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Harmony in cash crunch as sales falter

Publication: Business Report
Journalist: Justin Brown

Johannesburg - Harmony Gold’s strategy to bring in cash through disposals has come under pressure as transactions worth a total of R4.4 billion have been halted or delayed, while shares received as payment have lost value.

The deals include the sale of a 60 percent stake in Rand Uranium for $252 million (R1.9 billion) to Pamodzi Resources Fund, which has $1.3 billion available; and the disposal of a 30 percent stake in its Papua New Guinea (PNG) operations for $225 million to Australian group Newcrest Mining.

The sale of the Mount Magnet gold mine in Australia to Monarch Gold has been halted, depriving Harmony of A$65 million (R440 million) in earnings, including as much as A$25 million in cash.

The value of 30 million Pamodzi Gold shares that Harmony received earlier this year as payment for its Orkney assets has fallen from R300 million to about R105 million.

An analyst who wished to remain anonymous said the Rand Uranium and PNG deals were orders of magnitude bigger than the Mount Magnet and Orkney deals.

The latter deals “are not material”, he said, but “if either the Rand Uranium or Newcrest deal comes unstuck, then Harmony will have a problem”.

Harmony had expected to receive $477 million last month from the Rand Uranium and Newcrest deals. It hoped to use this to pay off R2 billion in debt to Nedbank and close out a R1.6 billion convertible note.

Graham Briggs, Harmony’s chief executive, said the PNG deal was happening. “Tomorrow morning we will be shaking hands. We have already swapped account numbers.”

A joint venture with Newcrest was approved last month by the PNG government.

However, a strengthening of the rand in the last few weeks means that the inflows from the two deals will be reduced.

Briggs said the Rand Uranium deal was “well over time” but the “D-day” was September 12. “We are working hard on getting the deal done,” he said.

Gerhard Kemp, Pamodzi Resources Fund’s chief investor officer, said the fund was waiting for the transfer of mining rights to Rand Uranium as well as a licence from the nuclear regulator to mine uranium.

Briggs said that when the Monarch deal was concluded the Australian junior equity market was buoyant, but a downturn had caused the company to go into administration.

“The due diligence for doing a deal with a relatively small company and on a relatively small and unimportant asset was not huge,” he added.

He said Harmony’s financial advisers did a full due diligence on the company’s ability to raise money. “We are going through the sale process again.”

Pamodzi’s share price has declined, mainly due to its battle to raise funds. Pamodzi has been looking for $50 million in funding since late February.

Last September Harmony agreed to sell the Orkney assets for R550 million, including R350 million cash. In February the total was reduced to R300 million in Pamodzi shares.

Briggs said the change was due to Pamodzi’s funding woes. It was a case of, ‘Do we take the assets back or try and renegotiate the deal?’

“In hindsight you could say that we should have taken the asset back and dealt with them in some other way.”

Harmony fell 1 percent to R68.30 yesterday. The gold sector declined 0.35 percent.

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