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Gold is cooking — so Swanepoel makes a plan

Publication: Sunday Times
Journalist: Julie Bain

Julie Bain reports that bullion’s all-time high can lead to new opportunities — and greater investment.

The rand gold price, which this week hit its highest level ever, may open new opportunities for South Africa’s gold miners.

Bernard Swanepoel, chief executive of Harmony Gold, said at the current bullion price his company might consider investing billions of rands to access the Target North and Evander South gold resources.

Swanepoel said that in the first quarter the gold price averaged about R150000/kg for the first time ever. This was up from the R140000/kg to R145000/kg for the previous quarter.

“It looks as if the gold price for an unhedged SA producer is going to be 3% to 4% higher quarter on quarter, which is not a bad position to be in.”

The focus of one possible expansion, Target North, has been talked about for a number of years and would need an investment of billions of rands. But if Harmony can get back on track in the Northern Free State, with reserves which lie just north of Harmony’s Target mine, it could present another opportunity for the company.

According to the company website, exploration has identified resources of “325 million tons containing around 74 million ounces that could form the basis for a separate new mine”.

Evander South is one of a number of projects Harmony is considering at its Evander mine. It involves, according to Harmony’s website, producing a “detailed study of the Evander Basin, taking into account current mining activities” and will look at the exploration of a gap between Poplar and Evander South.

The company hopes to have all its new mining rights and exploration licences agreed to by the Department of Minerals and Energy within the next few months.

On Friday the rand gold price was R155066.69/kg. Harmony mines 92% of its gold in South Africa and pays its costs in rands.

The higher gold price may buoy the results of South Africa’s three biggest gold companies when they report in the next two weeks. Harmony reports on Wednesday and Gold Fields and AngloGold Ashanti report the following week.

Still, the first quarter of the calendar year, which is Harmony’s financial third quarter, is traditionally the weakest quarter of the year. Companies’ production dips because of the Christmas break.

Swanepoel said Harmony’s production was likely to show a drop of around 2% because of the long holiday period in the quarter. This would be lower than declines in production often experienced by gold companies in the first quarter of around 8%.

He said he expected the company to record a better performance than in the previous quarter. In the final quarter of last year Harmony’s headline earnings dropped to 44c from 66c in the September quarter.

This dented the company, which was moving to get back on track after a major restructuring in the last few years. Swanepoel said the gold price and stable costs should now show a positive trend.

Cost control was crucial and the company had worked to get on top of that. The gold sector wage negotiations, which start next month, were being looked at with some in trepidation.

“There will probably be a mismatch of expectations,” said Swanepoel.

He was referring to the general boom in the commodities sector, which inother metals had led to workers calling for pay rises to reflect the surge in profits posted by some resources companies.

Although the gold price was strong and a number of gold companies made healthy profits, these earnings were not as great as those being recorded by diversified miners and oil companies.

Gold companies hoped that from the unions’ side there would be an appreciation that their costs were high and that the companies continued to reinvest after a lack of investment during the years when the gold price had been depressed.

A fall-off in the grade (the amount of gold per ton of ore mined) at some of Harmony’s key mines knocked the company’s results in the final quarter of last year.

Swanepoel said he wanted to see the average grade across the company’s 24 mines at between 5g and 5.5g a ton. Achieving this would add much to production.

But Harmony needed flexibility at its operations. Flexibility meant if there was a problem underground, or the grade fell, other areas of the mine could be accessed to make up for the loss.

Swanepoel said any volatility in grades was likely to come from Harmony’s developing mines such as Doornkop and Elands-rand, which could not be as flexible as other assets as they did not have the mining infrastructures in place.

Nonetheless, he said: “We have to show we can get to 5.5.”

As well as investment of more than R2-billion in the last five years in South Africa, Harmony was developing mines and exploring in Papua New Guinea.

The Hidden Valley gold mine is scheduled to start production at the end of 2008, adding to Harmony’s production which this year is expected to remain at around 2.4 million ounces.

The goal is to increase production to 3.5 million ounces in three to four years.

Harmony is carrying out a pre-feasibility study at what is called the Wafi gold and copper project in Papua New Guinea. The open-pit mine, if it goes ahead, would produce more copper than gold.

Swanepoel, however, has no problems with mining copper and does not think this copper element of its business would detract from Harmony’s value as pure gold stock.

Another way to add value would be through selling the uranium, most of which, in Harmony’s case, lies in its slimes dams (dams where waste from previous mining is stored).

The company has entered an agreement with mining company Renova, owned by Russian oligarch Viktor Vekselberg.

Renova will study Harmony’s uranium assets in South Africa and Harmony Renova’s gold assets in Russia.

Harmony is carrying out a pre-feasibility study on how to develop its uranium assets.

“The uranium content in the Randfontein slimes dam could be worth R2-billion,” said Swanepoel.

As indicated previously, the company hopes to have completed the pre-feasibility study in this area by mid-winter. At the same time it is close to completing a feasibility study on a possible project to retrieve gold from its mega dumps.

Swanepoel suggested that there might be a way in which uranium and gold could be processed from the dumps and slimes dams as part of a linked project.

While Harmony ponders further expansions locally , the company is again considering selling assets which it no longer feels fits with its strategy.

“It is not inconceivable that we would consider selling some of our lower-quality assets. We have had conversations with some listed companies,” said Swanepoel.

These may have been small-scale miners Pamodzi Gold and Simmer & Jack because these operate mines similar to Harmony’s older assets. Free State operations such as Joel and Bambanani may be up for sale as well as the Orkney shaft.

Swanepoel said the company’s strategy and the extension of the lives of mines needed to be considered.

“You have to ask: Are there not existing and emerging players who could create value from these assets?” he said.

He knew the company had to get back on track and said the talk of him being tired following the failed takeover for Gold Fields had been a false perception. He added that heading a growing gold company over the next few years “looks attractive” to him.

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