Harmony shafts face bleak future

Brendan Ryan | Fri, 30 Oct 2009 14:06
[miningmx.com] --

ALTHOUGH Harmony CEO Graham Briggs did his best not to get pinned down on potential shaft closures at Friday’s presentation of the gold miner’s results, the reality is that the group owns a number of shafts with poor prospects.

They do not look economic under current cost structures, let alone what is to come depending on what happens to electricity tariffs over the next three years.

Briggs declined to get into details on the cost implications of the proposed Eskom power tariff hikes, saying it was difficult to make any calculations at this stage because of the knock-on effects on other cost items such as steel.

DRDGOLD CEO Niel Pretorius was far more explicit in his quarterly presentation last week.

Pretorius said he calculated that the proposed Eskom tariff hikes would add R70,000 in total over three years to the cost of producing a kilogram of gold at the group’s Blyvooruitzicht (Blyvoor) mine.

He added that would force the closure of the underground operations at Blyvoor, unless the rand gold price appreciated sufficiently to compensate.

Briggs’ reticence probably has everything to do with the unions. Under cross-questioning from JP Morgan analyst Steve Shepherd, Briggs confirmed Harmony had not implemented any S189 notices (required to start a process of restructuring of operations and possible retrenchment of workers) “at present”.

Briggs told analysts at a recent presentation – to which financial media were not invited – that Harmony wanted to apply a rule of thumb that its shafts had to be viable at a cost of R250,000/kg, including development costs.

Applying that rule of thumb to the cost breakdown Harmony provides for its shaft systems immediately throws up the ones with questionable futures looking at their cost performances over the past six months, keeping in mind the current gold price is sitting at around R250,000/kg.

Most of them are in the Free State and their closure would be further blows for the already-hammered local economies of the towns of Welkom and Virginia.

It should be pointed out that the quarterly cash operating costs reported by Harmony now exclude development costs. These would typically add another R10,000/kg to R20,000/kg to the total cost number.

The Evander 3 and 5 shafts are the most exposed, with costs of R313,805/kg for the September quarter and R319,725/kg for the June quarter.

The Merriespruit 1 and 3 shafts at Virginia are also clearly at risk. Merriespruit 1 reported costs of R245,860 for the September quarter (June quarter – R227,212/kg) while Merriespruit 3 weighed in at R266,504/kg for the September quarter (R246,239/kg).

Harmony 2 shaft came in at R274,714/kg for September (R194,645/kg) while Brand 3 reported costs of R254,510/kg for September (R225,604/kg).

Again in reply to questions by Shepherd, Briggs said: “We have done some restructuring of the operations at the Evander 3 and 5 shafts. If they don’t deliver, we will have to deal with it.”