During that last big run in '01 your refer to Harmony was a marginal miner but with better quality assets than DROOY. They have done more than a dozen acquisitions and bought mines from Anglogold and Goldfields that are higher quality than the ones they had but were still marginal from the point of view of Anglo and Goldfields. I believe that they are now the biggest SA producer, if one counts only SA sourced production. HMY is also known to have the best and most aggressive gold mining management in SA.
But thanks to the high RAND and having most of their production SA sourced they have the dubious honor of being the number one marginal miner in the world. They are losing money now every quarter. So the fundamentals really suck. But one strategy for profiting during a bull market is to buy the most marginal mines that are not flirting with bankruptcy since that is where you will get the most leverage on the upside if the gold price moves up. I am betting big on SA golds in the hope that SA will not allow the RAND to appreciate any more against the dollar as the dollar falls further from here. This means as gold rises in dollar terms it will also rise in RAND terms thus causing the SA golds to fly since they are barely surving at the current gold/RAND levels. DROOY's SA production is even more marginal than Harmony's but they now have 40% of their production out of Australasia which is quite profitable and thus offsets the cash drain from SA. Also as Jim Sinclair points out, at some point in this gold bull market investors are going to start valueing gold companies for their assets rather than their cash flows and Harmony has enormous gold resources that can be converted into reserves as the gold price in Rand goes up.
My biggest position in SA golds (and any golds for that matter) is in DROOY. My second biggest position is in RANGY which is around 30% of my DROOY position by value. Last comes Harmony which is around half my RANGY position. Prior to Harmony's attempted takeover of GFI, my preference would have been for GFI which has higher quality assets and enormous gold resources also. But now there is a 25% takeover premium built into GFI which could disappear if the takeover fails. Prior to the takeover announcement HMY was actually selling at a slightly higher price than GFI. I figure if the takeover fails HMY and GFI will converge in price again. And if the takeover succeeds the combination will result in the worlds largest gold miner which will probably mean that it will be valued at a premium to the sum of the individual parts. So either way HMY comes out ahead is my hope. I hope the merger succeeds since it will have the side benefit of removing the biggest competitor to DROOY for investment dollars looking for marginal gold mines and thus increase the scarcity value of DROOY. Here is trotsky's take on the merger:
Heinz on GFI merger Date: Mon Oct 18 2004 13:08 trotsky (GFI/HMY/IAG) ID#248269: GFI's offer to merge its international assets with IAG can be characterized thusly: they overpay, but it makes good strategic sense, and is a growth oriented move. clearly though, GFI is overpaying for IAG's assets, and this is also why inter alia, Potanin doesn't like the deal. he thinks it dilutes Norilk's pro rata ownership claim on GFI's international assets, and this assessment is correct. The new proposal to merge HMY and GFI makes a lot of strategic sense - from HMY's PoV. they get their hands finally on Beatrix ( the mine in front of which GFI has put a 'not for sale' sign ) , and can realize numerous synergies at the South African operations, plus they get their hands on a big international presence which they didn't have thus far. the combined international ops of HMY and GFI would not only be a major player in Ghana, but also in Australia. Of course it does not make sense from the PoV of GFI management's playbook. GFI's plan was to retain the best of the major SA assets ( of which 15% have been hived off to an empowerment group already ) , but pursue expansion exclusively outside of SA, i.e. primarily grow the GFI International side of the business. by merging with HMY the resulting combination would once again be weighed primarily toward SA based assets. it is hard to say which strategy would bring about the better long term benefits. one must however note that HMY would no doubt be the best thing that could happen to GFI's domestic assets - if HMY's management were to concentrate on those while GFI's management continues to concentrate on the international side of the business, the results could be quite spectacular in terms of shareholder value. Of course, IAG's shareholders would be stuck with the bag, but not a bad bag, since IAG's assets are quite valuable on their own. but the premium ( the amount of overpayment by GFI for IAG's assets ) would disappear from the share price, or rather, is disappearing already as we speak. it is doubtful whether another suitor would be prepared to pay as much for IAG as GFI would - although Randgold could still emerge as a potential 'white knight' for IAG. there are wider repercussions should the proposed HMY/GFI merger succeed: since the company would be the new number one global producer, we can expect the other big gold groups to accelerate their own consolidation plans. a NEM/PDG combo is a possibility, and imo BGO is also a strong contender ( as a target for any of the major producers, who no doubt are salivating over Kupol ) . |
