Harmony hedges 20% of gold as eyes task of building Golpu

Peter Steenkamp, CEO, Harmony Gold

HARMONY Gold has hedged a fifth of its gold production for two years – equal to about 432,000 ounces – as it seeks to strengthen its balance sheet ahead of heavy capital expenditure on its $2.6bn Golpu project in Papua New Guinea (PNG).

In an announcement to the Johannesburg Stock Exchange, the R27.5bn company said it wanted to “create cash certainty” and to “secure margins at some of our higher cost operations”.

It also said that it had met its annual gold production guidance for the 2016 financial year of 1.1 million ounces and had increased underground grade 6% to 5.02 grams per tonnes – the fourth consecutive year of increased underground grades.

“Our hard work has paid off and I am extremely pleased with Harmony’s performance,” said Peter Steenkamp, CEO of Harmony Gold. “Harmony is well positioned to benefit from a strong R/kg gold price.” Harmony Gold is due to report its full-year results ended June on August 17.

Commenting on the hedge, Steenkamp said: “The gold hedge was a necessary short term step to secure our margins at some of our higher cost operations and creates certainty on a portion of our future cash flows.

“It enables us to further reduce our debt and strengthen our balance sheet,” he added. Steenkamp told Miningmx in an interview in May that the group was achieving margins of up to 45% at some of its mines.

He also said it was crucial the company build “a kitty” of cash for investment in Golpu. “I think it’s important that we position ourselves now because, obviously, the good days are not always going to be here,” he said.

In February, Harmony said the first phase of Golpu, which it holds in joint venture with Newcrest Mining, would cost $2.6bn and would produce 500 000 gold equivalent ounces per year on an attributable basis during peak production.

HEDGING

Commenting on the hedge, Harmony said it would lock in 20% of its gold sales at “a very attractive” average rate of approximately R682 000/kg. South African gold producers currently achieve R617,731 per kilogram, an increase of about 14% since the beginning of the year.

“The limited size and duration of the hedge means shareholders retain full upside exposure on 80% of Harmony’s future gold production for the next two years, after which shareholders will have 100% exposure to the gold price,” it said.

Hedging gold, once considered a swear word in the early 2000s when the likes of Ashanti Goldfields and AngloGold Ashanti ran into financing problems because of it, has made a comeback recently.

According to JP Morgan Cazenove’s commodity team, some 79.6 tonnes (2.8 million oz) of hedging was announced in the first quarter of this year compared to only 9.2 tonnes in the whole of 2015.

“JPM feels that hedging strategy in Q1 shifted from protecting specific projects at the beginning of the quarter towards more strategic though still short duration hedging towards the end as producers found it increasingly more prudent to lock in hard earned profits,” said John Bridges, an analyst for JP Morgan.

Societe Generale and the GFMS team at Thomson Reuters said on July 11 that hedging increased by 50 tonnes (1.62 million oz), but it said that hedging gold would increase this year.

“Hedging within the gold producer community saw a broader base of mining companies covering production, albeit over shorter time frames than in 2015,” said Dante Aranda, a mining analyst at GFMS.

“With gold prices hovering near 2014 highs, the marked-to-market value of the current hedge book risks slipping into negative territory should prices continue trending higher,” he said.

“Nevertheless, GFMS expect that the heightened volatility and uncertainty surrounding gold prices in a number of currencies, and the apparent mellowing of investor perceptions to hedging, will lead to more producers joining the ‘hedging club’ over the remainder of 2016,” he added.