Allan Seccombe| BD live | 6.02.2016
HARMONY Gold, which expects to be debt-free at the end of this year, has run into a conundrum at its Hidden Valley mine in Papua New Guinea, and it may be the first tough decision for new CEO Peter Steenkamp.
Harmony shares the Hidden Valley mine with Australia’s largest gold miner, Newcrest Mining, and the partners have grappled for years to make the mine a sustainably profitable gold and silver producer since it opened in September 2010.
Now, it appears Newcrest has reached the end of its patience after it appointed Sandeep Biswas its new CEO in 2014 to head a programme of restructuring and appease shareholders angry about multiple production downgrades by focusing on generating cash and running a more operationally disciplined firm.
One of the mines that came under scrutiny was Hidden Valley, a marginal mine, difficult to access and which has run into safety issues that have led to long shutdowns. Harmony impaired the mine by R2.1bn last year.
While Newcrest may want to sell or close the mine, it will remain a partner with Harmony on the undeveloped Golpu project, which will deliver a copper and gold mine in Papua New Guinea in coming years.
“They want to remain as long-term partners. The big issue is really about Hidden Valley. It’s had quite a bad run in the past few quarters and, at the current dollar gold price, it really is a marginal asset,” Mr Steenkamp said on Friday.
“Newcrest certainly is very excited about Golpu,” he said.
At the prevailing rand-gold price, Harmony would be debt-free by the end of December, said chief financial officer Frank Abbott. Harmony will release its Golpu feasibility study on February 15.
“The study will show that for the next two or three years, it is very fundable for Harmony, at Golpu and we probably wouldn’t need to incur any debt.
“After that, capital would ramp up and we would look at our options at that stage,” he said, adding there would be enough cash flow from the South African mines to fund dividends and early work at Golpu.
The partners are negotiating a pre-mining agreement for Golpu with the government and are understandably coy when it comes to saying exactly what their intentions are with Hidden Valley. As part of a review of the mine, which has enough ore exposed to continue mining this year, it will decide whether to invest $50m to push back the edges of the open cast mine and expose more material.
The other options include suspending the mine or selling it outright. Harmony is unlikely to want to take full ownership and mine it alone.
A decision will be made by end-June, the financial year-end for Harmony and it will mark the first major decision around Harmony’s assets for Mr Steenkamp, who has been in the CEO role for six weeks.
“We are looking at strategic options at Hidden Valley,” he said.
Mr Steenkamp has visited the mine in which all pre-stripping of waste material to expose ore has stopped until metal prices improve “significantly” and mining will focus on remaining cash flow neutral or, at best, positive.
“It’s probably one of the nicest mines I’ve ever visited. The pit conditions are fantastic; the fragmentation is great. The conveyors, the crushers and the plant are all working well, but the problem is that it’s a marginal ore body,” he said.