Discord

29 October 2004 By Edward Hadas

Either the company’s management is irrational or it thinks Harmony’s stock is overvalued. The miner’s shareholders will give up value to get control of the Gold Fields. Optimistic synergy targets barely compensate.

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Harmony Gold Mining Company has proposed a merger with Gold Fields. It will offer 1.275 of its own shares for each share of the larger and more international producer. The offer is dependent on approval of 75% of Harmony's shareholders in a meeting to be held November 12.

The proposal is also dependent on Gold Fields' shareholders rejecting a proposed merger of the company's international operations with a smaller Iamgold, a Canadian gold mining company. Harmony argues that this transaction transfers too much value from Gold Fields to Iamgold shareholders.

Harmony plans to make its offer in two parts, an early settlement offer that allows Harmony to accept 34.9% of the Gold Fields shares without any conditions, and then a tender for the remaining Harmony shares. Gold Fields has challenged the legality of several elements of the proposed offer.

In the September quarter, Harmony reported a loss of R340m while Gold Fields reported a profit of R102m. In the fiscal year ended in June 2004, Harmony reported a loss of R523m, while Gold Fields reported a profit of R678m. Both companies have been hurt by the high level of the rand against the dollar, which makes their South African mines less competitive. Gold Fields benefits from its higher quality mines in South Africa and its international exposure.

We have used August 10 share prices to reflect valuations before any bid speculation. The transfer of value is less dramatic at current prices.

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