When the wave of violent strikes erupted across the country, Nick Holland's security advisers cautioned him to stay away from his gold mines. He went anyway – and soon found himself facing an army of 5,000 angry miners marching across the fields, waving machetes and sticks.
"I always like to be at the front," says Mr. Holland, chief executive officer of Gold Fields Ltd., the world's fourth-biggest gold producer. "But it gave me a really scary feeling in the pit of my stomach, that we were about to have something blow up."
Gold Fields survived the wildcat strikes that left dozens dead at other mines in South Africa last year, but now Mr. Holland faces an even greater challenge: How to save his company from a national mining-industry crisis of rising costs, deteriorating production, high political risk, labour pressures and the threat of new taxes.
It's a daunting moment for South Africa's gold industry, the biggest in the world for nearly a century but now in steady decline. At a time when innovation is crucial, Mr. Holland has become a pioneer, orchestrating a bold move to divide Johannesburg-based Gold Fields by spinning off its older South African mines into a new company, leaving its most modern and international mines in the hands of Gold Fields itself.
The spinoff, Sibanye Gold, was listed on the Johannesburg and New York stock exchanges last month. It creates two options for investors: a purely South African vehicle, Sibanye, with declining but still profitable assets; and a global company, Gold Fields, less exposed to South Africa's political risks and labour clashes.
Analysts are lauding it a potential model for the rest of the South African mining sector, which is already wrestling with planned restructuring and layoffs as the threat of more strikes looms again this year. Other South African companies such as AngloGold Ashanti are believed to be mulling a similar spinoff of assets.
The unbundling of Gold Fields could be a key step in rationalizing South Africa's troubled mining sector and preventing an escalation of job losses, Mr. Holland said. "I think this could potentially save the industry," he said in an interview at his Johannesburg headquarters.
"I think consolidation in the industry could save it: tearing down the farm fences, looking for opportunities between contiguous ore bodies, which up until now had been jealously guarded by each mining house. Putting unloved assets into, say, Sibanye Gold might create a new lease on life for those assets, when the mother ship is more interested in pursuing other opportunities outside South Africa."
It's clear that something drastic was needed to salvage South Africa's mining sector, which has shed about 900,000 jobs in the past two decades, employing only about 500,000 people today. At its peak, in the early 1970s, South Africa produced two-thirds of the world's gold. Today its gold production is less than 200 tonnes – barely a fifth of its peak level. Mining contributes only 6 per cent of the country's GDP today, compared to 21 per cent in 1970.
When the strikes hit the industry last year, South African gold producers were already struggling with rising costs as their mines had to plunge deeper to reach the gold reefs. Some of its mines today are four kilometres below the earth – the deepest in the world. The rising costs are worsened by the political uncertainty. The South African government has allowed lengthy debates over nationalization and windfall taxes, scaring away many investors.
The wildcat strikes cost the mining industry more than $1.1-billion (U.S.) in lost revenue last year. The mines controlled by Sibanye Gold saw their production drop by 15 per cent last year, mainly because of the strikes. Similar declines were suffered across the industry. One of the biggest miners – Anglo American Platinum – has given notice that it could eliminate up to 14,000 workers in a restructuring this year.
The unbundling of Gold Fields had been planned before the wildcat strikes, but the announcement in November caught the industry by surprise. Analysts hailed it as a shrewd decision. "I think they're ahead of the curve," said Carel Smit, head of Southern Africa natural resources at KPMG in Johannesburg.
"In these times, restructuring is a good idea, and we will see more of it. South African assets are undervalued, because the investors don't see the same value, even though South African assets generate a lot of cash."
By spinning off most of its South African mines into a separate company, Mr. Holland showed that he was listening to investors, Mr. Smit said. "Investors want to choose the geographies where they want to invest. They don't necessarily want the company to choose."
After the unbundling, most of the Gold Fields mines are in Peru, Ghana and Australia. Only one of its mines today is in South Africa: the highly mechanized South Deep operation, seen as the flagship for its future.
But the deep-mining operations that are common at Gold Fields and Sibanye can be dangerous for workers. Sibanye's mines are up to three kilometres deep, and South Deep is nearly as deep. Until recently, Gold Fields was suffering nearly 40 fatalities annually, including a devastating accident that killed nine workers at South Deep in 2008, on the same day when Mr. Holland became CEO. He shut down the shaft system for six months and improved safety standards, and the company's fatalities today are only a third of the previous average.
Mr. Holland, a British-born accountant who helped create the modern Gold Fields from a merger of British and South African companies in 1997, has become the company's first CEO to go underground regularly, making about 50 underground visits to its mine shafts since 2008.
He says the illegal strikes last year were a "wake-up call" for the company. It was a "big mistake" to rely on official unions as the conduit to the workers, he says. Instead, the managers plan to engage workers directly, holding more meetings with work crews, making more visits to worker hostels and making a bigger effort to listen to their problems and frustrations.
If labour relations can be improved, investors could be attracted to companies such as Sibanye, despite its heavy exposure to South Africa. "I think we can turn it around," Mr. Holland says.
"You'll get a new breed of investors who will buy for yield, for cash. I think we have to embrace the potential of China, Hong Kong, Abu Dhabi, Qatar. I think we'll see more of these investors swimming around, looking for opportunities. And they're not afraid of political risk."