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Graham Briggs, Harmony Gold CEO

Harmony sees gold at $1,850 in 2012

André Janse van Vuuren | Mon, 24 Oct 2011 12:54

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[miningmx.com] -- HARMONY Gold sees the price of the commodity to average close to the record spot highs of September in 2012, but doesn’t bank on its peers’ views of sustainable prices north of $2,000/oz.

Releasing its annual report for the 2011 financial year on Monday, Harmony said it was expecting the gold price to be around $1,850/oz in its next financial year, as gold continued to entrench its function as a store of value and a currency.

“Our belief in gold remains steadfast and we are forecasting continued high dollar prices in our next financial year, especially given a weaker dollar and global economic uncertainty,” CEO Graham Briggs wrote in his review.

Briggs said September’s record price levels where gold exceeded $1,800/oz, reflected the ongoing search by investors for safe havens, particularly through exchange-traded funds.

“More important, however, are the fundamentals of supply and demand for physical gold,” said Briggs. “On the supply side, new mines are coming on stream, some existing producers are ramping-up production and recycling of tailings and dumps has become an industry in itself, but deliveries from this sector depend largely on forecasts for the direction of the gold price.

“This supply must, however, be considered against falling production from mature mining regions, such as South Africa.”

Gold rose 22% during Harmony’s 2011 financial year, from $1,234/oz on July 1 2010 to $1,505 on June 30 2011. It reached levels in the high $1,800’s/oz during September, before again retreating to $1,600/oz. On Monday afternoon, the metal was trading at $1,648/oz.

In recent weeks, some gold mining CEOs have pinned their expectation for 2012 price-levels to be well past $2,000, with AngloGold Ashanti’s Mark Cutifani and Richard O’Brien of Newmont Mining respectively predicting $2,200/oz and $2,300/oz. JP Morgan has predicted the price to reach $2,500 next year.

RAND STRENGTH

Briggs warned that Harmony’s bullish sentiment on gold was tempered by the strength of the rand. Despite gold’s 22% rise in dollar terms during FY2011, in rand terms the rise was only 11%.

“In South Africa, our mine costs are incurred in rands and we face ongoing pressure from rising costs (mainly labour and electricity) over which we have limited control, as does the rest of the gold industry. In contrast, if the rand weakens, all stakeholders stand to benefit.”

For operational and strategic purposes, Harmony has based its budget on a gold price of R280,000/kg for FY2012, calculated on an exchange rate of R7.57/dollar and a gold price of $1,150/oz. Harmony said earlier this year it was expecting its gold production for 2012 to be between 1.45 million oz and 1.55 million oz, from around 1.3 million in 2011.

NATIONALISATION

In his chairman’s letter to shareholder, Patrice Motsepe said that the call for the nationalisation of mines deserved comment.

“The track record of nationalisation is extremely poor, to say the least, and countries that have nationalised mines and other industries have subsequently had to privatise as the adverse and far-reaching consequences of nationalisation became evident.

“It is in the interest of the South African economy and all its people, particularly the poor, unemployed and the youth that the mining industry remains globally competitive and attractive to domestic and international investment.”

Motsepe said Harmony was “engaged in discussions with the proponents of nationalisation to expose and make them aware of the fundamental beneficial role that the private sector plays in mining and other sectors of the South African economy”.

On the participation of the state in the mining sector, Motsepe said he was of the view that privately owned and managed mines will in future co-exist and compete with state-owned and operated mines.

“It is important, however, that the playing fields are levelled and that state-owned mines are treated for legislative and regulatory purposes in the same manner as privately owned companies.”

PAY HIKE FOR BRIGGS

Briggs saw his total remuneration increased by 55% during FY2011 to R10.2m, compared to R6.5m during 2010. While his basic salary of R5.2m was only 4.6% higher than 2010’s R5.04m, the balance of the increase was made up of bonuses (R2.7m) and the exercising of share options (R2.2m).

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