Birth of a new giant.

South Africa's large mining houses are adjusting to new realities through several approaches, including mergers. Priscilla Ross outlines one of the most significant developments.

Gold Fields, the new mega South African gold mining group created from the gold assets of Gold Fields of South Africa and Gencor, was listed on the Johannesburg stock exchange on 2 February 1998.

On 10 October 1997, Gencor had announced an agreement with GFSA in which the gold interests of the two groups would be merged. The intricacies of the merger transaction were so designed that Gencor's participation in Gold Fields is now by both direct and indirect shareholding.

The core assets of the new Gold Fields are amongst South Africa's best: namely Driefontein, Kloof and the Southern Free State complex. Gold Fields owns around 40% of Driefontein and 100% of Kloof. Driefontein and Kloof lie on the West Wits line and Beatrix and Oryx are part of the Southern Free State complex. The lives of the mines of the West Wits line complex and the Southern Free State complex will extend well into the 21st century.

The challenge for the new Gold Fields is to bring the three core mines to peak operating efficiency, and to extend substantial improvements in operating costs and cash flow to shareholders. The company is currently producing 3.5m ounces of attributable gold a year from a reserve base of around 100m ounces. This production level is likely to decrease over the next year as decisions are made about whether or not to retain the higher cost non-core mines in the Gold Fields portfolio. These decisions are being prompted by the need to chase profitability at a time when the gold price has reached an 18 year low. If these decisions are carried out, Gold Fields' average operating costs could decline from the current $280/ounce to around $250/ounce.

At Beatrix, production for the first half of the 1998 financial year was 243,000 ounces which was consistent with that achieved for the previous six months. Cash operating costs during the second quarter were brought down to $216/ounce. This means that Beatrix retained its position as South Africa's lowest cost producer. Despite high levels of capital expenditure at the No.3 shaft, Beatrix earned R51m profits for shareholders at the half way stage. For the financial year ended June 1997, gold output was 490,524 ounces.

Oryx's gold output to end December 1997 was more than double that achieved in the previous six months. Exploration borehole values have been favourable and reef development is also promising, but the low dollar gold price could delay cash break -- even into 1999. Cost reduction opportunities are being examined.

The Oryx mine was expected to achieve break-even production levels in mid-1998. However with the gold price prevailing at levels lower than planned, this may only be achieved in 1999. To date Oryx has produced around 60,000 ounces of gold. Oryx is nevertheless well funded, with net cash resources approaching R70m, to finance its production build-up.

St. Helena operates two mining divisions, the St. Helena mine and the Oryx mine. St. Helena was able to maintain its contribution to earnings with almost R20m earned in the first half of the year, and some Rl3m in tax savings were passed onto Oryx. To date St. Helena has produced 26.6m ounces of gold. Total proven and probable reserves are around 2.3m ounces. Gold production for the year ended June 1997 was 184,830 ounces.

New vision

The poor operating performance at Evander together with the declining gold price posed a serious threat to its continued viability. Operating losses of R28m and R59m were reported for the September 1997 and December 1997 quarters. In the face of these strained financial circumstances, a retrenchment programme involving 5,500 employees was implemented at a cost of some R58m. A further 1,000 employees were to be retrenched in February 1998. This expenditure was partly offset by the sale of Evander's gold reserve to raise R32m.

The new look Gold Fields has its eye on the profitability ball. It has critical mass, with reserves of 100m ounces and will be capable of competing globally with major international gold producers for gold deposits, acquisition opportunities and capital. It will also have a platform to both reduce overheads and restructure assets and operations from top to bottom. It is the stated objective of the new management to either close, sell, distribute to shareholders or otherwise dispose of high cost operations.