Harmony scrutinises Virginia/Evander

Allan Seccombe | Wed, 30 Sep 2009 15:22
[miningmx.com] -- HARMONY Gold is closely scrutinising its Virginia and Evander operations to cut costs and improve productivity instead of shutting unprofitable shafts, CEO Graham Briggs said.

In a presentation to analysts on Wednesday, Briggs showed what the company’s expectations of its operations are for the September quarter. The message was not great, some analysts said.

“Operationally, there was more slippage this quarter. Costs were up, grade was down. They improved underground tonnages and production, but for me the grade and costs are the significant factor,” said one analyst.

Briggs said gold output was expected to be four percent higher than the June quarter’s 353,752 oz. Rand per kilogram costs were seen rising by between 9 and 12% from R179,074/kg. There was a “slight decline” in grade, while underground tonnage rose six percent.

The rising costs were well flagged by Briggs at the June quarter presentation, when he told the market labour costs would rise because of a new two-year wage agreement and increased power tariffs resulting from a 31% price hike and the winter charge.

One of the most striking slides was a graph showing the performance of the rand gold price plotted against the dollar price per ounce.

The wild fluctuations in the dollar price are in stark contrast to the flatter rand per ounce price since September 2008, but the worrying aspect for Harmony – and other South African gold producers – is the absolutely steadiness of that line at the R7,500/oz (R241,000/kg) mark despite gold bulleting up to $1,000/oz.

The rand gold price is currently around R238,600/kg.

Briggs has warned shareholders that the weakness of the rand gold price and rising costs could force a review of operations, which could result in some shafts being closed.

“They’re hurting with this rand gold price,” the analyst said, adding the additional takeaway from the presentation was Briggs stressing the business had stabilised, that the business will improve when growth projects are commissioned in coming years, grade will rise and that there is zero debt within the company.

“As it stands, I think the likelihood is they will have to start closing shafts. It will be from the Virginia stable.”

Looking at the performance of the various mining units, the Virginia operations in the Free State stand out in the September quarter as the only loss making section of the business, with a negative three percent contribution to profit.

Evander is another business unit that is coming under management scrutiny.

“There are two areas that are hurting under this gold price regime. Some of the shafts in the Virginia area and Evander shafts two and five. They are under the spot light and we’ve got them under special care to get them to perform better,” Briggs said.

One way to look at the troubled operations is to make a call on the rand gold price and costs and regard them as unlikely to make profits again, which then results in the company taking as much out of them as possible before closing them down.

Another way to look at these mines is that they can make lots of money if the rand gold price rises.

“One has to balance those views, which are either end of the spectrum. Therefore you have to look at how you can reduce costs, improve grades and profitability even if it is just above breakeven, so that if the gold price does change you can then really turn it on again and make a lot of money out of those assets,” Briggs said.

“To get back into these mines is very difficult once they’re closed. Our preference is not to do that but focus on the longer term,” he said.

Virginia is the largest source of gold for Harmony. Unicel is likely to remain open. One analyst reckoned if Harmony were to start shutting shafts, it could shed up to two thirds of production from Virginia.

“If they do make the decision to close shafts it will be over 12 months, so they will mine as much of the better gold as possible for that period. There wouldn’t be a sudden drop in production and it could end up being more profitable for that period if they take that decision,” the analyst said.

Another option would be selling these marginal shafts to a junior producer, but that sector is in disarray. Pamodzi Gold, which had bought Harmony’s Orkney mine, has gone into liquidation. “Simmer & Jack is a mess and DRDGOLD has chosen to go a different route with surface treatment operations. Ideally what Harmony needs is a bottom feeder, but there isn’t one at the moment,” the analyst said.