Where next for African mining?

Gold miners have a dilemma. How best do they deploy the cash piles generated by gold inflation to fund growth? Nice problem to have, you may say.

The Investing in Africa Mining Indaba in Cape Town has this week heard that pressure on gold miners' executives to drive growth has increased almost as fast as the price itself.

Gold margins have increased threefold since 2008, an average of $900 an ounce.

Yet two industry giants have opted for rapid global expansion into often challenging regions, while another prefers a more systematic and limited approach.

Goldfields, the third-largest gold producer with the fourth-largest reserves in the world, is undertaking a global expansion that it hopes will result in production of five million ounces of gold a year - up from 3.5 million ounces - by 2015.

It intends to achieve this by expanding into Peru, Mali, Finland, the Philippines, Canada, Ghana and Chile where current projects are in various stages of development, and bringing them online as prudently but as quickly as possible, managing director Mick Holland told Interactive Investor.

It aims to rebalance its portfolio of assets from a ratio of 52:48 - South Africa to the rest of the world - to 40:60 in four years, but not before sinking one billion rand (£132 million) into South Deep, its giant South African mine that holds 34 million ounces in reserves. It also intends to extract 700,000 ounces per annum from South Deep by 2015.

The company is using its vast cash reserves to drive the expansion, says Holland - in the third quarter of 2011, free cash flow was almost $400 million (£253.1 million).

AngloGold Ashanti (AGD) reports it is undertaking a similar expansion programme. It has a similar ability to generate cash - the company reported a 300% increase in operational cash flow over three years.

It has established an exploration footprint that covers Colombia and Brazil in South America; Gabon, Namibia, Guinea and Ghana in Africa; Saudi Arabia, Eritrea and Egypt in the Middle East; and China, Australia and the Solomon Islands in the Pacific.

AngloGold Ashanti is aiming to achieve 2015 production of slightly more than five million ounces a year through the expansion and a 25% increase in cash flow per share by 2014.

Randgold Resources' (RRS) CEO Mark Bristow mapped out a different path, however, arguing his company would base its expansion on the mature but profitable Morila and the younger but also profitable Loulo mine.

The Tongon mine was now on stream, said Bristow, and with Gounkoto and Kabila set to contribute, his company would limit its focus to Mali and the Democratic Republic of Congo to achieve 1.2 million ounces a year production by 2015.

Another interesting departure between Bristow and his Goldfields and AngloGold Ashanti colleagues was his belief that a "big mining company" approach in third-world countries, specifically Africa, would not necessarily work.

He pointed out many big mining companies lost their entrepreneurial edge through mergers and acquisitions and so lost the ability to be creative in areas where it was most needed. He also pointed out the need to effectively create value for host countries that exceeded royalties and licence fees.

Bristow's argument was that "the African discount doesn't need to be applied to companies who know how to operate in Africa," which some observers, who chose not to be quoted as they conducted business with all three companies, took as criticism of the expansion plans of the former.

What is clear is that how executives choose to deploy their cash piles will dictate which companies will emerge from the next few years as winners, assuming the gold price holds, and most companies expect it will, given their projections.

Are you looking for more on mineral resources in the region? Read our focus on mining in Africa.