Anglo American is bullish on getting the disposal to Peabody done (JSE: AGL)

The debate is over the definition of material adverse change

Every corporate deal includes a reference to a material adverse change in the transaction agreement. This is basically an escape clause that allows the buyer of an asset to walk away from the deal if something goes badly wrong while the deal is being implemented. These clauses are important, as deals can take months and even years to be finalised thanks to regulatory approvals and other complicated conditions.

It’s rare to see these clauses triggered in practice, but it does happen. What makes it particularly interesting is that there isn’t always agreement over whether a material adverse change has actually been triggered. Even where there are “precise” definitions related to financial metrics, this is still open to forecasts and debates. The incentive is for the seller to still get the deal done and for the buyer to try wriggle out of it if something changed, so this creates a natural tension.

Anglo American is a perfect example of this, as the disposal of the steelmaking coal business to Peabody Energy hangs in the balance after there was an ignition event at Moranbah North mine on 31 March, with personnel only re-entering the mine on 19 April.

Understandably, Peabody isn’t so sure that this isn’t a material adverse change. Also understandably, Anglo American is downplaying the incident to try and get the deal across the line. Ultimately, it’s a negotiation – and negotiations always have uncertain outcomes.

Astral Foods gives a tighter earnings range (JSE: ARL)

It’s been an unpleasant interim period for the group

Astral Foods published an initial trading statement on 24 March, in which they noted that earnings for the six months to March would be down by up to 60%. They attributed this to a number of factors, ranging from consumer affordability through to higher feed input costs and maize prices. The poultry industry operates with such tight margins that any pressure can cause a nasty swing in earnings.

In a further trading statement, Astral has noted that the expected drop is between 50% and 60%, which means a HEPS range of between 354 cents and 442 cents. They’ve haven’t given any further updates on the underlying factors that caused the drop.

Despite this, the share price is actually 21% higher over the past 12 months!

Gold Fields got the Gold Road board across the line (JSE: GFI)

Is this a sign that we are nearing the top of the gold cycle?

Wise and experienced investors in the market will tell you that acquisitions in the mining sector are often a sign of the top of the cycle. Logically, this should be happening at the bottom of the cycle, when prices are depressed. In practice, due to the general risk-off sentiment that accompanies such a cyclical low and the relative lack of availability of debt, it’s rare to see this happen. In contrast, gold is flying right now, so funding providers are lining up to inject debt into gold mining houses to support deals.

The risk is that acquirers overpay for assets. Gold miners have been having the time of their lives, so any acquisition at this stage is at a premium valuation. Once you layer on a further premium for control and to pry the shares out of the hands of existing shareholders, there’s real risk of overpaying.

When Gold Fields put in an initial non-binding proposal to Gold Road, they were talking about A$2.27 per share plus a variable portion related to De Grey Mining, taking the total estimated consideration to $3.05 per share. This would be settled in cash.

The Gold Road board said no to that, which sent the parties back to the negotiating table. The structure that got them across the line is a fixed cash component of A$2.52 per share, plus a variable portion for Northern Star (linked to the De Grey Mining asset) that would currently be A$0.88 per share. This takes the total to $3.40 per share.

The deal structure envisages Gold Road declaring a fully franked dividend (an Australian thing) of $0.35 per share. This will be deducted from the fixed cash consideration, so that’s not an additional amount for Gold Road shareholders.

The updated pricing is a 43% premium to the closing price on 21 March 2025 before news of the deal broke. That’s a juicy premium, but not out of range vs. what we usually see in buyouts in the market. Gold Fields has made it clear that this is their best and final price and that if a better bid emerges from somewhere, they won’t get into a bidding war.

Although the Gold Road board is happy with this, the final answer will come from shareholders. At the moment, holders of 7.51% of shares have pledged their support for the deal. It’s not uncommon to approach major institutional shareholders, making them “insiders” (i.e. they can’t trade the shares) and gauging their willingness to support a particular price. They will need to reach 75% approval, but a unanimous recommendation by the board to vote in favour of the deal obviously helps.

Funding for the deal will be from new bridge financing, supported by the current net debt to EBITDA ratio of 0.73x at Gold Fields. They expect to remain with the 1x target and of course to maintain their investment grade credit rating.

Harmony Gold: record net cash and full-year guidance affirmed

With nine months of the year behind them, the numbers look great

Harmony Gold released an operational update for the nine months to March 2025. Not only has the average rand gold price increased by 25%, but they’ve also enjoyed a 2% increase in underground recovered grades. Sadly, this was more than offset from a production perspective by severe rainfall in South Africa and severe safety incidents, so production is 6% lower. Still, group revenue is up 20% for the period and cash operating costs only increased by 8%, so they are basically printing money at the moment.

This is why Harmony can now point to a record net cash pile of R10.8 billion. If this carries on, they will need to get a Tolkien-level dragon to protect this hoard!

Notably, group all-in sustaining costs (AISC) increased by 17%, so margins haven’t expanded by quite so much once you take those additional costs into account. Another very interesting nugget is that royalties were up by 52%, now representing 4% of the cash operating cost base.

Harmony is investing heavily at the moment as well, with capital expenditure up by 31% to R7.6 billion. This is based on ongoing extension projects at Moab Khotsong and Mponeng.

And although they would obviously be exposed to any moderation in gold prices, the hedging policy has been maintained at between 10% and 30% of production over a rolling 36-month period. This means that as prices have increased, they’ve been able to replace maturing hedges and lock in higher prices on a portion of production.

It’s just a real pity that the announcements that preceded this one were about two separate loss of life incidents. Sadly, mining remains a dangerous occupation, despite the best efforts of the mining houses to make it safer.

Nibbles:

• Director dealings:
  • A prescribed officer of Sun International (JSE: SUI) bought shares worth R10k on behalf of a child.

• Hudaco (JSE: HDC) announced that all conditions for the Isotec acquisition have been fulfilled. This deal was announced in January this year, with Hudaco acquiring a substantial South African business with around R500 million in annual revenue. The effective date of the acquisition was 1 May.

• Murray & Roberts (JSE: MUR) announced that acting chairman Alex Maditse has resigned from the board. He’s been on the board since August 2017. As Murray & Roberts is due to be wound up as part of the business rescue, there are only two executive directors on the board and there won’t be any further appointments.

• With Exxaro (JSE: EXX) still working to restore trust with the market after the suspension and subsequent resignation of the previous CEO, there’s been another change to the top management team. Kgabi Masia, the former Chief Coal Operations Officer, has agreed to a mutual separation with the company after being with Exxaro since March 2022. Mervin Govender will continue in his role as Acting Chief Coal Operations Officer.