[miningmx.com] — HAVING a strategy in South Africa’s gold industry
these days is usually a question of securing international growth options. AngloGold
Ashanti derives a third of its output from SA, while Gold Fields has declared itself
willing to build smaller mines than shareholders are accustomed to seeing, provided
they are offshore.
Harmony Gold, by contrast, has 90% of its production in SA but last month set down
the findings of a prefeasibility study into its 50% Golpu prospect in Papua New
Guinea, a tropical mountainous island not without its political risks. Golpu, however, is
a gem; a needle-in-the-haystack copper and gold discovery the size of which is
becoming increasingly rare in today’s exploration market.
Its development, however, is the subject of debate among analysts who were firstly
disappointed that the project will only produce its first metal two years later than
planned and that the capital cost of the project, shared with Newcrest Mining, has
soared. Given the project’s first cash flow is further out than expected, there are
worries about what could happen between now and then impeding Harmony’s ability to
fund it.
David Davis, an analyst for SBG Securities, estimated that continuing operations – SA-
based except for one mine, Hidden Valley – will not produce the budgeted 1.7m oz by
2016 but could come in at 1.4m oz. Thereafter, Harmony is forecast to see local
production fall to 1.1m oz. In other words, cash flow from SA mines will start to fall
just as the capital burden for Golpu, which is estimated to be about $5bn for first
production, starts to kick in.
“Under these circumstances, we believe that Harmony will be hard pressed to fund its
share of the project from cash generated from its SA operations,’ says Davis. He says
that the risk to Harmony is on the downside and adds that “we believe Harmony
should reconsider its options in this regard’.
Harmony spokesperson Marian van der Walt acknowledges past production promises
have tended to disappoint. “Our guidance took cognisance of the general complaint of
over promises and under delivery,’ she said. But only at a gold price of R360,000/kg
in 2017 would Harmony run into the cash flow headwinds that would make financing
its share of the project untenable. The local price of gold currently is about
R466,000/kg.
“Even then, Harmony can rely on issuing bonds or sell copper forward [from the
project],’ says Van der Walt, although an equity issue “of any type’ is being
discounted.
An asset manager, who asked to remain anonymous, says that Harmony’s SA
operations have had an uneven production performance but it’s still early to form a
judgment. “There are many ways to skin the cat for Harmony. They could sell down
their 50% to Newcrest, and African Rainbow Minerals (16% shareholder in Harmony)
could possibly take a higher stake in Harmony after helping to finance the project,’ he
says.
– Finweek
