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Harmony Gold to cut costs, capex amid gold price volatility

Publication: Mining Weekly
Journalist: Leandi Kolver

South African gold producer Harmony Gold plans to cut its service and corporate costs in South Africa by R400-million and its overall capital expenditure (capex) in South Africa and Papua New Guinea by R1.4-billion in the 2014 financial year, Harmony Gold CEO Graham Briggs said on Friday.

“We cannot influence or predict the future price of gold. For the past year, the high gold price has assisted us in producing strong margins but, with the gold price that fluctuated and decreased to levels close to $1 400/oz, immediate actions to reduce costs were implemented during April,” he said on Thursday.

Larger cost-cutting measures, such as shaft or mine closures, were not envisaged at the moment, Briggs stated.

He told Mining Weekly Online that the cost reductions were aimed at keeping the company profitable should the gold price stay at levels of around $1 400/oz. “Should the price fall to levels of around $1 200/oz, we would have to do dramatically more to remain profitable.”

Briggs pointed out that, while major job cuts were not expected, as no shafts would be closed, some of the actions to come included reducing service and corporate costs, as well as renewing or renegotiating all external consultant and supply contracts, which would lead to some job losses.

“While we will not follow a Section 189 retrenchment process, employee numbers will be reduced through a voluntary process. However, the total number of jobs cut should not exceed 500,” he assured.

Harmony recorded an operating profit of R821-million for the March 2013 quarter, following a 15% quarter-on-quarter drop in gold output to 7 699 kg.

The decrease in production was mainly as a result of the temporary closure of the Kusasalethu mine, near Carltonville, owing to safety and security reasons; the damage to the ventilation shaft at the Phakisa gold project, in the Free State; and a slow start-up at the other operations post the festive season, the company stated in a media release.

The rand per kilogram unit cost for the March 2013 quarter increased by 17% to R362 491/kg. The costs were, however, skewed, as Kusasalethu was not in production during the quarter under review.

Capex for the quarter amounted to R677-million – R189-million less than the December 2012 quarter, the company stated.

“This quarter was a poor quarter with regard to gold production, but this was not unexpected. Kusasalethu not producing gold during this period had a massive influence on the results. During the last two quarters, 2.5 t of gold production was lost as a result of disruptions at Kusasalethu.

“This reflects on the year’s result from Kusasalethu, highlighting the cost of that type of industrial action. If you multiply 2.5 t of gold by the current gold price, it amounts to R1.2-billion in revenue,” Briggs said.

During the third quarter, Harmony still had most of the costs relating to Kusasalethu to deal with, without any revenue coming from the project; which accounted for a big swing in the company’s results, he added.

“The results for the March quarter have reaffirmed that we need to do more to meet expectations,” Briggs stated.

“We are focusing on getting assets such as Kusasalethu and Phakisa into full production. The damage to the ventilation shaft at Phakisa was a blow that affected us in that we have not been able to ramp up. Kusasalethu was another blow.

“We, the whole of Harmony – management and employees – have to work harder to produce the gold we said we were going to produce. We have had the advantage of a favourable gold price and we must not squander that opportunity,” he asserted.

Meanwhile, highlights for the quarter included a quarterly lost-time injury frequency rate of 5.15 – the lowest in company history; the signing of a watershed agreement with Kusasalethu labour; and achieving the best drill production of 14 664 m at its Wafi-Golpu project, in Papua New Guinea, where the gold recovery testwork programme determined a material improvement in both gold and copper recoveries.

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