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A new hand of cards


Publication: Financial Mail
Journalist: Brendan Ryan

Harmony is set to sell off some marginal shafts and to look at developing its uranium assets, in a major reshaping of the gold group as new, long-life and higher-grade projects come on stream.

Agreement in principle has been reached to sell the Orkney 1 to 7 shafts to Pamodzi Gold for R550m, payable in cash and shares, as well as a royalty on production from those shafts.

The royalty is 3% on the first million ounces of gold to be produced. Harmony estimates that will be worth R250m, putting a total price tag of R800m on the deal. After the first million ounces the royalty drops to 1,75%.

Harmony CEO Bernard Swanepoel indicated at last week’s presentation of the March quarterly results that the group was looking at disposing of other marginal shafts, but declined to provide specifics.

“I don’t have a list of assets for sale,” he said, but added that "the mines in Western Australia will not sit comfortably in the Harmony of 2010/2011, and Kalgold is not a logical asset for us to keep."

Kalgold, in SA’s North West province, and the Australian mines turned in disappointing results for the March quarter, which was marked by a better-than-expected performance from most of Harmony’s SA mines.

It seems a number of marginal operations in the Free State are also likely to go. Swanepoel confirms he has received a tender bid for some of them.

The sale to Pamodzi follows a year in which Swanepoel has given out conflicting messages to shareholders over the future structure of Harmony.

These have included:

Listing the group’s Papua New Guinea mines separately in Toronto.

  • Keeping the marginal shafts to maintain Harmony’s production volumes;
  • Selling some of them outright;
  • Splitting the marginal shafts into a separate vehicle listed on the JSE through Village Main, which Harmony controls; and

Swanepoel’s vacillations have irritated some analysts. Investec Securities analyst Leon Esterhuizen asked him why he had dropped the proposal to list the marginal shafts separately.

Swanepoel replied: “We were offered more for the Orkney shafts than we believed we could make out of continuing to operate them ourselves. We have also retained some upside to the gold price on these shafts for our shareholders, through the royalty scheme.”

JP Morgan analyst Steve Shepherd considers the deal a smart move. Among other factors, it shifts the closure liabilities to another company. “Criticism has been levelled that this type of deal sacrifices the group’s leverage to the gold price,” says Shepherd. “We see it another way, bearing in mind the gold price can also go down. Orkney employs 3 000 workers who may one day have to be retrenched - and most of the shafts are short-life. Getting statutory closure certificates can also be expensive.”

A driving force behind the disposal of low-quality mines is that several of Harmony’s new, quality developments are about to start production.

“We are rebalancing our portfolio according to the hand we now hold, which is very different from the one we started with 12 years ago,” says Swanepoel. Turning to the Papua New Guinea operations, he says some of Harmony’s biggest shareholders have indicated they would like Harmony to maintain a large exposure to these mines. Listing them separately in Toronto would mean a dilution of Harmony’s stakes in them.

Harmony is developing the Hidden Valley gold mine and the Wafi/Golpu copper/gold deposits, and has an extensive exploration programme under way which is yielding promising results.

Swanepoel says Harmony is also now looking seriously at developing its uranium resources, which are contained mainly in surface tailings dams at its Randfontein and Free State mines.

He adds that he feels “embarrassed” about this, because he was first approached by fund managers about turning Harmony’s uranium assets to account five years ago. Harmony’s project managers also proposed the developments to him two years ago.

It seems Swanepoel’s attitude towards uranium was influenced by two decades of rock-bottom prices, during which almost the entire SA uranium industry was forced to shut down.

Says Swanepoel: “My managers have now shown me that there’s potentially up to R4bn worth of value in the Cooke dump at Randfontein, which is believed to contain up to 25m pounds of uranium, and there could be similar value in the Free State tailings dams. I am now very excited about our uranium prospects.”

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