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Harmony has a formal risk policy framework in place, which is continually maintained and developed to assist management and the board to address systematic categories of risk associated with its business operations.
The board is satisfied there is an ongoing process to identify, assess and manage significant risks and establish internal controls. Weaknesses identified within Harmony are addressed appropriately. The board reviews and approves the risk strategy and policies formulated by management. Management is accountable to the board and has established a system of internal controls to manage significant risk in Harmony. This system assists the board in discharging its responsibility to ensure that the wide range of risks associated with Harmony’s operations are effectively managed. Full reviews of risk controls and disclosure processes are undertaken regularly.
In conducting its annual review of the effectiveness of Harmony’s risk management systems, the board considers key findings from the ongoing monitoring and reporting process, management assertions and independent assurance reports. The board also takes into account material changes and trends in the risk profile and considers whether the control system, including reporting, adequately supports the board’s risk management objectives. The board also received assurance from the audit committee, which derives information from regular internal and external audit reports and other reports on financial risk and internal control throughout Harmony. The board has assigned the responsibility of assisting it in discharging its duties and responsibilities on risk management to the audit committee, in line with the recommendations of King III.
The chief executive officer and chief financial officer are both required by the Sarbanes-Oxley Act to certify on the Form 20-F filed with the Securities and Exchange Commission (SEC) that the group financial statements present a true and fair view of Harmony’s financial position, cash flows and operational results, in accordance with IFRS. Both officers are responsible for establishing and maintaining disclosure, internal controls and procedures for financial reporting. The certification process is pre-approved by the board of directors prior to filing the Form 20-F.
All key components of the Enterprise Risk Management – Integrated Framework issued by the Committee of Sponsoring Organisations of the Treadway Commission (COSO) have been incorporated into Harmony’s process to comply with Sarbanes-Oxley section 404 dealing with Harmony’s internal control system. Requirements for King III are also included.
Harmony’s risk management systems meet the requirements of King III and Sarbanes-Oxley.
There may be risks in addition to those reported that Harmony does not currently know of or deems immaterial based on information available. Any of these risks could have a materially adverse effect on Harmony’s business, financial condition or operational results, leading to a decline in the trading prices of Harmony’s ordinary shares or its ADRs. The risks described below may be incomplete and therefore may not be the only risks to which we are exposed. Additional risks and uncertainties not presently known to us or that we now believe are immaterial (which have not been included) could also adversely affect our businesses, results of operations or financial condition. The order of presentation of the risk factors below does not indicate the likelihood of their occurrence or the magnitude or significance of individual risks. The risks described below could occur individually or cumulatively and intensify in the case of a cumulative occurrence.
The profitability of our operations, and cash flows generated by those operations, are affected by changes in the price of gold. A fall in the gold price below our cash cost of production for any sustained period may lead to losses and require Harmony to curtail or suspend certain operations.
Substantially all Harmony’s revenues come from the sale of gold. Although the gold price has increased over the last decade, historically, the market price for gold has fluctuated widely and been affected by numerous factors over which Harmony has no control, including:
In addition, current demand and supply affects the price of gold, but not necessarily in the same manner as current demand and supply affect the prices of other commodities. Historically, gold has retained its value in relative terms against basic goods in times of inflation and monetary crisis. As a result, central banks, financial institutions and individuals hold large amounts of gold as a store of value and production in any given year constitutes a very small portion of the total potential supply of gold. Since the potential supply of gold is large relative to mine production in any given year, normal variations in current production will not necessarily have a significant effect on the supply of gold or its price.
The volatility of gold prices is illustrated in the table, which shows the annual high, low and average of the afternoon London bullion market fixing price of gold in US dollars for the past 10 years:
| Price per ounce (US$) | |||
| Calendar year | High | Low | Average |
|---|---|---|---|
| 2001 | 293 | 256 | 271 |
| 2002 | 332 | 278 | 309 |
| 2003 | 412 | 322 | 361 |
| 2004 | 427 | 343 | 389 |
| 2005 | 476 | 411 | 434 |
| 2006 | 725 | 525 | 604 |
| 2007 | 841 | 608 | 695 |
| 2008 | 1 011 | 713 | 872 |
| 2009 | 1 212 | 810 | 972 |
| 2010 | 1 421 | 1 058 | 1 225 |
| 2011 | 1 900 | 1 314 | 1 538 |
On 5 October 2011, the afternoon fixing price of gold on the London bullion market was US$1 617/oz.
While the aggregate effect of these factors is impossible to predict, if gold prices should fall below Harmony’s cash cost of production and capital expenditure required to sustain production and remain at these levels for any sustained period, Harmony may record losses and be forced to curtail or suspend some or all of its operations. In addition, Harmony would have to assess the economic impact of low gold prices on its ability to recover any losses that may be incurred during that period and on its ability to maintain adequate reserves.
Harmony’s average cash cost per ounce of gold produced from continuing operations was US$1 009 in FY11, US$801 in FY10 and US$583 in FY09.
Foreign exchange fluctuations could have a material adverse effect on Harmony’s operational results and financial condition.
Gold is priced throughout the world in US dollars and, as a result, Harmony’s revenue is realised in US dollars, but most of our operating costs are incurred in rand and other non-US currencies including the Australian dollar and PNG kina. Any significant and sustained appreciation of the rand and other non-US currencies against the dollar will materially reduce Harmony’s rand revenues and overall net income.
As Harmony currently does not enter into forward sales, commodity derivatives or hedging arrangements on future gold production, it is exposed to the impact of any significant decreases in the gold price.
As a rule, Harmony sells its gold at the prevailing market price. Currently, the company does not enter into forward sales, commodity derivative or hedging arrangements to establish a price in advance for the sale of future gold production, although Harmony may do so in future. As a result, Harmony may realise the benefit of any short-term increase in the gold price, but is not protected against decreases; if the gold price should decrease significantly, Harmony’s revenues may be materially adversely affected.
Global economic conditions could adversely affect the profitability of Harmony’s operations.Harmony’s operations and performance depend on global economic conditions. Global economic uncertainty may have follow-on effects on our business.
These could include:
In addition, uncertainty on global economic conditions may also increase volatility or negatively impact the market value of Harmony’s securities.
Estimations of Harmony’s gold reserves are based on a number of assumptions, including mining and recovery factors, future cash costs of production and the price of gold. As a result, quantities of gold produced may differ from current estimates.
The mineral reserve estimates in this annual report are estimates of the mill-delivered quantity and grade of gold in Harmony’s deposits and stockpiles. They represent the amount of gold that Harmony believes can be mined, processed and sold at prices sufficient to recover its estimated future cash costs of production, remaining investment and anticipated additional capital expenditures. Harmony’s mineral reserves are estimated based on a number of factors, which have been stated in accordance with the SAMREC and JORC codes, SEC Industry Guide 7 and Sarbanes-Oxley. Calculations of Harmony’s mineral reserves are based on estimates of:
These factors, which significantly impact mineral reserve estimates, are beyond Harmony’s control. As a result, reserve estimates in this annual report should not be interpreted as assurances of the economic life of Harmony’s gold and other metal deposits or the future profitability of operations.
Since these mineral reserves are estimates based on assumptions related to factors detailed above, should there be changes to these, we may in future need to revise these estimates. In particular, if Harmony’s cash operating and production costs increase or the gold price decreases, recovering a portion of Harmony’s mineral reserves may become uneconomical. This will lead, in turn, to a reduction in estimated reserves.
To maintain gold production beyond the expected lives of Harmony’s existing mines or to increase production materially above projected levels, Harmony will need to access additional reserves through exploration or discovery.
Harmony’s operations have limited proved and probable reserves, and exploration and discovery are necessary to maintain current gold production levels at these operations. Exploration for gold and other metals is speculative in nature, may be unsuccessful and involves many risks, including those related to:
Harmony’s exploration efforts might not result in the discovery of mineralisation, and any mineralisation discovered might not result in an increase in proved and probable reserves. To access additional reserves, Harmony will need to successfully complete development projects, including extensions to existing mines and, possibly, new mines. Development projects would also be required to access any new mineralisation discovered by exploration activities around the world. Harmony typically uses feasibility studies to determine whether to undertake significant development projects. Feasibility studies include estimates of expected or anticipated economic returns, which are based on assumptions about:
Actual cash costs, capital expenditure, production and economic returns may differ significantly from those anticipated by feasibility studies for new development projects.
It can take a number of years from the initial feasibility study until development is completed and, during that time, the economic feasibility of production may change. In addition, there are a number of inherent uncertainties in developing and constructing an extension to an existing mine or any new mine, including:
Harmony currently maintains a range of focused exploration programmes, concentrating on areas not too distant from its operational mines, as well as a number of prospective known gold mineralised regions around the world. During FY10 and FY11, the bulk of exploration expenditure was allocated to activities in PNG and South Africa. However, there is no assurance that any future development projects will extend the life of our existing mining operations or result in any new commercial mining operations.
Costs associated with pumping water inflows from closed mines adjacent to our operations could adversely affect Harmony’s operational results.
Certain of our mining operations in South Africa are adjacent to the mining operations of other companies. A mine closure can affect continued operations at an adjacent mine if appropriate preventive steps are not taken. In particular, this could include the ingress of underground water when pumping operations at the closed mine are suspended. This can result in damage to property, operational disruptions and additional pumping costs, which would adversely affect any one of our adjacent mining operations.
Fluctuations in input production prices linked to commodities may adversely affect Harmony’s operational results and financial condition.
Fuel, energy and consumables, including diesel, heavy fuel oil, chemical reagent, explosives, tyres, steel and mining equipment consumed in mining operations form a relatively large part of the operating costs and capital expenditure of a mining company. Harmony has no control over the costs of these consumables, many of which are linked to some degree to the price of oil and steel.
Fluctuations in oil and steel prices have a significant impact on operating cost and capital expenditure estimates and, in the absence of other economic fluctuations, could result in significant changes in the total expenditure estimates for new mining projects or render certain projects non-viable.
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