Strong rand may force Harmony review

Allan Seccombe | Wed, 01 Jul 2009 12:01
[miningmx.com] -- HARMONY Gold will need to take “fundamental” look at its mines if the rand gold price remains at lower levels for another quarter, CEO Graham Briggs said on Wednesday.

Harmony posted a 3% increase in gold production during the June quarter, Briggs said in a slide presentation given to analysts. Underground tonnage increased but grade fell 1%. Total cash costs rose 8% in the quarter.

“The grades came off and they’ve pushed tonnage, which is where the problem was. It’s the weak asset base that Harmony has. This is typically what happens, you don’t have the flexibility to increase grades and compensate,” said an analyst who declined to be named.

“When you have a falling rand gold price environment you have to find other ways to compensate for that. Companies with strong assets can increase grades in the quarter, something Harmony can’t do because it has marginal assets, deep level and less agile assets,” the analyst said.

The production increased, the analyst said, but this was coming off a lower base. Another analyst said the performance was roughly in line with expectations.

Harmony produced 349,801 ounces in the March 2009 quarter, a 3.4% decline from the previous three months. It reported a cash cost of R171,361/kg for March.

Harmony reported an increase of nearly 16% in the received gold price for the March quarter at R293,238/kg.

That figure has fallen to R246,000/kg in the June quarter. The strength of the rand against the dollar is working against South African gold mining companies. The rand has gained about 15% on the dollar in the June quarter. The companies are today receiving R230,000 for each kilogram of gold they sell.

“We’ll have to look at capital expenditure as a start and we’ll have to look at operations to see where we can cut out some of the lower grade and in the short term put in higher grade,” Briggs told Miningmx.

“It’s all a time-based thing – how long does the rand stay strong?” he said. “You can’t panic in the short term and you don’t plan like that in the gold business. After a quarter, if the rand price stays very strong, one has to reassess those things.”

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Another analyst pointed to rising costs for gold miners. Eskom has hiked its power tariffs by 31%, with further increases expected in the next three to five years. Labour is pushing for a 15% wage increase in the current round of two-year salary talks.

Harmony has a suite of four big projects to boost production from 1.5 million oz to 2.2 million oz by 2012. Briggs said these projects are largely on their way.

“The preference would be to not look at those projects. We’d look at cutting out and reducing some other capital expenditure,” he said.

The higher cost operations, which happen to be among the smallest mines, would be the first to come under scrutiny. Briggs identified Brand 2 as top of the list.

“If one can’t restructure it and one made the decision that the rand gold price is here to stay for a longer period, one would have to look at the drastic side of that of reducing and cutting it completely. If it’s a short -term issue, you wouldn’t stop it,” Briggs said.

Briggs said the group was on track to reach its 2.2 million oz target in 2012. In a graph showing where the extra ounces were coming from, he showed 308,000 oz coming from “improvements and other”.

This included 30,000 oz from de-bottlenecking programmes at Hidden Valley in Papua New Guinea, which will contribute 150,000 oz before the improvements.

Two of the other growth projects, Doornkop and Elandsrand, both in South Africa, could both contribute up to 30,000 oz each per annum on top of the 100,000 oz they are each scheduled to add to Harmony’s production, Briggs said.

The President Steyn mine Harmony is acquiring from Pamodzi Gold’s provisional liquidators -- a process that could take another six months -- is expected to add 150,000 oz/year to production, but this is not factored into the 2.2 million oz plan yet.