Harmony to buy AngloGold’s Moab Khotsong for $300m

Peter Steenkamp, CEO, Harmony Gold

THE reconfiguration of AngloGold Ashanti’s portfolio continued apace today with an announcement that it would sell its Moab Khotsong operations to Harmony Gold for $300m – a transaction that halves its South African production.

The group, formerly a division of Anglo American and the cornerstone of the South African gold mining sector, also said it had concluded the sale of its Kopanang mine, an asset west of Johannesburg that had been formerly earmarked for closure. The mine will be dispatched to Heaven Sent, the Chinese owner of Village Main Reef, for some R100m as well as the transfer of surface gold resources.

AngloGold now mines at two remaining assets in South Africa: its long-life Mponeneg/TauTona mining complex which has a project extension underway, and Mine Waste Solutions, a surface retreatment operation. It will not have any more underground mining operations in the Vaal River region following the sale of Moab Khotsong.

AngloGold would take net debt down to about $1.8bn and leave the transaction with a more globally balanced portfolio instead of its South African heavy exposure. Total South African production will reduce to about 450,000 oz/year from 967,000 oz whilst its mineral resources will fall to 57.9 million oz equal to 30% of group resources compared to 38% of total group mineral resources prior to the transactions.

Whilst AngloGold said it had a significant project pipeline, it’s still worth noting that excluding the extension project at Mponeng, the projects are in Colombia, the Democratic Republic of Congo, Ghana, Guinea and Australia. In 2016, it put its Obuasi mine on care and maintenance but also opened Kibali in joint venture with Randgold Resources.

From AngloGold’s perspective, the sale was driven by its strategic thinking over capital allocation as it was likely it would not proceed with the Zaaiplaats project which would have extended the life of Moab Khotsong.

“This transaction is in line with our capital allocation strategy and our aim to effect the improvement of our global portfolio, through projects that extend mine lives, enhance margins and provide quicker cash turns on investment” said AngloGold CEO, Srinivasan Venkatakrishnan in an announcement.

TRANSFORMATIVE

For Harmony Gold, however, the transaction is potentially transformative. Following completion of the deal, which will be in cash and may involve a rights issue in order to refinance initial bridge finance, it will have more than 250,000 ounces a year in additional gold production – an increase of about 25% on current production and a boost to gold resources of 38% to some 17.5 million oz.

It advances Harmony CEO, Peter Steenkamp’s, strategic aim of portfolio repositioning of its own by cutting low margin gold production from assets such as Kusasalethu while increasing production to nearly 1.5 million oz a year – a plan he outlined in 2016 but which appeared to have been frustrated, until now.

“Buying Moab Khotsong means we boost our cash flows by more than 60%, increase our average overall underground recovered grade by 12% and grow our South African underground resource base by 38%,” said Steenkamp in an announcement.

Started in 2006, Moab Khotsong is the newest underground mine currently operating in South Africa. It has incorporated the neighboring Great Noligwa operation since 2015. The two mines produced 280,000 oz of gold at an all-in sustaining cost of $884/oz for AngloGold’s 2016 financial year ended December 31. They produced 130,000 oz of gold at an AISC of $998/oz for the six months ended June 30.

RIGHTS ISSUE

Of the $300m consideration, some $100m will be settled from Harmony’s existing $350m debt and revolving credit facilities with the balance settled through a fully underwritten $200m bridge loan facility. “Harmony is assessing various alternatives to optimally repay the bridge, including a potential rights issue,” it said.

Frank Abbott, CFO of Harmony Gold, said in a media call this morning that a final decision regarding the rights issue would be made in December when the company issued a shareholder circular. It was possible, however, the group could ask for less than $200m in shares. He added the transaction had “a very short payback” without giving details.

He also believed that post the transaction, Harmony Gold would continue to manage “one of the best balance sheets” in South African gold mining. Net debt as of mid-2017 was about R900m while Harmony’s long-term Golpu project with Newcrest Mining in Papua New Guinea would not be disturbed, he said.

“We will be in a better position to do Golpu,” said Steenkamp referring to the improved cash flow that Harmony expected after buying Moab Khotsong.

Asked if regulatory risks might unhinge the project, as demonstrated by the mines minister, Mosebenzi Zwane’s recent suspension of mining and prospecting licenses – since withdrawn  – Steenkamp said: “I’m sure this will have the support of the South African government.” There is uncertainty in South Africa regarding compliance of mining companies to its black economic empowerment targets.

Said Harmony: “Harmony believes this it is fully empowered under the MPRDA [Minerals and Petroleum Resources Development Act] and current Mining Charter. Harmony has therefore undertaken to work with AngloGold Ashanti and the DMR [Department of Mineral Resources] to ensure that the transaction is implemented in a manner that goes beyond compliance and ultimately to the benefit of South Africa].

The existing Mining Charter empowerment target in terms of ownership is 26% but a redraft of the Charter in June set a new target of 30% among a raft of other previously unseen demands in respect of procurement, training and development as well as recommendations on dividend payments and treatment of empowerment partners.

5 COMMENTS

  1. Dear Readers,

    THIS IS A BRILIANT DEAL FOR AGA!

    For once, it seems that Venkat has really gotten his business development guys to do the right thing…Let the fools pay top-dollar for making the last cent!

    For Harmony, its time to learn that ” Orebodies evolve, just because a mine generated ±$60M last year, It does not mean you will make the same money…NOT when paying $300M”.

    As previously predicted when HMY released its FY17 results, I wrote :

    The current South African’s ops of AngloGold Ashanti are NOT in a good shape. High unit costs and poor geological conditions are dogging them, to the extent that they are Cash Flow negative. So as the Harmony CEO will recall, Pamodzi Gold failed because it was Cash Flow -ve by ±R160M/yr ( inc CAPEX) , and he added debt ( ±R300M) and -ve CF (± -R50M/yr without CAPEX) Old Vaal reefs ops, and the it did NOT end well. It was a toxic mix (with a onerous Gold Hedge) which sunk it together with its 8Moz reserves.

    Well, well….here we go:

    Just to provide prelude, AGA is a growth phase & needs Orebodies to do so, hence they are dusting-up Obuasi. So from the said, they would NOT walk away from a R+R = 17,5Moz @ 14 g/t without just-course. Its R+R that just won’t leave-up to hyped-up expectations….because geological conditions won’t permit. The high unit costs are as consequence of geological conditions NOT profligate spending/leaving by management!

    Moab Khutsong orebody can be characterised as structurally complex , akin to Evander, orebody. Its faulted requiring extensive development coupled with high R/kg gold prices for it to have a remote chance of success. It can be broken into 3 x mining blocks namely, Noligwa(almost exhausted) , Middle Mine (centre of current mining activity, near exhaustion) & Zaaiplaats (long on the drawing board, requiring CapEx). AGA conducted extensive close infill drilling on Zaaiplaats to try decipher understanding of its faulted nature to no avail. SO HMY is, for all intends & purposes , buying Lower Mine/ Zaaiplaats (and water pumping liabilities & Nufcor liabilities), for generosity we will include the shafts pillars etc…. for $300M ….What a deal for AGA! IT IS A STUNNER! I truly wish to congratulate Carter & Dennison for this adroitly executed deal!

    HMY is exhausting its credit card…with Golpu to come. Newcrest is already preparing to it alone on Golpu with US$2Bn in the bank because this Freestate-pampoens are not going to stump-up anything! In trying to mimic Sibanye by using expensive bridge-funding is ludicrous, more so for a mere $300M. Sibanye mines are dependable cash-flow cows NOT HMY’s rats & mice!

    For HMY shareholders( and stakeholders), this is what happens when a not-so-competent/clever CEO , living in nostalgia, loses his bearings (without BoD guidance) by pursuing nonsensical deals to honour his poorly-conceived growth strategy. IT IS NOT GOING TO END WELL!

  2. Congratulations, Peter. Hard earned and well deserved. Much more than just a mining achievement…

  3. All the critics against Harmony, but yet Harmony saves jobs, keep another 6500 employees and their families to at least be part of society.
    Harmony are always labelled as the fools, however, they end up picking up the pieces to ensure new employees and their current employees can provide for a longer period of time.
    It’s sad to see what the above negative comment from a Gold speculator has to say about Harmony and in turn praises AGA for endangering thousands of people with a life to live.
    Harmony, I salute you in the highest degree, Well Done!!

    • Dear Spectator,

      HMY will NOT keep sustainable jobs if it makes silly business decisions.

      Furthermore, if its mission has changed, thus its on a philanthropic pursuit like creating employment instead of profits for its shareholders, then its obligatory for it to state this. Frankly, AGA is just as compassionate as HMY on matters of Jobs in RSA.

      The thrust of my comment is that : “This is a lousy deal for HMY shareholders ”
      I hope there are NO worker’s pension funds invested in HMY because it has well and truly become a call-option on the R/kg price of gold. Call-options are for speculators/share traders NOT pension funds investment!

      Lets agree to differ….

    • My friend, I sympathise with you and all these people you speak of. Unfortunately, the world of business is tough, and mining is after all a business. It is not the role of business to provide jobs for people. It is also definitely not the goal of any business to make losses at the expense of share holders in order to be seen as the ¨good guys¨ keeping people employed, fed and clothed. Businesses exist to make money. The ANC is making it more and more difficult for mining companies to make money. Mining companies that invest in SA put shareholder money at risk with very little prospect for a decent return, the cash cows of Sibanye excluded. Blame government for all of these ills, not the companies leaving SA or the guy writing the comments. And, like all of these companies, you should, if you are able to, leave the country and try to make a decent life elsewhere for you and your family…If you do not, you will regret it, mark my words….

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