Harmony books dividend lift, but side steps AngloGold rumour

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Peter Steenkamp, CEO, Harmony Gold

HARMONY Gold declared a final dividend for the year ended June 30 of 35 cents per share taking the total dividend to 85c/share – a 70% increase year-on-year performance that CEO, Peter Steenkamp described as “disciplined”.

The boost came on the back of a modest 0.5% increase in year-on-year production to 1.09 million oz in the year under review, benefitting from output increases at Hidden Valley (31%), Kusasalethu (14%), Masimong (4%), Kalgold (9%), Phoenix (10%), as well as underground grade increase for the fifth consecutive year to 5.07 g/t.

Harmony Gold CEO Peter Steenkamp told investors on Thursday morning that the grade improvement was the result of a “disciplined” approach to mining deeper project areas.

“We’re looking at the lower parts of mines, and are confident that the grades are there. At Kusasalethu, we are already seeing higher grades, and we’re currently mining a high-grade pillar at Bambanani. We’re developing in the right areas at the moment, so we’re confident that we’ll continue to increase grades,” he said.

Harmony posted a 35% increase in headline earnings per share of 298 cents for the twelve months, while managing a 18% reduction in net debt to R887m.

The improvement in net debt came despite the acquisition of the Hidden Valley mine during the year, which was expected to add 180,000 oz to Harmony’s 1.5 million-ounce output target by 2019. The recent completion of the Central Plant reclamation project had added an additional 15,000 oz a year, while Steenkamp noted that the unlocking of Golpu, in Papua New Guinea, would see the inclusion of further ounces.

While side-stepping questions on whether the company was in talks with AngloGold Ashanti over the possible acquisition of their South African assets, Steenkamp confirmed that the company was on the lookout for global resources and projects that would up its gold production.

“We’re talking to numerous potential partners, but no agreements have been signed yet. We have also changed our operating model to ensure, that two executive teams – one in South Africa and the other in Papua New Guinea – supported by corporate services, focus on optimising all of our assets and increasing value for shareholders,” he said.

Meanwhile, as a result of progress in the negotiations to settle the recent silicosis and tuberculosis class action against Harmony and other South African gold miners, the company has made provision of R917m, which is charged to other operating expenses and reduced headline earnings.

Revenue increased by 5% to R19.3bn over the twelve months, chiefly as a result of year-on-year production remaining stable and the inclusion of the realised gains on the rand gold hedges of R728m as part of revenue.

This inclusion resulted in the average gold price received being $1,304/oz, compared with $1,169/oz in the prior year, despite the rand gold price being flat year-on-year.

Overall, all-in sustaining costs increased by 10% to $1,182/oz, while capital expenditure increased by a hefty 68% to R3.686 billion, of which R1.335 billion was spent at Hidden Valley.

Visit Miningmx later today for further updates and analysis on Harmony Gold’s year-end results.

11 COMMENTS

  1. Dear Fellow Readers,

    The Harmony FY17 results are in, and they make for a sad reading indeed.

    SALIENT POINTS
    1. 72% of Harmony’s underlying production is Cash Flow negative at prevailing reasonably ( > R500K/kg) high price
    2. At first blush it seems that HMY achieved guidance , but deeper analysis reveals that its the marginal operations (Doornkop; Joel; Masimong) which lifted production with the Cash Flow spinners ( Bambanani ; Phakisa ;Target 1) missing targets. Kusasalethu & Tshepong met guidance but at significantly higher costs of R525K/kg (Fcast :R495K/kg). High-grading can be expensive!
    3. The dividend is unaffordable and aimed at boosting the lagging share price for a potential rights offer to fund Golpu.
    4. Harmony total costs (OPEX + CAPEX) are out of control at R23563M ( FY16 : R18219M) with increase of 29%y/y.
    5. 1,5Moz/y by FY19 production target is unattainable and endeavours to achieve it at all costs will be reckless ( ditto Pamodzi Gold saga).

    DETAILED ANALYSIS

    A. HARMONY CASH FLOW AND SHAREHOLDER RETURNS TRENDS

    Accounting is a business language used to communicate to those who understand it and interpreted to assess the economic performance of the underlying business. In that vein, Harmony has learned a bad , but legal , habit of lowering operational (depreciation) costs by impairing assets. Over the period FY12-FY17 , Harmony has impaired assets by $825M , which has reduced depreciation costs by ±$100M/yr. Considering that their Gross Profit is on average $110M over the said period, the scale of the decrease in depreciation costs is evident. Over the same period ( which was chosen based on current portfolio), the Invested Capital has decreased from $4265M (FY12) to $2804M (FY17) despite CAPEX of $1422M, without any major disposal of assets. Harmony will NOT self-fund the FY18 forecasted CAPEX of $319M (R4389M) even with the hedge contribution given the y-on-y total operational costs escalations using their own planning data. THIS IS A STAGGERING DECAY IN THE BUSINESS! The ROIC over the said period has been -2% despite the clever accounting antics.

    The Free cash flow generating capacity of the company is poor because of its lousy assets portfolio of capex junkies. CAPEX constitutes , over the period FY12- FY17, 99% ( ninety-nine percent) per year of the Net Operations Cash Flow , without building a single new mine. Comparable companies of the same production scale ( ± 1,1 -1,3Moz ) the CAPEX/OCF is ±25% . So the dividends are a distraction from the much needed portfolio upgrade which will require significant investments over an extend period of time.

    Harmony is intended on being a >1Moz producer come-what-may, to an extent to shouldering significant cash flow negative production. But now the cash flow registers ( Bambanani, Tshepong, Phakisa) are starting to sputter and its evident in the numbers. The high-grading of other operations has come back to hound with increasing unit costs. So Shareholders ,must brace themselves for serious dilution and debt load ahead. Harmony has truly become a pure call option on the R/kg gold price. THE RETURNS ARE NOT THERE IN THE CURRENT HARMONY’S ASSET PORTFOLIO, THERE ARE BETTER GOLD MINERS ELSEWHERE!

    B. THE FANTASY OF BEING A 1,5Moz/yr PRODUCER

    As Harmony has demonstrated, it can produce 2Moz/yr in FY18 if they so desire, BUT will it be profitable?

    Only 28% of 1,08Moz is profitable. Therefore , Harmony needs to find profitable cash flowing 1,28Moz/yr( 1,5Moz/yr – 0,224Moz/yr = 1,28Moz/yr) by FY19. This herculean task needs to be done with a mere total liquidity of R3965M ($95M + $210M ; R700M) in FY Balance sheet , if the current operations dont chew it up! Lets be clear, the current CF generation ability of the assets CANNOT sustain any additional DEBT.

    Harmony management indicated that they are making progress on this target by including a Tailings pretreatment project and Hidden Valley Reinvestment. I posit that they are actually going the other way , thus making negative progress. Tailings pretreatment is a marginal business and cannot make a meaningful CF contribution , even if it were Mine Waste Solutions + DRDGold put together towards 1,5Moz/yr. Central Plant Tailings at full-tilt is only ±25Koz/yr.

    Hidden Valley has been a dog from the get-go and will remain such forever. Harmony management is coy about the details of their interventions which will change the HV mine for the better. Simply put, they will continue to do what they have been doing and hope the gold price comes to the rescue. The current HV mine was planned as a 350Koz/yr Au-eq, with 250koz/yr Au and Ag by-product in 2009. To date, $1155M CAPEX has been spend on it for 1,31Moz Au ( Planned : 3,5Moz Au), thats a lousy reserves extraction efficiency of ±40% AND Capital Intensity of $881/oz WITHOUT OPEX. The AISC over the period since production commenced to date was $997/oz – $2550/oz. All this when hauling distances are short , oil price is low , most of the pre-strip done etc, and ore being near surface and sufficiently understood. Now Harmony want us to believe that going forward the AISC will be $850/oz-$950/oz. Newcrest just paid Harmony $34M to take the 50% of the problem from their hands , and it was a fantastic deal for them as we will all soon discover.

    Harmony plans 180Koz/yr from the mine FY19/FY20. This is NOT achievable by HV. The current units costs of $33/t are for processing stockpile NOT mining, yet Harmony is planning $9,25/t for total mining,Processing and G&A. The capacity will still be ±4 Mtpy ore, with planned strip ratio of 4,5. Which is impossible given that the ore body plunges , therefore the initial strip ratio of 11 is more feasible , hence Newcrest bailed-out. It’s going to be one expensive adventure this for a tidy sum of $242M. HV mine is located in a rainforest with rainfall ±2700mm/yr, poor visibility for trucks etc and prone to seismic affecting plant structures etc. The mine has never achieved it’s yearly ore tonnage call or metallurgical recoveries (planned : 78%). Yet the plan going forward is an 80% extraction efficiency of reserves, inclu Mining losses etc.IMPOSSIBLE!

    CONCLUSIONS

    The Board of Directors of Harmony are really AWOL on the performance of this company. But then again, maybe they’re overwhelmed given that only 3x have mining experience. Of the three, only Vishnu has actual operational mining management in the new RSA, NOT under apartheid. So they are failing to provide guidance to the not-so-capable management team with history of failures. Most of the BoD members are tenured ( >8 yrs) with Harmony, so they own the mess…

    I don’t believe this mining company will prosper. The roll-up model it adopted in the early 2000’s is now bust, and the problematic mature-aged asset portfolio is showing. Even for the grey-haired person like myself, i am stunned by the shear business decay of the assets despite the capex spend on them. It’s frightening that things have been allowed to get to this stage where there are no sensible cost-effective remedial solutions.

    Gold Price hedging has a place in mining finance, but it needs to be used with care. Recently, Newcrest has demonstrated that with their Telfer Mine gold hedge to nurse the mine back to profitable footing. If they are employed to boost revenue, they become addictive and operational discipline slips. Furthermore, the current 20% of production hedge is insufficient to cover the glaring portfolio decay of Harmony. Rationalisation is required to salvage it.

    The current South African’s ops of AngloGold Ashanti are NOT in a good shape. High unit costs and poor geological conditions are dogging them, to the extent that they are Cash Flow negative. So as the Harmony CEO will recall, Pamodzi Gold failed because it was Cash Flow -ve by ±R160M/yr ( inc CAPEX) , and he added debt ( ±R300M) and -ve CF (± -R50M/yr without CAPEX) Old Vaal reefs ops, and the it did NOT end well. It was a toxic mix (with a onerous Gold Hedge) which sunk it together with its 8Moz reserves.

  2. Good analysis though very Gloomy! Would be interesting to have your opinion on Sibanya’s results – hich may even top the above….

    • I am NOT at all Gloomy BUT its the Harmony figures which are gloomy….

      REMEMBER THAT FIGURES DO NOT LIE ….BUT LIARS DO FIGURE!!!

      So you need to analyse this things very carefully. I am NOT gloomy on GFI , if there is a change of management there! I think South Deep can be turned around. But I don’t believe Harmony has a “South Deep” which can provide catalyst for value enhancement going forward.

      Await and expect my analysis on SBGL when the numbers hit the tape right here on miningmx….

    • Ok nom more protesting , wink wink …HARMONY is a growth stock with lots of upside ….when the gold price is R1Million/kg….

  3. Goldspeculator you’re legend! The analysis rock solid. Await the next saga on Sibanya. BTW you really think GFI is a gem and south deep any upside…. numerous CEO’s gave it a bash with only $’s going down the tube?

    • Check out my analysis on GFI. It has only been Nick and his incompetency..Get rid of him first and then we can really get to know what the true facts/challenges then we can get to the solutions to overcome them. Remember this a >34Moz 2P deposit Mine , so the prize is worth the effort although R35Billion is already down the drain.

      I tell you, >34Moz 2P Au deposits are truly remarkable ( the stuff that negates the need for viagra or teasers). Look at the Cash Flows out of Olympiada , Cadia , Loulo-Gounkoto etc which are operated at >700 Koz/yr and you will truly appreciate my perspective on the need to stay the course of GFI ( without Nick).

      • Hi Goldspeculator – you’ll notice I edited your comment slightly. Certain comments run the risk of getting me sued in terms of media law.
        Hope you understand.

        David

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