assets, not
to mention any growth projects, as well as the financing of
approximately R400 million per annum interest payable on the loan
from Mvelaphanda Resources Limited (`Mvelaphanda`), under the
Mvelaphanda Black Economic Empowerment transaction announced in
the press on 26 November 2003.
10. The proposed merger - putting the proposed IAMGold transaction into
perspective
In contrast to the proposed IAMGold transaction, Harmony believes that the
proposed merger provides Gold Fields shareholders with, inter alia, the
following benefits:
- a full and upfront premium of 29% to Gold Fields` average 30 business
day volume weighted average price on the JSE on 14 October 2004;
- significant operational value enhancements and synergies from the
application of the Harmony Way to Gold Fields` assets;
- prevention of the disposal of Gold Fields` international asset
portfolio and exploration portfolio at significantly less than fair
value;
- retained access to the existing asset portfolio and future growth
opportunities both locally and internationally and the prospective
exploration development potential;
- retained access to existing cash resources and future cash flows from
which to fund capital expenditure, development and pay dividends;
- full financial flexibility, allowing for the optimum allocation of
cash resources between all assets, whether in South Africa or
elsewhere, subject to SARB conditions;
- the creation, rather than the potential erosion, of value in South
Africa, through the revitalisation of Gold Fields` South African asset
portfolio;
- retention of a simple corporate structure, avoiding any of the
potential value leakage implicit within the structure of the proposed
IAMGold transaction;
- full management control, further enhanced by gaining access to
Harmony`s management team, with their proven deal-making skills and
their reputation as highly regarded gold mining operators; and
- the creation of the world`s largest gold producer with global scale
and relevance and the firepower to grow both the domestic and
international businesses.
11. Shareholder support in respect of general meetings
11.1 Gold Fields shareholder undertaking to vote against the proposed
IAMGold transaction
Harmony has received an irrevocable undertaking from Norilsk to vote
against the proposed IAMGold transaction at the Gold Fields general
meeting which, as confirmed by Gold Fields at its presentation to the
Investment Analyst`s Society on 8 October 2004, will be held on 7
December 2004 (the `Gold Fields general meeting`) in respect of
98,467,758 Gold Fields shares, representing approximately 20.03% of
the entire issued share capital of Gold Fields.
11.2 Harmony shareholder undertaking to vote in favour of the proposed
merger
Harmony has received an irrevocable undertaking from African Rainbow
Minerals Limited (`ARM`) to vote in favour of the resolutions (the
`Harmony resolutions`) to be considered and, if deemed fit, passed at
the Harmony general meeting (the `Harmony general meeting`) for the
successful implementation of the proposed merger, including the
requisite resolutions approving the increase in the authorised share
capital of Harmony and the allotment and issue of the Harmony
consideration shares (the `Harmony consideration shares`) in respect
of 63,632,922 Harmony shares, representing approximately 19.8% of the
entire issued share capital of Harmony.
12. Pro forma financial effects of the proposed merger
The following tables set out the pro forma financial effects of the
proposed merger. The pro forma financial effects have been prepared for
illustrative purposes only and may not give a fair reflection of the
financial position of the enlarged Group. The pro forma financial effects
are the responsibility of the board of Harmony.
12.1 Harmony pro forma - acceptances representing 50% of the entire issued
share capital of Gold Fields
Published Pro forma % change
before the after the
proposed proposed
merger (1) merger (2)
(3) (4)
Basic loss per share (cents) (206) (193) 6%
(5)
Basic headline loss per share (308) (202) 34%
(cents) (5)
Fully diluted loss per share (205) (192) 6%
(cents) (6)
Fully diluted headline loss (306) (201) 34%
per share (cents) (6)
Net asset value per share 6,479 7,449 15%
(cents) (3)
Net tangible asset value per 5,772 6,424 11%
share (cents) (3)
Number of shares in issue 320,741,577 634,068,059 98%
Notes:
1. The figures in the `Published before the proposed merger` column have
been extracted from Harmony`s audited annual financial statements for
the financial year ended 30 June 2004.
2. The figures in relation to Gold Fields have been extracted from Gold
Fields` audited annual financial statements for the financial year
ended 30 June 2004.
3. The following assumptions were taken into account in arriving at net
asset value and tangible net asset value:
(i) the `pro forma after the proposed merger` column assumes that the
proposed merger was implemented on 30 June 2004;
(ii) the adjustment to share capital for the issue of 313,326,482
(representing 50% of the Gold Fields shares in issue at 30 June
2004 multiplied by 1.275, being the ratio of Harmony shares to be
issued for each Gold Fields share) Harmony consideration shares
at the nominal value of 50 cents per share as settlement for the
offer consideration;
(iii) the adjustment to share premium represents the excess of the
closing market price of Harmony shares on the JSE of 8441 cents
as at the last practicable date above the nominal value of 50
cents per share;
(iv) the calculation of the pro forma net asset value per share and
net tangible asset value per share assumes that the Harmony
consideration shares were issued on 30 June 2004;
(v) the adjustment to property, plant and equipment represents the
net book value of Gold Fields` property, plant and equipment as
at 30 June 2004 of R15,829 million and an adjustment of R27,521
million which is based on the difference between 50% of the
market capitalisation of the Gold Fields group (Gold Fields
shares in issue at 30 June 2004 multiplied by the Gold Fields
share price of 9089 cents as at the last practicable date) less
50% of the net asset value of the Gold Fields group at 30 June
2004 as per the audited annual financial statements, increased by
the related deferred tax liability using the mining statutory tax
rate of 46%;
(vi) the adjustment to intangible assets represents the goodwill
arising from the implementation of the proposed merger,
calculated as the consideration paid (Harmony shares issued as
consideration multiplied by the Harmony share price on the last
practicable date) less 50% of the market capitalisation of Gold
Fields (Gold Fields shares in issue at 30 June 2004 multiplied by
the Gold Fields share price on the last practicable date) and
estimated transaction costs of R116 million;
(vii) the adjustment to deferred tax liabilities includes an
amount of R12,660 million arising on the adjustment of R27,521
million to the carrying value of Gold Fields` property, plant and
equipment using the statutory mining rate of 46% as per note (v)
above;
(viii) all other adjustments represent the carrying value of Gold
Fields` assets and liabilities as at 30 June 2004 as extracted
from its audited annual financial statements as at 30 June 2004;
and
(ix) IFRS 3 has not been taken into account in preparing the pro forma
balance sheet, as this was not the accounting policy of Harmony
for the year ended 30 June 2004.
4. The following assumptions were taken into account in determining basic
loss per share, headline loss per share, fully diluted loss per share
and fully diluted headline loss per share:
(i) the `pro forma after the proposed merger` assumes that the
proposed merger was implemented with effect from 1 July 2003;
(ii) except for the adjustments to amortisation and depreciation of
goodwill, property, plant and equipment, taxation and minority
interests, all adjustments represent the income statement of Gold
Fields for the financial year ended 30 June 2004 as extracted
from the audited annual financial statements for the year ended
30 June 2004;
(iii) included in the adjustment to amortisation and depreciation
is an additional charge amounting to R1,587 million as a result
of the amortisation of the increase in fair value of property,
plant and equipment and goodwill which is amortised over a period
of twenty years;
(iv) included in the adjustment to taxation is a reversal of R633
million of the deferred tax liability arising from the adjustment
to property, plant and equipment; and
(v) included in the adjustment to headline earnings is the
amortisation of the goodwill arising from the transaction
amounting to R211 million.
5. A weighted average of 566,884,482 shares in issue during the twelve-
month period ended 30 June 2004 for the purposes of calculating basic
loss per share and headline loss per share.
6. A weighted average of 569,921,365 shares in issue during the twelve-
month period ended 30 June 2004 for the purposes of calculating fully
diluted loss per share and fully diluted headline loss per share.
12.2 Harmony pro forma - acceptances representing 100% of the entire issued
share capital of Gold Fields
Published Pro forma % change
before the after the
proposed proposed
merger (1) merger (2)
(3) (4)
Basic loss per share (cents) (206) (189) 8%
(5)
Basic headline loss per share (308) (171) 45%
(cents) (5)
Fully diluted loss per share (205) (188) 8%
(cents) (6)
Fully diluted headline loss (306) (170) 45%
per share (cents) (6)
Net asset value per share 6,479 7,777 20%
(cents) (3)
Net tangible asset value per 5,772 6,637 15%
share (cents) (3)
Number of shares in issue 320,741,577 947,394,540 195%
Notes:
1. The figures in the `Published before the proposed merger` column have
been extracted from Harmony`s audited annual financial statements for
the financial year ended 30 June 2004.
2. The figures in relation to Gold Fields have been extracted from Gold
Fields` audited annual financial statements for the financial year
ended 30 June 2004.
3. The following assumptions were taken into account in arriving at net
asset value and net tangible asset value:
(i) the `pro forma after the proposed merger` assumes that the
proposed merger was implemented on 30 June 2004;
(ii) the adjustment to share capital for the issue of 626,652,963
(representing the Gold Fields shares in issue at 30 June 2004
multiplied by 1.275 being the ratio of Harmony shares to be
issued for each Gold Field share) Harmony consideration shares at
the nominal value of 50 cents per share as settlement for the
proposed merger consideration;
(iii) the adjustment to share premium representing the excess of
the closing market price of Harmony shares on the JSE of 8441
cents as at the last practicable date above the nominal value of
50 cents per share;
(iv) the calculation of the pro forma net asset value per share and
net tangible asset value per share assumes that the Harmony
consideration shares were issued on 30 June 2004;
(v) the adjustment to property, plant and equipment represents the
net book value of Gold Fields` property, plant and equipment as
at 30 June 2004 of R15,829 million and an adjustment of R55,042
million which is based on the difference between the market
capitalisation of the Gold Fields group (Gold Fields shares in
issue at 30 June 2004 multiplied by the Gold Fields share price
of 9089 cents as at the last practicable date) less the net asset
value of the Gold Fields group at 30 June 2004 as per the audited
annual financial statements, increased by the related deferred
tax liability using the mining s
