Harmony halves debt, pays dividend on record R5.2bn top line

Peter Steenkamp, CEO, Harmony Gold

HARMONY Gold kicked off its 2017 financial year in spectacular style paying a dividend and halving net debt after collecting revenue that – at over R5bn – was the largest top line number for a quarter on company record.

“We had a very good start to the new financial year with increased production, even stronger cash flows and a quarter in which we returned money to shareholders,” said Peter Steenkamp, CEO of Harmony.

Shares in Harmony were just about 2% higher a few minutes after publication of the first (September) quarter figures taking gains for the last 12 months to 343% to R44.30/share. The company is capitalised at R19.4bn.

Production increased 10% to 277,461 ounces quarter-on-quarter which, by dint of the group’s currency and gold hedges – which realised a combined gain of R240m – took revenue to R5.25bn.

The outcome on cash generation was R850m in free cash which the company used to pay a R218m dividend after pumping R555m into debt halving net debt to R528m and raising the prospect it could be debt free by the beginning of the 2017 calendar year. The price received for its gold was 6% higher in dollars at $1,336/oz and a percent down in rands (R605,224/kg).

On the negative side, Harmony’s cash costs for the September quarter increased 12% quarter-on-quarter to 554,114/kg owing to the winter tariff on electricity levied by Eskom and higher labour cost following bonuses and wage improvements.

The all-in sustaining cost for the group remained stable with a 1% decrease to R516,116/kg (5% increase to $1,142/oz), despite the seasonal effect of winter electricity tariffs.

Average underground grade achieved was 5.01 grams per tonne, a 5.5% increase against the June quarter and all operations performed well. Steenkamp said the firm was “on track” to meeting production guidance of 1.05 million oz for the 2017 financial year.

The only hiccough was Target 1 in the Free State province where unstable ground conditions hampered further mining in the higher grade areas. “Action plans include an increased focus on development to ensure that mining flexibility improves. Higher grade is only expected by the third quarter of the financial year,” Harmony said in its quarter announcement.

The group’s offer to buy take 100% control of Hidden Valley, a mine in Papua New Guinea, from Newcrest Mining became unconditional on October 25.

Harmony is to spend $180m building Hidden Valley into a 180,000 oz/year gold and silver mine – a surprise development seeing as previous management had prepared the operation for sale.

Steenkamp warned that there would be a five month gap in the supply of ore from Hidden Valley from July 2017 until November, when Harmony will be in its 2018 financial year. This was to allow for a major plant shutdown and for upgrades and maintenance projects.

“Reducing this ore gap remains the biggest opportunity to increase our gold ounces at Hidden Valley and is receiving a high level of attention and management focus,” said Steenkamp.

Since taking over from Graham Briggs in January, Steenkamp has had the fortune of a rising gold price. As a result, he embarked on a strategy to expand production to 1.5 million ounces, a 50% improvement, through brownfields growth and through acquisition – an endeavour that has raised some eyebrows.

Perhaps in acknowledgment of market scepticism regarding spending aggressively only a few years after poor capital allocation was blamed for bloated balance sheets among the mining sector, Steenkamp said his company was aware the firm was handling shareholder’s money. “We … understand that we are custodians of shareholders’ trust to optimise their investment in the company,” the company said. “Safe gold production – combined with higher gold prices – means stronger margins,” it added.