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Pamodzi buys Harmony shafts for R550m

Publication: Miningmx
Journalist: David McKay

PAMODZI Gold, a Johannesburg-listed gold junior mining firm, is to buy gold mining shafts near Klerksdorp owned by Harmony Gold in a R550m cash and shares deal that will double gold production and triple resources.

The proposed transaction is currently framed by an in-principle agreement with conclusion of a formal deal expected no later than June 30, Pamodzi Gold said in an announcement to the JSE. The announcement confirms Miningmx’s earlier speculation.

Payment for the Orkney shafts (1-7) will be through a combination of cash, debt and new Pamodzi shares to Harmony Gold. In an effort to retain the black-owned status of Pamodzi Gold, parent firm, Pamodzi Resources, will also subscribe for new shares.

“This deal gives us massive flexibility,” said Ken Steenkamp, Pamodzi Gold CEO, in an interview. “It’s a great deal for us and good deal for them [Harmony].”

Harmony Gold will also receive payment through a royalty system which appears to be the first of several planned by the gold producer.

In terms of the scheme, Pamodzi Gold will pay to Harmony 3% of net smelter revenues for the first one million ounces of gold produced by the Orkney assets. A further 1.75% will be paid of net smelter revenue on the balance of gold production.

Annualised gold production from Pamodzi would be in excess of 300,000 oz, but in the second year of ownership output would be lifted to 340,000 oz, Steenkamp said.

According to Miningmx calculations, the Orkney 2, 4 and 7 shafts produce about 162,000 oz/year of gold. In addition, gold resources at the Orkney shafts are estimated to be between 15 million to 20 million ounces. Pamodzi Gold currently has gold resources totalling 10 million ounces.

In a presentation before its December listing, Pamodzi said that it would produce 200,000 oz from the beginning of 2007 with plans to double that to 400,000 oz/year.

However, the company has encountered mining problems at its existing mines while profitability has been held back by a sales contract at the East Rand mines which sells gold forward at predetermined prices.

Steenkamp said the company would issue more shares than it needed for the Harmony Gold in order to retire about 60,000 oz of the hedge book. “This will help Pamodzi start flying,” another source told Miningmx.

Whether the Orkney shafts will contribute significantly towards Pamodzi Gold’s profitability is a moot point, however. The Orkney shafts, in Harmony’s hands, have been variable performers.

The Orkney shafts (2, 4 and 7) are considered ‘leveraged ounces’, according to Harmony Gold’s website. This means they make money when the price of gold ramps up. The three shafts produced a combined profit of R54.1m in the December quarter, a vast improvement on the R7m profit in the September quarter.

AngloGold Ashanti, which first sold the Orkney shafts to ARMGold in the Nineties — unconditionally waived its preemptive rights over the assets. Harmony bought ARMGold in 2003.

Commenting on future deals, Steenkamp said others were in the planning stages. “This will not be the last. We’ve got other plans.”

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