Harmony posts dividend, outlook wary

Allan Seccombe | Mon, 17 Aug 2009 11:41
[miningmx.com] -- HARMONY Gold posted its first dividend in five years and posted its higher ever annual net profit, but CEO Graham Briggs would make no promises on its sustainability.

Harmony, the world’s fifth largest gold producer with plan grow output to 2.2 million ounces by 2012, generated full-year net profit of R2.9 billion rand, cash of R2bn and a dividend of 50 cents.

JP Morgan precious metals analyst Steve Shepherd said the dividend had come as a pleasant surprise. Briggs said the board had not wanted to pay a dividend at the June financial year end, but shareholders had suggested it would be a good idea.

Harmony, which has debt of R362m, has a strong project pipeline, agreed to spend R405m in buying Pamodzi Gold’s Free State assets out of liquidation. The conclusion of the purchase is some way off with the conversion of the mining rights being the major hurdle.

Briggs estimated Harmony would need to spend another R100m to bring the mining operation back into production of some 150,000 oz/year, but cash generation from the mines, including breaking down the old treatment plant, meant the net capital spend would not be more than R460m.

That production figure is not factored in to Harmony’s detailed plans to life production to 2.2 million oz from 1.55 million oz in the 2009 financial year.

Pamodzi declared 1.8 million oz of reserves and a further 18.6 million resource ounces. Harmony estimates the reserves could be as high as 2.5 to 3 million oz, but those figures would be confirmed once Harmony took ownership of the operations which are contiguous to its existing mines, giving it synergies other interested parties didn’t have.

Briggs estimated that by using its own plants and not having to invest in refurbishing the Pamodzi plant Harmony had saved around R100m.

In the June quarter, Harmony posted a 37% drop quarter-on-quarter in cash operating profit to R743m. The gold price in rand terms came down by 16% in the three months and rand cash operating costs rose 4.5%.

Gold output for the quarter was flat at 353,752 oz.

The cost of more expensive winter electricity supply fed into the cost figures. It adds R40m extra per month for the winter months between June and September. The recent price hike announced by state power utility Eskom bumped the cost of electricity up to R230m per quarter from R170m, excluding the winter tariff.

Investors can expect Harmony to pay R350m in the September quarter alone for power at its South African operations. The average 9.23% wage increase recently agreed with major gold groups will bump up Harmony’s wage bill by R100m in the September quarter.

It’s easy to see why Briggs won’t commit to a dividend policy.

“We have deliberately not got a dividend policy… life is so uncertain and everything changes from month to month for us,” Briggs said. “It’s unlikely we’ll have an interim dividend. If things go well it’s our commitment to reward our shareholders.”

Harmony plans capital expenditure for 2010 of R3.1bn, of which R2.8bn will be spent in South Africa. The production target for 2010 is 1.7 million ounces.

The rand strengthened to R8.42 against the dollar in the June quarter from R9.92 in the March period. It is currently at R8.18.

"If the rand strengthens, we like many other businesses, will be in dire straits," Briggs said, adding this would prompt Harmony to review its capital programmes as well as its operations.

Imara SP Reid said: "The lower average R/kg gold price received will be a major factor to the group’s profitability. Cost escalation will also be another negative factor. In our view the financial performance of the group has peaked in the short-term and it will take a significant improvement in the R/kg price for the profits reported to be repeated.

"However our long-term optimism is based on the group’s cash position of close to R2bn which should give management room to develop its portfolio to a production of 2moz a year in 2012 by which time the R/kg could have improved."