Bernard Swanepoel
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» Harmony failing the acid test
» Harmony output to fall 13% in 2006
» Harmony's bid for Gold Fields


Harmony's latest buy gives the market jitters
Allan Seccombe
Posted: Fri, 10 Mar 2006

[miningmx.com] -- Harmony Gold shares fell on Friday as the market digested the news the company had bought a 29% stake in Western Areas, which has a crippling hedge book and faces a large capital expenditure programme at its sole asset, the 50% stake in South Deep gold mine.

Harmony’s shares on the Johannesburg bourse fell six percent to a morning low of R77.50 before pulling back to R78.50 by midday. The shares fared better in New York overnight.

“The offshore shareholders are looking at this and saying it’s a good asset to get into. It’s a good thing in rising gold market to put cash to work in a good quality asset,” said Georges Lequime, an analyst with RBC Capital Markets.

A number of South African gold miners, including Gold Fields and AngloGold Ashanti, have taken a close look at Western Areas and it was just a question of time before an offer was made.

The Western Areas share price rocketed 17.5% higher on Friday to R41.50, raising speculation that another company might throw its hat into the ring.

“There may be bit of a bidding war between Harmony and someone else,” Lequime said.
There may be a bidding war between Harmony and someone else
Some analysts said that as a long-term prospect the Western Areas buy is a wise move, despite the problems of the hedge book, capex and the published 39% holding in Western Areas by JCI, which has been left in an unholy financial and corporate mess by former CEO Brett Kebble.

It is thought JCI's stake has been reduced to just above 30% by Kebble disposing of Western Areas shares. The exact JCI holding in Western Areas will be made known at the end of this month when auditors release a long-awaited report into the JCI’s financial affairs.

JCI, which is not actively looking to sell its Western Areas shares, could do a deal with Harmony if the price was right, said JCI spokesman Brian Gibson.

Other analysts are less convinced about the wisdom of Harmony’s purchase, saying Harmony, which has made an investment case for itself as an unhedged gold producer, is making a mistake becoming involved with a hedge book that is negative mark-to-market to the tune of R2bn.

“In the short term there are some really high hurdles that they need to get over, these are the hedge book and capital development,” said a South Africa-based analyst. “It's the hedge book issue that really the worry.”

The Western Areas hedge book affects production until 2014. It will affect 90% of Western Area's attributable portion of South Deep's production this year, said an analyst.

If production levels increase the smaller the proportion of ounces become that are affected by the hedge book and the more ounces can be sold for the spot price in a rising market, but so far the volumes haven’t come through.

Former deputy finance minister and South African Reserve Bank deputy governor Gill Marcus, who was appointed as chairwoman of Western Areas in November, has said the board is investigating ways of mitigating the effects of the hedge book.

“Buying a hedge book is not always the optimum way of dealing with it. There’s a combination of delivering into it, rolling it and from time to time buying it back. I don’t think we bring any new perspective. As Harmony we really don’t like hedging,” Harmony CEO Bernard Swanepoel told Miningmx on Thursday.

A cloud uncertainty hanging over the South Deep project is whether Barrick will stay on as the other 50% holder of the mine as a joint venture partner. It recently acquired Placer Dome and its South Deep stake.

Again, views are divided on whether the Canadian company, which has in the past made clear its aversion to deep-level mining in South Africa, will retain its stake in South Deep, which goes down three kilometres.

Stephen Roelofse, a fund manager at Sanlam Asset Management, said with Peter Kinver, a former Anglo Platinum employee with South African underground mining experience, as Barrick’s chief operating officer the Canadian miner might just decide to keep its stake.

Lequime said Western Areas hold the right of first refusal if the Barrick stake comes up for sale, which adds to the company’s value.

“He who controls Western Areas ultimately controls the whole of South Deep.”

The big question is whether Harmony will up its stake in Western Areas and if it does so, how will it fund that. Harmony has issued shares in the past to grow, but some analysts think this would annoy Harmony shareholders if it does so again to increase its Western Areas holding.
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“I don’t think they’ll do a rights issue. The market wouldn’t like it. Their current gearing after this transaction is 12%,” said an analyst, who thought raising debt was possibly the best option. He had a target price on Western Areas’ shares of R50.

Harmony bought the Western Areas’ stake for R2bn at an average of R44 per share. A billion was raised through Rand Merchant Bank and the balance from its R2.9bn cash pile.

"Bernard's probably going to make an offer at some stage. I can’t see him taking a passive investment in an asset like this," said Roelofse.

Harmony is unlikely to generate cash until early next year if the rand gold price stays above R100,000/kg as it is now, the analyst said.

“Harmony has lots of low-grade, low-volume, mature assets. They need to shift their asset base towards higher quality, longer life, higher grade, higher volume assets, which is exactly what South Deep is,” he said.

South Deep has reserves of 29 million ounces and a life of 25 years.