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Adam's letter to shareholders   
  

"Acquisitions, and our ability to drive down costs while increasing productivity, have played a central role in Harmony’s growth. In March 2001 we completed the transaction with AngloGold to merge Elandsrand and Deelkraal (Elandskraal) into our existing operations. These are now the highest-grade mines in Harmony and the approximately 450 000 ounces of additional annual production will dramatically improve the quality, flexibility and profitability of the company’s output."
– Adam Fleming,
Chairman

 
 

ADAM’S LETTER TO SHAREHOLDERS

Dear Fellow Shareholder

On the face of it, it was an average year for Harmony. We experienced strong growth in cash operating profit but earnings per share were down, improvements in our safety record did not materialise and the US dollar price of gold is trading at the lowest levels in recent history. But first appearances are invariably deceptive. Behind the numbers in this report lie some important and fundamental developments within the company that will ensure both future growth and enhanced profitability, and that recognise the progressive empowerment changes sweeping through the country. These activities can be highlighted as follows:

 

Harmony has become the first major mining company in South Africa to do significant and broad-based black economic empowerment. Through the financial assistance of the Industrial Development Corporation, R400m of new shares, or 7.5% of Harmony’s issued share capital, will be acquired by Simane Investments, a broad-based South African empowerment group. This, along with Khumo Bathong Holdings as our joint venture investors in the Elandskraal acquisition, is one of the first major steps following the decision by your board more than 12 months ago to pro-actively review a whole range of empowerment models, including our value adding initiatives in the Freestate.

 

Acquisitions and our ability to drive down costs while increasing productivity, have played a central role in Harmony’s growth. In March 2001 we completed the transaction with AngloGold to merge Elandsrand and Deelkraal (Elandskraal) into our existing operations. These are now the highest-grade mines in Harmony and the approximately 450 000 ounces of additional annual production will dramatically improve the quality, flexibility and profitability of the company’s output. This, coupled with the completion of our acquisition of New Hampton in Australia, increases Harmony's annual production to approximately 2.5 million ounces of gold a year, making your company the sixth largest producer in the world today.

 

Our strategy of acquiring existing operations with turnaround potential has, over the past 18 months, placed an uncomfortable level of gearing within the Harmony balance sheet. The debt involved in the take-over of Randfontein 18 months ago and the acquisition cost incurred with Elandskraal and New Hampton, left the company with the task of restructuring its balance sheet in the short term. Our recent fundraising, R1.2 billion through a pioneering domestic bond and R1.2 billion through an equity placing with South African and international institutions, met with a positive response and is indicative of a growing investor interest in the gold share market and the acceptability of the Harmony name amongst fixed interest investors – a relatively new audience for us. Our balance sheet is now in a strong position to support Harmony’s role in the continued consolidation of mainly the South African gold mining industry, part of which faces potential premature closure in the absence of this.

 

Last year we highlighted the considerable emphasis we place on improving our safety record. The formation of our new Health, Safety and Environmental Audit Committee, reporting directly to the board on a quarterly basis, has been backed up by a comprehensive safety campaign presented to every single member of Harmony’s 42 000 workforce. The number of fatal accidents remains unacceptably high, but we are confident that the energy and commitment being given will produce significant results in due course.

 

Turning to the gold market, conditions remain as depressed as ever when measured in the world's leading currency and gold's toughest competitor, the US dollar. Our industry worldwide is valued at a fraction of its replacement value. Its continued consolidation is inevitable while the gold price trades well below the industry's real total cost of production and the cost of replacing the ounces currently being mined. The South African gold mines trade at a discount even to their depressed peers – on a combination of perceived political risk and the presumed higher costs of deep level mining. This is ironic. For the following reasons, Harmony currently regards South Africa as the most attractive international destination for gold mineral extraction:

 

the Rand currency, by depreciating against the US dollar, acts as a natural hedge. Gold in Rand terms is at a record high;

 

the legal and tax framework is mining friendly. The final agreement between industry and government on mineral rights will be the product of open debate and ongoing discussion and is expected to be concluded by mid 2002; and

 

the rapid consolidation of the industry over the last three years has been possible through the co-operation and support of strong unions prepared to recognise the preservation and future growth of the industry. This can only be accomplished by the eradication of the financial cost inefficiencies and the removal of illogical farm boundaries. Nowhere is this more acute than in the huge but marginal Freestate goldfields.

 

Looking ahead, we at Harmony are excited by what we see. Indications are that the domination of the US dollar is coming to an end, and with it, the great barrier to gold performance. As a company that remains unhedged by choice, this is the prize that we and our loyal shareholders have been awaiting for so long. By achieving the next level of planned productivity improvements at our operations, the prospects for profits have never looked better. Further acquisitions are inevitable, but with our most recent acquisitions having been incorporated over the past six months, our management teams and Harmony can only benefit from a period of operational focus.

I doubt there is a tougher industry than the one in which we operate. At Harmony we are exceptionally fortunate in the calibre of the men and women who fight tirelessly to extract hard-won profits from our orebodies. To them and to their leaders, from the stope face to the boardroom, I express the thanks of all our shareholders.