Top investor calls for Gold Fields to scrap $5.3bn Yamana deal

A top investor in Gold Fields has called on the South African miner to abandon its pursuit of a Canadian rival and focus on its existing growth options.

Redwheel, which controls 3 per cent of Gold Fields for clients, said the company should withdraw its $5.3bn all-share offer for Toronto-listed Yamana Gold and concentrate on the “excellent organic growth options which it already owns”.

“While we acknowledge Gold Fields’ desire to secure long-term production growth, we believe that the takeover of Yamana is both too expensive and not guaranteed to deliver production growth and profitability,” Redwheel said.

It believes Gold Fields’ cash flow would be better used to finance a share buyback rather than develop Yamana’s pipeline of projects, which include Mara, a copper-gold resource in Argentina. A feasibility report on Mara is due early next year.

Gold Fields is led by Chris Griffith, the former head of Anglo American’s platinum business. When he announced the all-paper deal at the end of May the company’s share price slumped with some investors and analysts alarmed by the premium it was paying.

“[The] sharp 24 per cent share price decline following the surprise announcement is a clear indication that a lot of the market believe that the company has made a serious error in its takeover approach,” said Redwheel.

In a statement Gold Fields said it would continue to engage with shareholders over the merits of the deal.

“By combining Gold Fields’ cash generative gold mines with Yamana’s immediate and longer-term pipeline of high-quality, long-life assets, we believe this transaction will secure the best interests of the company and its shareholders.”

Gold Fields, which was founded by Cecil Rhodes in 1887, currently produces about 2.4mn ounces of the metal a year from nine sites in Australia, Ghana, Peru and South Africa. That will rise to 3.4mn if the Yamana deal goes ahead, making the combined company the fourth-largest gold mining group, behind Newmont, Barrick and Agnico.

Many of the recent deals in the gold industry have been structured as nil premium mergers, including Barrick’s purchase of Randgold Resources. Under this deal, Yamana shareholders will receive 0.6 Gold Fields shares for each share they hold, giving them about 39 per cent of the combined company that will have a market capitalisation of almost $15bn.

When the offer was announced on May 31 it was pitched at a 33.8 per cent premium to Yamana’s average share price over the past 10 days.

The deal could also trigger a contractual change of control compensation package for senior Yamana executives that could be worth as much as $50mn in cash.

“Based on Gold Fields own current project pipeline, we expect that it can drive current production to over 2.7mn by 2025 (up 22 per cent) before trending down to 2mn,” said Redwheel.

“This production growth is already one of the strongest across the major gold miners globally. We believe the company has ample time to be opportunistic over the next few years rather than rushing into a significantly dilutive acquisition today.”

For the deal to go ahead, the transaction requires 67 per cent approval from Yamana shareholders and 75 per cent approval from Gold Fields investors. If the deal is terminated by Gold Fields, Yamana is entitled to a $450mn break fee. Gold Fields is entitled to $300m fee if Yamana walks away.

Shareholders in Gold Fields include BlackRock and South Africa’s state asset manager Public Investment Corporation, which owns 11 per cent of the company.

“Given the perceived unhappiness with the deal, there has been questions as to whether investors may vote the deal down,” said Arnold Van Graan, analysts at Nedbank, in a recent report. “We believe that would be futile. The share price damage has been done, and voting down the deal would not see Gold Fields re-rate to pre-deal levels.”