Harmony to spend $180m doubling Hidden Valley after $1 deal

3
2509
Hidden Valley, Papua New Guinea

HARMONY Gold is to buy out joint venture partner Newcrest Mining’s 50% stake in Hidden Valley and invest $180m in the Papua New Guinea mine in an effort to double its production.

The South African gold miner announced today that it intended to increase production at Hidden Valley to 180,000 ounces a year as part of its ambition to lift group production 400,000 oz/year in three years to 1.5 million oz/year.

“Acquiring 100% of the Hidden Valley mine and its surrounding exploration tenements meets our acquisition criteria,” said Peter Steenkamp, CEO of Harmony Gold.

“After the initial investment phase Hidden Valley will generate strong free cash flows, which could be applied to the development of the Wafi-Golpu project and our exciting exploration portfolio in Papua New Guinea,” he said, adding that the plan was to mine the 5 and 6 cutback at the mine.

The first phase of Wafi Golpu, in which some 3.6 million ounces of gold will be produced, is slated to cost about $2.6bn, equal to R37bn on an 100% basis

Harmony forecast production of between 80,000 oz to 95,000 oz this year – equal to 8.5% of total production – at a cost of between R395,000 to R425,000 per kilogram.

“Our acquisition of the Hidden Valley mine is aligned with our overall aspiration to increase our annual production profile to 1.5 million oz within three years,” said Steenkamp.

“We believe that Hidden Valley has the potential to contribute approximately 180,000 oz gold per annum to Harmony’s production profile at an all-in sustaining cost of less than $950/oz within the next three years,” said Steenkamp.

It also said the mine of life of Hidden Valley would be extended by seven years. The current life of mine was estimated to be between three and six years, according to Harmony Gold’s 2015 annual report.

As of June 30, Hidden Valley had an estimated mineral reserve of 1.4 million oz at 1.6 grams per tonne (g/t) and some 27 million oz of silver at a grade of 31g/t. The estimated mineral resource includes four million oz of gold at 1.6g/t and 73 million oz of silver at 29g/t.

In terms of the offer to Newcrest, Harmony will buy the Australian firm’s wholly-owned subsidiary, Newcrest PNG 1 Ltd, for $1 in cash. It will also include assuming all liabilities and expenses related to the mine, including environmental liabilities, and Newcrest’s 50% stake in Hidden Valley’s adjacent exploration tenements.

Newcrest had made a $22.5m once-off contribution towards Hidden Valley’s future closure liability, said Harmony. The two companies would remain joint venture partners in the Wafi-Golpu project, Harmony said.

The decision to invest in Hidden Valley delivers another surprise in Harmony’s expansion plan after Steenkamp said during the firm’s second quarter results presentation that in an effort to increase profitability, it would ‘high grade’ or mine only the most profitable parts of Kusasalethu, it large West Rand mine, reducing the operation’s life of mine to five years from 24 years.

Hidden Valley was loss-making in Harmony’s 2015 financial year following the failure of the overland conveyer and a safety stoppage as a result of a fatality at the mine which led to lower gold production. Harmony said it would restructure the mine which would have shortened its mine life.

Capital expenditure on the mine had been planned at R135m in the current financial year compared to R121m in the previous year but there was no growth capital in that number in either year.

Shares in Harmony were 1.46% higher in early trade on the Johannesburg Stock Exchange valuing the company at nearly R21bn.

3 COMMENTS

  1. I have to agree with Goldminer on this issue. Here comes another Kusasalethu, clothed as a $1 mine to costs a hell-a-lot-more. I say the best outcome is for Harmony to repackage this mine and sell it to the next australian-chancers, for a tidy sum ( ± $ 50-100M ). This must be done urgently ( within the next 1-3 years). I disagree with David that Harmony will spend $180M. HARMONY DOES NOT HAVE THAT KIND OF MONEY FOR AN ASSET LIKE HV, unless Peter Steenkamp wants to pull-off another Pamodzi Gold!

    My confidence in Peter Steenkamp is waning with each statement he makes, like :

    “After the initial investment phase Hidden Valley will generate strong free cash flows, which could be applied to the development of the Wafi-Golpu project and our exciting exploration portfolio in Papua New Guinea”.

    Either this CEO is “NOT A NUMBERS GUY” or wilfully ignorant. Wafu-Golpu needs ±US$200- 300M/yr , with total bill for Harmony being US$1300M in 5 yrs @ IRR=15% with Payback of ±10 years SO rendering the project highly schedule & CAPEX sensitive. So execution will be the mantra NOTHING ELSE!

    Lets apprise him of recent facts about HV. These are :

    1. The asset has hardly been cash positive , bar for 2012.Even at best of times when strip-ratios were good, which was 2010-2011.
    2. The push backs he is alluding to have been uneconomic at current gold prices according to Newcrest. The management at HV is Newcrest personnel. These will been ±US$80M/yr to execute and all for Harmony’s tap.
    3. HV has NOT achieved its metallurgical recoveries and grades. Yet they contemplating a pushback which will make the mine even more cash-flow negative. These 5&6 pre-stripping has lead time of 18months. So effectively 1,5 years of serious cash-burn awaits with resulting uncertain grades & recoveries.
    4. Currently, HV is processing low-grade stockpiles with limited pit mining , yet its AISC = $1255/oz. So with pushbacks expect something ridiculous like ± $2000/oz.It has been as high as $2200/oz before!!!

    My view is that HV does not belong into a listed mining company’s portfolio. Mark Cutifani would have sold it within a week given its unreliable and erratic operational/production history, including never having been close to achieving any of its stated targets.

    So the current CEO is really turning it into Pamodzi Gold which incidentally did aspire to be a ” 1 Moz per year gold producer”. We all know what followed next after such grandiose plans. Harmony’s board must really be kicked out of their slumber with this pending disaster appointment.

  2. Since the crash in the price of most commodities, including Gold, copper and Iron ore, most of the miners have realized that growth in output does not equal growth in earnings. This is a clear case of wanting to grow output despite all of the signs that this is a money pit. These guys have no idea how difficult it is to operate in PNG. I hope the share holders still have the opportunity to stop this madness…

Leave a Reply to Goldminer Cancel reply