[miningmx.com] – THE collapse in gold equities on the JSE has created a situation where a mining entrepreneur with large “cojones’ combined with access to funding could really make his mark, and Harmony is the obvious target.
Gold shares have fallen across the board, but the Harmony share price has dropped to levels putting the group’s market capitalisation way out of whack with its peers.
The unexpected announcement by CEO, Graham Briggs, that he intends stepping down has also triggered speculation about what may be going on internally at the group.
The Harmony share price has dropped some 66% from a 12-month high of R38.50/share to current levels around R12.95 giving the group a market capitalisation of just R5.6bn at present.
Over the same period, the Pan African Resources (Pan African) share price has dropped around 50% from 278c to about 140c currently, but that still leaves the company with a market cap of about R2.6bn.
But when you stack Pan African up against Harmony on the fundamentals it’s chalk and cheese.
Harmony is a gold major which produced just over one million ounces in the year to end-June. On top of that, Harmony owns 50% of the Morobe Joint Venture in Papua New Guinea which includes the Wafi-Golpu project – potentially one of the world’s most valuable gold/copper mines if it ever gets the go-ahead.
Pan African is a mid-tier miner producing about 200,000 ounces of gold annually from two main operations – Barberton Mines and Evander Gold Mines.
So, on the one hand, you have a 200,000 oz gold producer worth R2.6bn, and on the other, a one million ounce producer owning half of Wafi-Golpu which is valued by the market at R5.6bn. Doesn’t make sense, does it?
According to one mining industry source: “It’s crazy. You could take over Harmony – probably get most of your outlay back by selling off its nine South African mines piecemeal because, realistically, no foreign investor is going to want to operate here – and then you sit free and clear with half of Wafi-Golpu.’
Logic would indicate that either Pan African shares should take another hit or Harmony shares should stage a recovery, but markets are not always driven by logic – particularly when it now seems every analyst and his dog is predicting further drops in the gold price to below $1,000/ounce.
I see that, according to a Bloomberg report on July 22, Goldman Sachs analyst Jeffrey Currie reckons “… the worst is yet to come for gold and that prices could fall below $1,000 an ounce for the first time since 2009.’
The report adds that analysts from ABN Amro Bank and Societe Generale feel pretty much the same way predicting gold “will approach $1,000 by December’.
But anyone planning a move on either Harmony or Pan African needs to get a handle on what may be happening behind the scenes at each company because the situation is not clear in either case.
Briggs – 62 – is a highly respected executive who has been with Harmony for 20 years and has run the group since 2008.
He has agreed to stay on the job until a replacement has been found, but no reason has been given for his departure with the official announcement stating only that he had “indicated his wish to retire as CEO and member of the board.’
If there is something serious going on in the background that has caused Briggs to opt out the clearest “unofficial’ confirmation will come if any other Harmony top executives subsequently announce they are leaving as well.
At Pan African there are two issues: the influence of BEE partner Shanduka on the company and just how well management is delivering on its forecasts that mining operations at Evander are moving out of the “low-grade cycle’ which have hammered results over the past 12 months.
The trading update published on June 8 was not encouraging, reporting that the move into the higher grade mining cycle had been “slower than previously anticipated’.
Pan African also announced it had agreed to buy the Uitkomst Colliery for R200m in cash from Oakleaf Investments and Shanduka stating “… the acquisition is expected to be immediately earnings and cash flow accretive to Pan African.’
That purchase makes no sense for a mid-tier gold company, according to some industry observors, but it has been defended by Pan African CEO, Cobus Loots, – formerly the MD of Shanduka Resources before he moved to Pan African as finance director.
In February, just before he took over as CEO from Ron Holding who, like Briggs, also announced unexpectedly that he was retiring, Loots rejected the suggestion that Shanduka might “unduly influence’ Pan African.
He declared: “Shanduka would be unable to vote on any such deal. It would be a decision for the other shareholders. We simply will not do any deal that is not massively value accretive to our shareholders.’
Ja, well, no fine but – from where I sit – any future potential deal through which Pan African gets set up to acquire Shanduka’s marginal platinum assets will set off the alarm bells big time.
