Graham Briggs, CEO, Harmony Gold
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» Harmony takes a third of Pamodzi Gold
» Radical change at Harmony
» Harmony's turnaround marred by safety, power
» Harmony weighs large surface project
» Harmony project not yet in the bag
» Harmony to release cash flow valve
» Harmony mine passes milestones
» Harmony switches offshore strategy

» JSE:HARMONY GOLD MINING COMPANY LIMITED:
6697c 0%

Turnaround hopes for Harmony
Brendan Ryan
Posted: Thu, 28 Feb 2008

[miningmx.com] -- HARMONY’S share price jumped 500c to around R80/share in trading immediately after the release of the troubled gold miner’s December 2007 quarterly results. Reason is investor optimism that Harmony is finally turning around in a sustainable manner.

However, analysts’ opinions are heavily split over the issue. There’s good reason to be cautious as Harmony’s been in that position before.

Harmony’s September 2006 quarterly results were the best from the group for the previous two-year period. At the time the news sent the share sharply upwards, moving back above R100 and reaching as high as R123 because investors reckoned the worst was over.
a clear pick in the South African gold sector
The euphoria lasted just three months. The subsequent December 2006 quarter results provided a nasty shock as the group was again hit by erratic grades and production performance and the price returned to the mid-R90/share levels.

Former CEO Bernard Swanepoel’s abrupt departure in August last year sent Harmony’s price tumbling to R60/share, from where it’s clawing its way back under the leadership of new CEO Graham Briggs.

JPMorgan says: “Harmony is a clear pick in the South African gold sector. We’re bullish on the gold price and continue to see a strong recovery in the stock in a record rand gold price environment.”

Deutsche Securities takes the opposite view, believing Harmony is still too exposed to deep-level gold mining risk and rates the company a “sell” with a target price of R65/share.

Cadiz fund manager Peter Major occupies the middle ground. He says: “Graham (Briggs) is making rapid progress, turning that company around – better progress than his competitors. But the jury is out; there’s still a lot more work to be done. He can’t sleep. He’s got to go 24/7 for another few months, I’m afraid.”

Major adds: “I don’t like it that Harmony is spending so much money on projects half-way around the world in Papua New Guinea (PNG), given its perilous financial situation. If I could be convinced that Harmony isn’t going to spend further large amounts in PNG then I think Briggs is over the hump.”

Briggs is working on that one. He says Harmony’s preferred approach is to find a partner prepared to take a 50% stake in all the group’s PNG assets and added the announcement of such a partner was “imminent”.

Harmony is also arguably the best placed of South Africa's gold mines to cope with Eskom’s 90% power rationing restriction. Reason is the mining groups are being forced to choose which shafts and mines will get the available power.

Harmony is cutting back anyway on its operations, meaning it will be able to allocate the power to its higher-grade, more profitable mines.

Harmony has already shut down its St Helena mine in the Free State and is selling its Orkney shafts to Pamodzi Gold. Pamodzi Resources Fund is buying the Cooke 3 uranium dump.

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Further restructuring of Harmony’s operations under Briggs has involved an end to continuous operations at Masimong and a downscaling of operations at its Evander 7 shaft. So far, 4,958 employees have been retrenched and another 4,859 transferred to more profitable operations.

Harmony has also changed its management system on the mines back to the traditional structure of mine captains and shift bosses from the system of “coaches” favoured by Swanepoel.

The two key numbers that will determine what happens next at Harmony are the gold price and the group’s working cost figure. The average gold price received for the past six months was R163,000/kg. Harmony’s average cash cost for the past six months was R133,000/kg, providing an average operating profit margin of 18.4%.

The gold price currently sits between R220,000/kg and R230,000/kg. Briggs’s forecast is that Harmony will hold its cash costs unchanged at R133,000/kg for the next six months.

Reasons for his optimism are that Elandsrand has been turned around, while production is building up from better quality mines such as Phakisa and Doornkop, which are coming on stream.

Assuming Briggs is right and Harmony holds its costs unchanged, the operating margin is going to open up to around R90,000/kg – 68% – which, as Briggs told investors at the quarterly briefing, is “huge”.

That also assumes the gold price will hold up at current levels which, given the strength of the US dollar gold market combined with the weakness of the rand, seems likely.

That kind of profitability surge would transform Harmony’s fortunes, as well as those of any South African gold group able to keep its working costs reasonably under control.

The continuing underperformance of South African gold stocks indicates either investors don’t believe managements can hold down their working cost levels or they haven’t realised just how much cash could be generated by the mines at current rand gold prices.