Helpful comments from AngloGold''s Godsell, and heartfelt thanks from S. Africa


Battle for Normandy sets the scene
for a shift in power in the gold industry

By Nic Hopkins
London Times
December 14, 2001,,37-2001575099,00.html

Bobby Godsell, the chief executive of AngloGold, was
not in the least bit happy. The man in charge of the
world's biggest gold company should have been basking
in the warm glow of a A$3.2 billion (L1.14 billion)
takeover bid for Normandy Mining, Australia's largest
gold producer. The deal would ward off any rivals to
AngloGold's top position and reduce its heavy exposure
to gold mines in South Africa, where it is based.

Instead, on a Thursday night in November, Godsell was
stranded in Adelaide, South Australia, selling to a
group of "mum and dad" investors a deal that had just
been dealt the gravest of blows. US-based Newmont
Mining, the world's second biggest gold producer, had
unveiled a rival three-way, $8 billion (L5.5 billion)
merger between itself, Franco-Nevada of Canada and
Normandy. Franco-Nevada, the gold royalties group, had
pledged its 19.9 percent stake in Normandy to the
deal, giving Newmont a healthy head start. Worse still
was that Robert Champion de Crespigny, Normandy's chief
executive and the man with whom Godsell had long
consulted on AngloGold's bid, had given his support to

The US mining group was offering A$3.8 billion for
Normandy, including an attractive cash sweetener.
Although both deals were scrip-based, and Newmont's
subsequent price fall cut its offer to about the same
value as that of AngloGold, Godsell was now on the back

"I was disappointed that we were not advised that there
had been another approach, and that the Newmont
approach received different treatment from the Normandy
board," is how Godsell puts it.

But you don't become one of the world's most powerful
gold executives by accident, and Godsell wasn't going
to give up without a fight. So he raised his offer,
included his own cash sweetener, and took Newmont's bid
to Australian takeover regulators arguing that it did
not treat all shareholders fairly. And yet AngloGold,
which is 53 percent owned by London-quoted Anglo
American, still could not scare off Newmont and Wayne
Murdy, its chief executive.

Murdy this week struck what many believe will be the
final blow in the battle for Normandy, raising the
value of its offer to A$4 billion and increasing the
cash element. The offer is above the top end of an
independent valuation of Normandy.

"We are studying Newmont's latest increase, and will
respond in due course," says Godsell. "I would,
however, repeat that we have no intention of

AngloGold's attempt to block Newmont's bid for Normandy
was vetoed on Wednesday by the Australian Takeover
Panel, leaving Newmont set to take over as the world's
most productive gold company. AngloGold said it has a
"strong case" to appeal, and shows no signs of giving

The battle for bragging rights to the title of world's
biggest is merely a sub-plot to a much bigger story. At
the heart of the battle for Normandy are two
fundamental issues for the gold industry. One is the
trend towards rationalisation and the other is hedging.
The industry remains divided, in some cases religiously
so, on the question of whether to hedge or not to hedge

The two leading advocates of hedging are AngloGold and
Barrick Gold, the Canadian mining company.

Leading the anti-hedging crusade is Newmont, with
support from Gold Fields and Harmony, both from South
Africa. Hedging erupted across the gold industry in the
late 1980s as the price of gold began to tumble towards
long-term lows.

Mining companies took advantage of a gap, known as the
contango, between the price of borrowing gold from
central banks and the price of borrowing money. The
contango was created because central banks hold many
hundreds of tonnes of gold and earn no interest on
them. So a little interest paid on a lot of gold is
better than none at all. Gold producers could supply
gold before it was mined by borrowing it from central
banks at a very low rate of interest. They could then
invest the proceeds on the money market and earn a
healthier interest rate than they were paying back to
the central banks.

Barrick earned some $300 million in 2000 from hedging
activities alone. In the 1980s and early 1990s
especially, with the price of gold falling to long-term
lows, hedging was a safe way of protecting a gold
producer from further declines.

"We see hedging as a risk management tool, whose
purpose is to secure an appropriate measure of revenue
and price certainty over a proportion of our
production," Godsell says. But recently the difference
between borrowing money and paying interest on gold has
narrowed so much that hedging is no longer an
attractive source of supplementary profits.

If Newmont wins Normandy it will become an active anti-
hedger. It would unwind Normandy's hedge book of nine
million ounces (260 tonnes) of gold, partly by
delivering newly mined gold to settle the contracts,
and partly by buying on dips. The effect will be to
reduce the supply of gold and support the spot price in
the market. So tuned would the merged Newmont be to
fluctuations in the price of gold that every
improvement of $25/oz would add $162 million to its
pre-tax cashflow.

"If investors want to find a bond kind of return they
can do that, but when the price of gold turns the
leverage we offer is substantial," Murdy says. "To
hedge and give away that upside is not something we
think they're interested in, and we don't think it's in
their best interest." What's more, says Murdy, hedging
increases the supply of gold on the market and
therefore depresses the price. "I think we are winning
that battle," he says. "The gold price is up, people
are saying they're hedging less, attitudes are already

Meanwhile, analysts say the battle for Normandy sets
the tone for a shift in power towards the top end of
the gold mining industry. More takeover attempts will
come, and even now some observers are looking at which
companies among the other large players deserve a
takeover premium.

"The much-talked about wave of consolidation finally
crested over the North American and world goldmining
sector in the second half of 2001," says Mike Jalonen,
a gold analyst with Merrill Lynch. And according to
Godsell, the process has been hastened by the battle
for Normandy.

"This contest has gone a long way to creating a global
market in gold equities. Individual shareholders, fund
managers, and analysts have found it necessary to
compare gold companies across the three previously
distinct equity markets: North America, Australia, and
South Africa."

As if on cue, more rationalisation emerged this week in
the form of a A$234 million takeover bid by South
Africa's Harmony for Hill 50, a mid-sized Australian
producer. Jalonen says that within a few years we could
see a world gold industry where the top five producers
control more than 40 per cent of world gold output.
"The wheeling and dealing in the gold sector has likely
only just begun," he says.