My view - part 1
I believe Gold Fields(GF) will acquire Burnstone and if there is enough competition it could put us over the claims hurdle. Gold Fields recently restructured relative to its South African assets by spinning off its older mines into a new company called Sibanye and retained the Deep South mine for GF. Unlike the older mines, Deep South is a newer, largely mechanized mine utilizing long hole stoping as its main mining method and it has significant growth potential. Deep South is a big mine with 81Moz resource and 39 Moz in reserves and a long mine life of 69 years. It is the future of GF in South Africa. In the most recent estimate, GF has spent R36 billion and will spend another R4 billion to get it to steady state (40 billion rand is 4.43 billion USD at the current exchange rate)("R4bn more will set South Deep up for 50 years-Gold Fields" Mining Weekly 2/18/13, "All eyes on South Deep as Gold Fields sets stall" Miningmx 2/14/13, "South Deep: A South African Resurrection" Gold Mining Journal April-June 2013). GF CEO Nick Holland has a forward looking decisive style. He seems to decide what the future will likely be like, decide how best to position GF, and then he acts. I hope GF views Burnstone as a mini-South Deep with expansion potential and that they will acquire Burnstone as a second phase of their restructuring relative to South Africa. I think they will show that their restructuring is not so much a matter of minimizing South African exposure, but redefining it by changing their business model there with the emphasize on mechanization.
It has been a long and stressful wait for us deep underwater shareholders and I think it is fair to say it has caused some heightened sensitivity to adverse facts. For me, this is speculation, not gambling, and my primary goal is to get the analysis right. And so, is seems crucial to me to scrutinize the adverse and anomalous facts as they tend to reveal more. When the board discussion included many extrapolations of value from the resource and reserve numbers, I nudged the Blyvoor case out there to say - its not reliable to evaluate it that way. That purpose was completely explicit and contextually obvious. When another poster cited the Blyvoor case as a reason to buy, buy, buy, I responded to note how off that was. Again, the purpose was completely explicit and contextually obvious. In neither instance did I compare Blyvoor to Burnstone in any way or suggest it should be. Now, if you are looking to buy a house, you would find out how much other homes in the neighborhood sold for to cultivate a feel for how the neighborhood contributes to value. It is preferable that those other homes are comparable to the one you want, but even those that clearly aren't have some value in understanding the "neighborhood factor". Likewise, it is reasonable to look at the sales of other gold mines in South Africa(SA) to discern an SA factor in the valuation. I have put off posting about that due to the sensitivity, deciding instead to do a longer post at some point with positive, negative, and conclusions combined. This is that post. At another point I noticed an article about a silicosis (which I hadn't heard of before) while working on a different issue. I didn't want to spend time on it so I referred to it in a post thinking someone else would probably do some DD on the issue. I didn't know what comment to make about it, so I didn't make any comment at all. Whoops. And by the way, I wasn't even looking to acquire during that time frame. Here, I will try harder to be considerate of frayed nerves, but I have to discuss adverse factors to convey my assessment.
I) On the adversity of mining gold in SA.
Understanding the adversity of mining gold in SA will help us understand why the discounting of SA assets occurs and in turn how it could be avoided. In my reading, I find the following adversities: 1) declining production coupled with a high proportion of fixed costs, 2) cost inflation, 3) the difficulty of adjusting the business model, 4)strikes, 5)safety related mine closures, and 6) worker health related class action suits, specifically, the silicosis suit. Burnstone can avoid or greatly minimize these issues and hence, at least avoids discounting of value connected to them. Further, I think it is wise to distinguish between avoidance and escape as motives. If you are not burdened with a given problem, you still have a motive to choose that which enables you to avoid it. However, if you are burdened with a given problem, that which enables you to avoid it may be better described as escaping it and that seems a much stronger motive. For SA majors which are burdened with the problems mentioned above, the motive to acquire could be strong enough to pull us over the claims hurdle.
Lets start with the silicosis suit. It is important to understand that the suit "which has little precedent in South African law, has its roots in a landmark ruling by the Constitutional Court that for the first time allowed lung-diseased miners to sue their employers for damages." So, a door has opened and the silicosis suit is first to walk through it. So, the future is one where workers are more empowered to sue on this and related issues and government and industry must adapt to this. It is a modernizing factor. For SA majors, Burnstone represents a path forward.("Ex-miners seek silicosis class action vs. South African firms" Reuters 12/28/12, "Is Cutifani right to have shelved SA unbundling?" Miningmx 2/25/13)
Second, there is the danger of safety related mine closures. Apparently, in 2008 Amplats exec. Cynthia Carroll shut down a shaft after an accident occurred and subsequently, at least temporarily shutting down to evaluate safety became standard. "The South African government vigorously and broadly adopted Carroll's procedure of shutting down shafts when an accident had occurred. Until that point, it was virtually unheard of, now, its a law enthusiastically applied." ("Carroll recounts 2008 clash with Haverstein" Miningmx 12/4/12) So here, as well as with the previous factor, we have a kind of moral progress that can be rough on the profitability of the business. Although accidents can will occur at any mine, it seems reasonable to say a new and largely mechanized mine diminishes this risk.
Third, strikes. The labor strikes of 2012 led to loss of life and revenue. There are two points I want to make here. Burnstone wasn't unionized although management politely "recognized" the unions. Certainly, if an SA major bought Burnstone it would become unionized, but that doesn't seem worrisome. Burnstone is like a fledgeling Deep South and Deep South, unlike GF's other mines didn't have strikes. Further, while most mines were stuck in difficulty negotiating a workable agreement, Deep South seemed to smoothly forge its own deal with the unions in which GF got what it wanted, including some sort of change in the way shifts a structured which they say will lead to more productivity and bonuses are now linked to productivity. GF should be emboldened that they are on the right path with Deep South and Anglogold Ashanti should have a case of Deep South envy ("Gold Fields, NUM, solve South Deep Impasse" Miningmx 10/2/13).
