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Harmony to sell marginal shafts

Publication: Miningmx
Journalist: David McKay

Harmony Gold is laying plans to sell a portion of annual gold production it considers marginal – estimated at 750,000 oz/year in the December quarter, says a source familiar with the proposal.

A condition of the divestments, however, is that Harmony imposes a royalty on the gold production. This comes into effect when the rand gold price reaches a certain level. Bernard Swanepoel, Harmony Gold CEO, declined to comment when asked to confirm the proposals.

Georges Lequime, currently a gold analyst in the UK offices of RBC Capital Markets, has been lined up to manage the strategy, market sources said. Lequime, who is expected to remain in London, could not be reached at the time of writing.

The effects of the strategy is to have the mines recapitalised by third party with Harmony retaining a royalty. The royalty kicks in when the gold price increases. It will seek third party participation for its low margin mines from among the ranks of the world’s junior mining companies.

Key in the development of the strategy is that Harmony improves its capital efficiency. “Instead of pumping $100m into mines that don’t shoot the lights out, the capital can be put into building new mines,” said a market source.

In addition to retaining its leverage to the gold price, Harmony also hopes to extend the operating lives of its marginal mines.

While it’s not known how much of the 750,000 oz/year Harmony will sell, it’s thought the company is still seeking net production growth over the next three to five years. The company is planning new gold production of about 1 million oz/year over that period.

Harmony is also able to avoid shutting mines. The South African gold producer endured a gruelling restructuring in 2005/6 in which it retrenched more than 10,000 employees, a development that dragged it into court action with the National Union of Mineworkers, South Africa’s largest mining union.

Details are sketchy but it’s thought that Harmony intends to sell assets, some of which might be already be mothballed, for a “token sum.”

And if the gold price falls, Harmony does not participate in any royalty stream. “Harmony wouldn’t make money at lower gold prices on these assets in any event,” said a market source.

Assets on the block may include the Orkney shafts in the Klerksdorp region of South Africa with the balance, such as St. Helena, Joel and Bambanani situated in the Free State province.

Some of the ‘marginal ounces’ are not profit-making. According to quarterly production information published on Harmony Gold’s website, the West shaft (albeit a tiny producer of gold) has a rand per kilogram cost of 240,000, far in excess of the current rand gold price of R152,000/kg.

Pamodzi Gold may become the first company to participate in the scheme. It is thought to be negotiating buying the Orkney shafts which could help that company reach its 2007 gold production target of about 400,000 oz/year.

Ken Steenkamp, Pamodzi Gold CEO, has declined to comment on the speculation. He confirmed however the company had recently visited potential shareholders in Canada who might support a shares for cash programme.

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