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Harmony scraps Evander listing

Journalist: Brendan Ryan

Harmony Gold has dropped plans to spin off its Evander Mines division through a separate listing on the Johannesburg Stock Exchange.

The possibility was raised by CEO Graham Briggs in May, when Harmony released its results for the March quarter. At that time Briggs indicated the group was looking at ways to limit capital spending on marginal projects in South Africa.

He said: “The underpinning geological resource of Evander is the variable and very rich Kimberley Reef. The mining of this resource demands strict management philosophies and capital.

“We are currently looking at ways to unlock value at Evander, as it requires further capital to fully develop the abundant resource.”

In reply to questions at Monday’s presentation of Harmony’s June quarter results, Briggs said: “There are a lot of boxes to be ticked to carry out an IPO (initial public offering) and, after close evaluation, it was clear Evander did not tick them all.

“One of the critical issues, according to our advisers, was size. You need a company worth around R3bn and Evander was not going to get there.

“Another was the requirement for a robust business plan with good objectives. The Everest South project turned out not to be as robust as we initially thought it was.

“There were issues with the grade and the likely capital cost which rose to around R2.5bn, which is much more than we thought it would be.

“The Poplar project has plenty of potential, but a problem emerged that the core samples from some of the previous drilling work carried out had been destroyed.

“That posed a problem in terms of getting a competent persons report on the project, meaning we would have to repeat the drilling work to verify the previous results.”

For the June quarter, the Evander division produced 577kg (March quarter - 602kg) of gold at a cash operating cost of R283,939/kg (R256,013/kg) and reported an operating profit of R4.4m (R6.6m).

Harmony closed the 2, 5 and 7 shafts at Evander at the end of last year. Future mining operations will only take place from the No 8 shaft decline, where high-grade areas of ore will be targeted.

For the year to end-June, Harmony made a net loss of R192m (previous financial year - R2.9bn profit) while the cash flow statement shows the group had to borrow R1.2bn ( nil) to fund its hefty capital expenditure programme of R3.5bn (R978m).

Despite this, Harmony has declared an annual dividend of 50c which will require a total payment of R215m.

Asked why a dividend was being paid under these circumstances, Briggs replied: “Our shareholders deserve a bit of a dividend and it’s not a huge amount of money.

“I believe we have a very healthy company while this financial year will be good and the next will be even better.

“There are cost pressures building up, but we have a good set of assets and there’s a lot of hard work that has gone into controlling costs such as electricity consumption.”

Asked his opinion of the furore over the mining rights disputes at Kumba Iron Ore and Lonmin, Briggs said: “Those events are concerning.

“They have required us to relook at everything again from a different angle. We have done that and will continue to watch it.

“Harmony’s operations are a lot simpler than those of the platinum mines on the Merensky and UG2 reefs.”

Briggs forecast that Harmony’s total gold production would rise to 1.7 million ounces (m oz) in financial 2011, from the 1.43m oz produced in financial 2010.

But he added the production target for financial 2012 had been revised to 2m oz from the initial 2.2m oz.

He commented there would be “a significant emphasis on ensuring that these are 2m profitable ounces. This is in line with our strategic objectives, and takes into consideration the closure of some of the Virginia and Evander shafts sooner than had been planned.

“We do not expect further shaft closures, with the exception of Merriespruit 1 should it not comply with the two conditions outlined in the profitability agreement.”

Briggs said a number of Harmony’s mines which were currently ramping-up production - including Kusasalethu, Phakisa, Doornkop, Tshepong and Target - would become “the best gold mines in South Africa in the next three years”.

He said these would provide the cash flow Harmony needed to fund growth at the Wafi/Golpu mine in Papua New Guinea.

Briggs said: “We remain committed to South Africa, and see our South African assets as an important part of our portfolio.”

The writer owns shares in Harmony.

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Harmony Investor brief, Sep 2017
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Harmony Investor brief

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