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SAfm Market Update: Harmony Gold results

Publication: MoneyWeb
Journalist: Alec Hogg

Listen to the SAfm Market Update


Alec Hogg: Graham Briggs, chief executive of Harmony Gold is in the studio with us. Graham, one can perhaps start off with the major issue. We spoke last night with Nick Holland of Gold Fields Limited. He said that if Eskom gets its 45% a year increase for the next three years, it’s going to raise the cost of producing an ounce of gold at his company by 30%. Have you worked those numbers through?

Graham Briggs: It’s a difficult problem because you have to understand it’s not only the direct electricity cost. It’s actually the cost of your consumables, the steel that you use, and it will impact on salaries, wages and all that sort of stuff. So it’s a difficult issue. Our sort of early figures are 15% per annum, so that’s a big number. I mean it is a proposal. We need to discuss it. But, you know, a South African gold mining industry is going to take a heavy knock if that happens.

Alec Hogg: You need to lobby, don’t you?

Graham Briggs: Well, you need to lobby, not only as a group - and we do that in the Chamber of Mines, the gold mining companies certainly, but probably other mining companies as well, and individually.

Alec Hogg: He was saying it was 30% just on Eskom’s price to you guys. He then said if you add in the steel prices and, as you mentioned earlier, the consumables, it would be even higher than that. So this is a very serious issue for employment in the country in future and clearly for the gold sector.

Graham Briggs: Yes. The gold sector probably employs - I think the number is somewhere around 170 000, 180 000 people. The knock-on effect in most gold companies is probably one-to-ten, so you are talking of two million people here that are going to suffer from this process if they are out of work. It’s a big number.

Alec Hogg: Another big number was that you did disclose that the electricity of the past quarter was up R135m, and this is before the 45% increase.

Graham Briggs: Yep. So the R135m, of which R75m is winter tariffs. Four months of the year we have winter tariffs, and that’s June and then the quarter we’ve just done. And roughly at the moment that is R25m a month, the winter tariffs on its own.

Alec Hogg: Will that drop away...

Graham Briggs: Well, that drops away during the next few months, but obviously as increases come through, and I’m not sure when the next increase will come through, but if it comes through in March obviously the next winter tariff will be at a higher rate.

Alec Hogg: Well, it’s clear that electricity is becoming an issue. The labour costs, the increase there was even larger than what you paid in electricity in the past quarter. Was that due to annualised increase?

Graham Briggs: Ja. The annual increase came in 1st July, and there’s a bit of a once-off in salaries. Once you do the salaries increase, all those leave liabilities also ramp up a little bit. There’s about R35m involved in that. But it’s a once-off.

Alec Hogg: Graham, I was doing a few numbers, going back six months, not three months - remember we are talking about a quarter here - and the gold price in dollars has gone from $900/oz to round about $1050, up 16%. The gold price in rands is virtually unchanged. Harmony’s share price is down 7.5% - and I guess it’s in line with the gold sector as a whole. This stronger rand then is not only affecting your profits, but it’s clearly affecting your shares.

Graham Briggs: Yes, it’s very difficult to actually try and relate gold price and the share price directly because a lot of it is on sentiment. People see the gold price going up, or see the rand weakening, and people make judgements and factor in. So it’s very difficult to look at the gold price and simply say: "This company is going to be more profitable." But we are very sensitive to the rand gold price.

Alec Hogg: Probably the most sensitive of any gold stock on the JSE.

Graham Briggs: Absolutely, because most of our production is from South Africa, and just the gold price movement from R240 000 as it was last quarter to the current price of round R260 000, that’s R20 000/kg. For us that’s another R220m in profit. So it’s massive movement. That’s just a small change in the exchange rate.

Alec Hogg: So if we see the rand coming under further pressure, it seems to have reversed - there’s a lot of effort by government, by the authorities, to get the rand weaker - that would have a very quick impact on your bottom line.

Graham Briggs: Absolutely, yes. A huge impact.

Alec Hogg: As far as Harmony as a whole is concerned, in this quarter your production was better than expected. We’ve spoken about why the cash costs were up, but perhaps the most important thing is you’ve invested heavily for many years now in expanding your operations. Where are you in that process?

Graham Briggs: Well, it’s good news, because we are at the end of that, and all our cash going into these new capital ventures actually is coming down. Quite dramatically we spent in this last quarter R950m, next quarter will be another R100m down, the quarter after that - so quarter by quarter it’s going down by R100m for the next three quarters.

Alec Hogg: So you are still burning cash. Have you got plenty in reserve?

Graham Briggs: Well, I guess you would say "burning cash". We would say we’ve been investing it, and what’s nice to see is that the production is coming through from those new projects, and they are building up. So that’s all ramping up and there’s this delay between investing the money and returns.

Alec Hogg: I ask this because you did pay your first dividend in five years in September. If at some point in time two lines are going to cross - you are going to start spending less money and have more money available for dividends - the question is, when might that be?

Graham Briggs: Well, I think we have sort of made an objective internally to try and pay annual dividends. We haven’t got a policy as such, but that’s what we would like to do. It’s an indication, I think, of a healthy company to be able to do that. That’s our aim. Obviously it depends a lot on economic circumstances.

Alec Hogg: So if we see the gold price going up and we see the rand, please God, falling a little, then the dividend payment this year from Harmony could be quite a substantial increase on that initial one you paid last year?

Graham Briggs: Ja, it certainly should be better, but remember that our investors also want us to invest in further projects, possibly in this country or in other countries. So they certainly would want to see growth as well.

Annual report

Integrated annual report 2016
Integrated annual report 2017


Investor brief

Harmony Investor brief, Sep 2017
September 2017 -
Harmony Investor brief

(PDF - 6.5MB)

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