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Harmony Gold – Unlocking potential in Papua New Guinea

Harmony Gold, South Africa’s third-largest gold producer, recently released a set of strong numbers for their financial year ended 30 June 2012. The gold miner reported an 80% increase in operating (production) profits for the year to R 5.9bn, with headline earnings per share more than doubling from 223 cents to 551 cents. A final dividend of 50c brought total dividends for the year to 90c per share.

Simple start, rapid expansion

Harmony was incorporated and registered in 1950 and operated a single gold mine in agreement with Randgold until 1997, when it became completely independent. Through a series of acquisitions including Lydex, Bissett, Evander Gold Mines, Randfontein Estates, Kalgold, and West Rand Consolidated Mines, the company has evolved into a world-class gold producer that is looking for opportunity to expand even further. Much of Harmony’s recent success can be attributed to their innovative management team and executives, including CEO Graham Briggs and non-executive chairman Patrice Motsepe.

Operations

The miner’s interests in South Africa include nine continuing underground operations and three surface operations, mostly concentrated in the Witwatersrand area. Operations at Kusasalethu and Tshepong account for nearly 33% of the total gold produced locally, and contribute 37% to the production profit.

Harmony has made a conscious effort of late to dispose of high-cost, unproductive mines, and this strategy is rewarded in that only one operation posted a loss for the year. In addition to streamlining its current operations, a renewed focus was placed on exploration and unearthing new opportunities in SA and abroad.

Harmony launched into offshore operations in 2007, acquiring royalty rights for the Hidden Valley area in Papua New Guinea. The Morobe Mining Joint Venture situated at Hidden Valley, which is a 50% partnership with Newcrest of Australia, is still in its exploration phase, with production planned to start in 2016.

This area is probably the most valuable untapped resource on the planet, with investigations and test drilling at the Wafi-Golpu site revealing the presence of vast amounts of high-quality copper and gold. The results of the pre-feasibility study on the region, which Harmony will release on 29 August, will be critical to Harmony’s future production and resultant profitability. Management hopes to mine 40% to 45% of its gold outside of SA by 2017, and establishing a flourishing operation at Wafi-Golphu can make this objective a reality.

Drivers of profit

Harmony produced 39.642 tons of gold from a total of nearly 19m tons of ore milled, which is a slight decrease of 2% over the previous financial year. Cash operating costs increased by 20% due to increased electricity tariffs and a rise in transportation costs. The main drivers of profitability were the increase in the rand gold price by 36% and the weakening of the ZARUSD exchange rate by 11%. As a result, the increase in operating profit of 80% is mostly due to unpredictable macro factors that do not necessarily reflect Harmony’s ability to mine gold efficiently. These factors affect all gold miners similarly, and result in very inconsistent year-to-year earnings figures across the board.

Current valuation and future prospects

Harmony currently trades at a PE of 13.69, which is expensive relative to its rivals AngloGold Ashanti (8.69) and Gold Fields (8.9), and has a DY of about 1.2%. With the resources sector in general priced at very attractive levels, the opportunity to increase exposure is ever present.

Harmony’s venture at Wafi-Golphu has the potential to distinguish the company from its rivals in terms of ounces produced and ultimately also profitability, but only time will tell if the gold deposits can be accessed cost-effectively.

Investors have to decide if Harmony’s current price is low enough to pay for a capable management team, established local operations, and a potential gold mine (pardon the pun) of possibilities overseas.

Annual report

Integrated annual report 2016
Integrated annual report 2016

(HTML & PDFs)

Investor brief

Harmony Investor brief, Sep 2017
September 2017 -
Harmony Investor brief

(PDF - 6.5MB)

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