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New Harmony CEO plots future

Publication: Miningmx
Journalist: Allan Seccombe

HARMONY Gold is charting a new course as it looks to cut costs, restructure its assets, bring in a partner on its Papua New Guinea projects and repay two large debts over the next couple of years, newly appointed CEO Graham Briggs said on Wednesday.

Briggs was appointed caretaker CEO of the world’s fifth-largest gold producer in August after the sudden resignation of Bernard Swanepoel, the man largely seen by the market as the driving force behind the creation of the company from a single mine.

News of Swanepoel’s departure knocked billions of rands off Harmony’s market capitalisation within the hour.

Briggs, who headed Harmony’s Australian operations and appointed group CEO with effect from 1 January 2008, says it is going to take time to complete the restructuring of the company’s mines and restore them to profitability.

Part of the restructuring is the decision on what to do with the marginal mines, which have generally underperformed in a record rand gold price environment.

“The first and biggest challenge is to put in place a strategy for the company going forward. We have a mixture of assets and some great challenges, like costs,” Briggs told Miningmx in an interview.

“The marginal assets should, with these gold prices, be generating good profits, but because of our lack of cost controls, that’s not happening,” he said.

The marginal assets could either be farmed out to other smaller producers or sold, as Harmony has done with the Orkney mines in a deal with Pamodzi Gold, separately list them or keep them within the group to turn them back into cash generators.

“A lot of those assets have great potential going forward, but we have got caught in big capital expenditure in the last couple of years and in the future. We therefore cannot afford to spend capital on the poorer assets,” Briggs said.

Harmony spent R1.2bn on five growth projects in financial 2007 and foresees group capital expenditure of R3.8bn in financial 2008.

The appointment came as no surprise to analysts, who thought he was the best possible appointment, given his long history with Harmony and his aggressive approach in turning around the company as acting CEO, creating a uranium company and selling marginal assets.

"The nice thing about this job it will be nearly impossible for him to mess up the company any more than it has been," said an analyst who declined to be named.

“I think this is a turning point for Harmony,” the analyst said.

“Those assets are by no mean no-hopers. In the right hands -- and those could be our hands -- they can be good money spinners. It’s just the timing of when we spend capital on them is not great.”

Speculation has run rife in recent years that Harmony will house its marginal mines in a separate company and list it, giving shareholders the choice of investing in high-quality mines or the more marginal plays, which should be strong cash generators in a high gold price environment.

Asked specifically about the separate listing option, Briggs said, “It could certainly happen and it’s one of the options. But where do you call the split? A lot of these are interdependent locally, so that’s something you’d have to look at.”

Harmony’s five growth projects will lift gold production to 3.1 million oz by 2011. Harmony expects gold output in 2008 to be less than the 2.334 million ounces generated in 2007.

The strategy will have to take into account the timeframe to bring production to account from the growth assets because some of the marginal, short- to medium-life mines are supporting those projects.

In Papua New Guinea, Harmony has drawn up a shortlist of five potential partners for the Hidden Valley and Wafi/Golpu projects, whittling the list down from more than 20 before the year-end.

“We hope to introduce the partner by the end of the first quarter of 2008,” Briggs said.

“We are not going to sell our Papua New Guinea assets. The strategy behind the partnering is that we want to grow in that region but we can’t afford all the capital to get the full benefit from all these projects.”

The undeveloped Wafi/Golpu copper porphyry faces expenditure of $100m on a feasibility study and a further $1bn to build a mine. Harmony is looking for a partner that could reduce capital expenditure and possibly revisit the planned mining methods.

“Once they've got Papua New Guinea done their whole capital requirement will reduce, which will be very good for the company,” the analyst said.

While Harmony doesn’t need to come to the market this year for its capital expenditure, the picture is likely to change. Harmony needs to repay a bank loan of R2bn at the end of calendar 2008 and in May 2009 there is a convertible issue for about R1.7bn.

“These are crunch years and we need to get our act right before then,” Briggs said. One of the options to settle this heavy demand on its cash could be a rights issue.

Harmony is realising some R1.6bn from vending its Randfontein uranium assets into a new companyin which it will hold 40%. The money will go towards the growth projects as well as repaying debt.

“We are at the moment focussing more on properly structuring our operations. It takes a long time to turn these ships around,” he said. Harmony is decentralising services and it has asked for voluntary retrenchments.

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