Gold Fields's Purchase May Start Bid War With Harmony

May 19 -- Gold Fields Ltd. raised its stake in Western Areas Ltd., owner of half the world's biggest gold deposit, fueling the prospect of a bidding contest with rival South African producer, Harmony Gold Mining Co.

Gold Fields, the world's No. 4 producer, paid 730 million rand ($114 million) to raise its holding in Western Areas to 15.5 percent, Willie Jacobsz, a spokesman for Gold Fields, said by phone from the company's Johannesburg headquarters today. Harmony is Western Areas largest shareholder with a 29.2 percent stake.

``With Gold Fields going in there, we've got a bidding war on our hands,'' Wayne McCurrie, who oversees the equivalent of $7.2 billion at Johannesburg's Advantage Asset Management, said an interview from London, where he's seeing clients.

Western Areas stock jumped as much as 8.1 percent after Gold Fields's purchase threatened to spark renewed hostilities between its chief executive officer Ian Cockerill and his opposite number at Harmony Bernard Swanepoel. The two are vying for access to the South Deep gold mine, west of Johannesburg, less than a year after Swanepoel's $3.8 billion hostile bid for Gold Fields failed.

Harmony has already held preliminary talks over selling its Target mine to Western Areas in exchange for an increased holding in the company.

Gold Mine

Bullion's 34 percent gain this year, with a 26-year high of $732 an ounce reached on May 12, increased the attractiveness of South Deep, which contains as much as 29.3 million ounces of gold. That's equal to about a third of the world's annual gold production and almost half of Gold Fields's reserves of 65.2 million ounces.

Shares of Western Areas rose as much as 3.01 rand to 40 rand and traded at 39.70 rand at 1:08 p.m. in Johannesburg, valuing the company at 6.1 billion rand. Gold Fields's shares fell 0.7 percent to 146 rand, while Harmony's stock rose 1.1 percent, to 91 rand.

Gold Fields bought the 11.8 percent stake from ``various market players'', Jacobsz said, without naming them. The acquisition, at 40 rand a share, was 8 percent higher than Western's Areas closing price yesterday.

Western Areas Chief Executive Officer Gill Marcus couldn't be reached for comment in Johannesburg.

An accident on May 5, when an ore container plunged a mile down the main shaft, may halve output at South Deep for a year, Western Areas said on May 10, delaying the build-up to full output at the mine. South Deep cost more than $1 billion to develop and was three years late starting production.

Accident

The mine was originally forecast to produce about 562,000 ounces of gold this year, rising to 700,000 ounces in 2007.

``With the problems we've seen at Western Areas, they might look at getting it at a lower price,'' McCurrie said.

The second phase of development, below the current mining depth of 3 kilometers (1.8 miles), will allow easier and cheaper access to gold from Kloof than from South Deep's own shafts, Cockerill said on May 2.

``Our intention is not to start a hostile bid, but to ensure that cooperation takes place,'' Jacobsz said. ``This stake, together with our ownership of the neighboring Kloof mine, puts us in a position to ensure that co-operation takes place.''

There should be cooperation between Western Areas and Gold Fields on the development of the mine's second phase, Swanepoel said today in an interview from Johannesburg.

Project Meerkat

``My understanding has been that Western Areas is keen to deal,'' he said. The Gold Fields acquisition of the stake ``is an extreme way to get its proposal taken seriously.''

Gold Fields paid 170 million rand to lawyers, bankers and public relations firms to defend Harmony's takeover bid last year. The battle cost Harmony 151 million in fees.

Cockerill in 2002 commissioned engineers and geologists to determine the feasibility of accessing South Deep from Kloof's number four shaft by digging a 3-kilometer tunnel. The study, codenamed project Meerkat, after a small prairie dog-like animal, showed it can be done, Cockerill said on Oct. 26.

The second phase contains 13.6 million ounces of gold, including that which can't be profitably mined, according to Western Areas's 2005 annual report.

Sinking a new shaft to access the second part of the South Deep ore body could take as long as 10 years to complete, Terence Goodlace, Gold Fields head of international operations, said that day. Gold Fields could access South Deep's gold-bearing rock in about three years at ``a fraction of the cost,'' he said, without giving details of the price.

``The knee-jerk reaction is that this could lead to a bidding war,'' Steve Meintjies, a mining analyst at Imara SP Reid in Johannesburg said in a phone interview. ``This time, though, instead of crossing swords, you might just see Swanepoel and Cockerill cooperating.''