Harmony: Staring down the barrel

Hidden Valley a ‘painful lesson’


The company’s full year financial results were amongst the toughest they have ever presented. Is the company sustainable?

Warren Dick | Mine Web

These are tough, tough times for Harmony. The company that made a name out of buying marginal gold mines and relentlessly streamlining them to produce buckets of cash has probably endured the toughest results in its history for the financial year ending June.

This saw the company post a headline loss of R821m for the year, something that was further compounded by an impairment charge of R3.4bn. With everything else included, the company posted a net loss for the year of R4.5bn. Net debt increased by R1.3bn to R2.3bn.

The poor financial result came despite the Rand gold price rising during the year. In 2014, the average price received was R432 thousand (k) per kilogram (kg) of gold. In 2015, the average price received rose 4% to R449k per kg (see graph). The increase in the price received – largely as a result of the depreciating Rand – was offset by lower production, which fell by 8% year-on-year to 33,513kgs.

And despite the company’s best efforts at restructuring and driving efficiency, All-in Sustaining Costs rose by 11% to R458k per kg. That’s R9,000/kg higher than what the company received for its gold.

harmony 1

The impairment charge of R3.4bn came as a result of the company being forced to reduce the Life-of-mine for a few of its assets. This comprised: Hidden Valley (R2.1bn), Doornkop (R1.03bn), Phakisa (R278m) and Freddies 9 (R43m). Life-of-mine was reduced as a result of “lower commodity prices and high operating costs.”

It proved to be a moot point with the investment community, based on some of the questions that followed after the presentation.  One analyst questioned whether it would not have been better to sell the company’s Hidden Valley project at ‘resource phase’ rather than attempting to bring the project into production itself. (Hidden Valley was Harmony’s first offshore greenfield project that was developed in Papua New Guinea in conjunction with Newcrest Mining and as you can see from the impairments, has not been a wild success).

Harmony CEO Graham Briggs conceded that Hidden Valley had indeed been a “painful lesson” but noted that in hindsight everything is easier to call.

The answer didn’t deter analysts from questioning the current strategy for the company’s other developmental assets in Papua New Guinea, Wafi-Golpu in particular. Wafi-Golpu and other sites in Papua New Guinea were described as being “the future of Harmony” by Briggs in the presentation, adding that “major capital spend in South Africa is behind us.”

Again the question around strategy came to the fore: “How are you going to build these assets – Golpu in particular? Is it not better to sell them?”

Briggs’s response: “As you advance these projects up the value curve, you add value. We think we have substantially de-risked the project, and we believe the market has attached very little value to Golpu in our share price. We also think this is an environment in which we can build projects for a lower cost. So while selling is one of the options – for now we think the better course is to de-risk the project and give it a lower capital hurdle.”

The current status of the wage negotiations does not bode well for the company. It cannot afford a protracted strike, nor a costly increase. For this reason, as the company pointed out, it is the most poorly rated of the major gold producers – see graph. So these are trying times indeed, and something has to give.

harmony 2


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Filed under Financial returns, Papua New Guinea

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