Harmony least attractive of SA gold majors despite improvements – JP Morgan

THE good news for Harmony shareholders following this week’s results for the year to end-June is that JP Morgan Cazenove reckons the group has shown “solid production and cost improvements” and has raised its estimate on 2019 EBITDA (earnings before interest, tax, depreciation and amortisation) by 50%.

The bad news is the JP Morgan team – led by analyst Dominic O’Kane – are recommending investors stay underweight in the share and rather put their money into AngloGold Ashanti and/or Gold Fields. That’s despite the generally negative sentiment against Gold Fields because of the on-going train smash at South Deep.

JP Morgan’s December 2018 price target on Harmony is R20.80 which compares with Friday’s price on the JSE of around R22/share.

The reason for the upbeat forecast on Harmony’s profits for the current 2019 financial year  is JP Morgan’s revised expectations for a weaker rand/dollar exchange rate which will boost Harmony because the group gets more than 80% of its production from its South African mines.

According to JP Morgan: “Harmony has been the best performing South African gold equity since 2016 but we believe the company’s strategic direction carries higher risk than many of its global peers, in part because it has the highest exposure to South Africa.

“We calculate around 40% of group production has mine lives of less than seven to eight years. These assets are relatively high cost, mature underground mines in South Africa where we expect the economic potential of extensions or expansions will be uncompelling at current old prices.

“We forecast immediate cash flow benefits will be eroded longer-term by higher South African inflation. We regard Harmony’s high exposure to mature, high-cost, underground South African mines as offering unattractive returns and risks versus peers in the current anaemic gold price environment.

“Therefore, we believe Harmony is likely to pursue merger and acquisitions in order to avert rising costs and production decline. Consequently, we believe Harmony’s capital at risk is higher than (its) peers.”

In mitigation of this pessimistic outlook, O’Kane notes that because of its “… high operating leverage” Harmony would “… record amongst the highest earnings and cash flow growth amongst global peers” should the gold price show a sustained improvement.

He also points out the current JP Morgan assessment “assigns zero value” to the Wafi-Golpu project which could have a positive impact on future valuations after development approval and “positive project net present value.”

O’Kane far prefers AngloGold Ashanti setting a share price target of R230,79 which is more than double the current share price of around R110/share.

According to JP Morgan, AngloGold is a cheap stock which has greatly reduced its exposure to “… high-cost, structurally challenged South African underground miniing operations” through recent mine disposals.

O’Kane comments: “AngloGold ranks as one of the cheapest South African listed gold companies on enterprise value/EBITDA metrics. It is trading at a significant discount to its own average historical trade multiple of 5.4 times and now trades at an extreme discount to international gold peers.”

He is just as upbeat on prospects for Gold Fields with JP Morgan setting a price target of R76.19 a share which compares with the current price on the JSE of around R34.

According to O’Kane: “Gold Fields’ share price has significantly underperformed global and South African gold peers since 2016. This stems from investor concerns over production decline at its international assets plus perceived technical risks and economics at its problematic South Deep mine expansion in South Africa.

“In our view, these risks are excessively discounted in Gold Fields’ share price. Approved expansions in Ghana and Australia will add more than 200,000 ounces per annum plus we identify high prospectivity for mine life extensions at three out of four of Gold Fields’ existing Australian mines.

“Even if we assign zero value to South Deep, Gold Fields remains the cheapest South African gold miner on price/net present value. We therefore believe the share price carries a cheap option on even limited success at South Deep; higher gold prices or a weaker rand.”


  1. Like I said in previous posts, the strategy to high grade, reduce costs, stop investing in sustaining development, exploration and the like, then invest those profits in acquiring quality assets outside of South Africa, close down all the South African operations… THAT is the correct strategy for Harmony and all of the companies still faced with the unfortunate reality of still having mines in South Africa…

  2. The post below has been edited in line with Miningmx standards and policies.


    Dear Fellow Readers,

    The armchair critic has had a peek at HMY results, AND the accounting does NOT make sense, and I attempt to explicate this below. Simply put ……THE NUMBERS DO NOT END-UP!

    Production UP …Costs UP even more, even with the concerted effort to conceal (Table 1):
    Prod (kg)______________33515_______33655_______33836_________38193
    AISC (R’M)_____________16337________16420______18843_________21078
    OCF (R/M) ____________2006_________4513__________3804________3884
    CapEx (or other OpEx)___2827_________2433_________3454_________4571

    Other OpEx relates to amounts classified under CapEx that are, in reality , OpEx for GAAP or IFRS accounting standards.

    However, the joke is on the Q/Q trend for the entire world to see (Table 2):

    Price(R/kg) ___R531k/kg_____R542k/kg____R556k/kg____R511k/kg____R531k/kg
    HMY (R/kg) ___R562k/kg_____R572k/kg____R566k/kg____R555k/kg____R525k/kg
    Prod (kg)______8574_________9040________8378_______7983________ 12792
    Costs (R’M)____5188_________4997________4508_______4115________5661
    MineOCF(R’M)___-205 ________100_________236_______-159_________845
    AISC (R/kg)___R605k/k______R553k/k______R538k/k_____R515k/kg___R443k/kg
    u/g Grade (g/t)__5,16_________5,35________5,17_______6,57_________7,68

    I have included the HV CapEx (excluding this CapEx is just pure “creative accounting “ by HMY).

    For seasoned mining managers, its evident as to what has transpired during the FY18. HMY just pulled inventory from plants etc , and supplemented this reckless activity with more intense high-grading. Yet they could not stop the business liquidity from drying up as they scrabbled to pay down the bridge loan. The inventory contribution to cost reduction was R222M for FY18. According to HMY management, Moab Khutsong changed everything despite the glaring costs concealment.

    So in essence, if you believe HMY accounting, they have cut total costs by 27% without having to lift a finger! And more remarkably, this costs decreases were timed pretty much in line with the decrease in the R/kg gold price (who said u/g gold mining was a high fixed costs business?) , which is the earnings driver. THIS REQUIRES ONE TO TRULY & WILLINGLY SUSPEND DISBELIEF….

    If we strip-out the Moab Operation, for apples-to-apples comparison, the picture truly reveals itself (Table 3) :

    Price(R/kg) ___R531k/kg_____R542k/kg____R556k/kg____R511k/kg____R531k/kg
    HMY (R/kg) ___R562k/kg_____R572k/kg____R566k/kg____R555k/kg____R525k/kg
    Prod (kg)_____8574__________9040_______8378________7983_______9496
    Costs (R’M)___5188__________4997_______4508________4115________6008
    MineOCF(R’M)__ -205 _______ 100________236_________-159_________298
    AISC (R/kg)___R605k/kg_____R553k/kg___R538k/kg_____R515k/kg___R633k/kg
    Grade (g/t)____5,16_________5,35_______5,17_________6,57__________5,25

    HMY CORE MINES ARE CURRENTLY OPERATING AT AISC = R632 687 (current gold price = R550 000/kg) !


    Now from above, its evident that costs are up 16% y/y , whilst production is increased on the back of HV gold production and grade increases. Without any announcement of restructurings etc , thus wihout lifting a finger. They don’t even attribute this to some wishy-washy productivity programme etc, because should they do , more questions might follow!

    On a unit costs basis, it’s a knock-out of 21% y/y decrease in AISC (R/kg)! On a flat grade 5,16 g/t vs 5,25 g/t . Surface Ops are not key costs drivers for HMY, so I exclude their tonnage from grade calculation, but add their gold production thus biasing/skewing the gold grade higher.

    According to its accounting, HMY claims it is more profitable than SGL gold division ! Over the same period, July 2017 – June 2018, SGL Gold Division delivered EBITDA = R4060M (Margin = 19% ) for gold production = 40832kg . HMY produced 38193kg with reported FY18 EBITDA = R4289M (Margin = 21%) Exiting June 2018 quarter, SGL’s AISC = R526833/kg, when HMY reports AISC = R443000/kg !!!!!! INCREDIBLE STUFF!

    SGL GOLD OPERATIONS ARE MORE PRODUCTIVE THAN HMY OPS, unless HMY have discovered a new mining method that they are using to lower costs drastically every year on their Q4 report, and such method is NOT in use during the other 3x quarters for reasons only known to HMY management. Furthermore, this mysterious mining method is rather responsive to the R/kg gold price!

    For FY18, Mine OCF = R1022M. This was to fund other corporate expenses ( i.e G&A , Exploration etc) = R1516M and still pay Interest expenses = R330M. So HMY needs liquidity injection badly at this juncture. As of June 2018, HMY had liquidity = ±R1859M, if you believe their financial results. The total Cash Costs of HMY is >R2Bn/month so this liquidity should be halved by end of August 2018, and would have dried-up by Sept 2018.

    2. Moab Khutsong CPR document, is inflated by abnormal production ( >300koz/yr) to get shareholder approaval….then subsequently downgraded to 248koz/yr for FY19 for management bonuses !
    3. Circulars for ARM BEE shares, when in effect it is Nedbank CIB purchasing the shares. The cover was blown when ARM ( which consolidates this ARM BEE shares, failed to disclose this to SENS. The investor relations chap at ARM did NOT even know about this purchase of shares! Given that its 2x listed companies, the share transaction needed to be disclosed by both parties. And yes, R225M is a material amount for ARM give its low cash balance. I will deal with ARM when it reports.

    ARM recently restructured its debt to Glencore. The net result, is that Glencore will not be making any further payments to ARM but keep the BEE credentials. Over the 12x yrs period , ARM has received cumulatively R120M from Gllencore related to ARMCoal BEE deal, whilst Glencore has pulled out $1665M ( yes, almost 1,7billion dollars). ARM has been consolidating these assets into its books for the palry sum of R120M. The Debt of ARMCoal to Glencor is R8,25 Billion ( more than eight billion rands) for a R3Bn BEE deal announced in 2005. I am looking forward to ARM NOW consolidating this debt into its books! DO NOT HOLD YOUR BREATH with the FD of HMY (Frank) being on the auditing committee at ARM.
    4. The repayment process regarding the Bridge loan for Moab Khutsong acquisition was obfuscated from other bankers with only Nedbank having purview of whats truly happening.
    5. Hidden Valley is hiding something seriously egregious from corporate governance viewpoint. Om the 17/08/2016 during an analysts call Mr Steenkamp said the following : “ Well we tried to dispose of it ( Hidden Valley). We ere not successful in finding a bidder…we are mining the stockpiles …… we still have to mine the stockpiles and then we have to get the closure certificate” .

    A month later, September 2016 , the same Mr Steenkamp had bought the mine for $1 .and received $34M from Newcrest for Rehab contribution. And he announced an reinvestment plan and when asked about a change of plan , he had the following to say : “ We have had experts look at this mine and they belief it’s a fantastic opportunity for HMY” ( which is a blatant lie As everybody knows , HV is a failed mine and it will enhance this reputation after FY19.
    The reinvestment project was essentially a plant & mining equipment refurbishments, and cut-back stripping for stage 5&6 of the HV orebody. Nothing unusual, but the accounting treatment of is totally abhorrent. Makes one wonder how much of the $220M will end-up in HMY executives pockets in kickbacks etc.
    6. Safety and Environmental incidents go unreported across the company. Execs do not know about them when you enquire, yet the impact on surrounding communities and environment are serious. When you report them, it’s a blame game and pillar-to-post stuff.
    7. The icing on the cake is the statement on their website: “ OUR GROWTH ASPIRATION TO PRODUCE 1,5Moz AND IMPROVE THE QUALITY OF ASSETS PORTFOLIO WAS REALISED”…they just couldn’t wait another FY to claim the bonuses!

    Buried in their FY18 results booklet (released on 21 August 2018), is the following disclosure pertaining to their Borrowings:

    “As a condition for obtaining the bridge loan, Harmony requested the covenant ratio of the TNW /ND to be relaxed from 6x to 4x for the duration of the Bridge loan, which is by end October 2018. “

    The Bridge loan was provided by UBS , Nedbank , Absa & JP Morgan. The borrowings of HMY are with Nedbank , which also happens to be holding on 14,29% of HMY outstanding shares. Upon inspecting the disclosures relating to the UBS bridge loan, one finds the following disclosure pertaining to the TNW/ND covenant:

    “ $200M bridge facility, which has a 12-month term with similar terms and covenants as the existing loan facilities. “

    So there was never an amendment to the covenants prior to assuming the bridge loan. Frankly, the relaxing of the TNW/ND covenant was POST its breaching by HMY, so Nedbank , given its equity stake in HMY, chose to amend the covenant WITHOUT HMY disclosing this to the market. The UBS et al, were duly paid prior to the testing of the covenants so that the whole matter never slips into the market place. An analyst on a conference call did put this to management, and to be kind, their answer was rather chaotic!

    HMY IS THE ONLY MAJOR MINING CO. WHICH WENT THROUGH ITS FY WITHOUT DISCLOSING ITS Q/Q OPERATING RESULTS, and as per above and below ,for nefarious reasons given the Net Mine Cash Flow (R’M) Trends (Table 4) :

    Price(R/kg) __R531k/kg_____R542k/kg____R556k/kg____R511k/kg____R532k/kg
    HMY (R/kg) __R562k/kg_____R572k/kg____R566k/kg____R555k/kg____R525k/kg
    Tshepong ____R140M_______R374M______R139M_______(R11M)______(R51M)
    Joel________(R35M)________(R24M)_____ (R41M)_______(R70M)______(R82M)
    H V________(R595M)_____(R691M)______(R395M)_______(R198M)____(R105M)

    What will be evident, is the huge variability in Net Mine OCF, despite range-bound gold prices received by HMY, NOT the average market prevailing gold prices. This so because these assets are so marginal, given their high costs, that management literally determines which asset is profitable and which is not. This is determined by the allocation of “ CapEx “(read OpEx wilfully misclassified as CapEx). Worryingly, is that Tshepong Ops are now losing money at gold prices of R550000/kg. The shorterm high-grading , was allowed to persist for too long , now this asset is now marginal despite its M+I > 20Moz. It will require more ORD CapEx for which the current gold price will fail to support.

    Exiting Q4FY18, Tshepong Ops break-even grade is 5,5 g/t whilst its 2P reserves is 5,76 g/t , thus rendering it marginal. Furthermore, it has been negative net mine CF for 2xqrts yet no word from management about it turning it around despite being the only investable asset in their portfolio. As I have said before in this forum, a less than 1g/t differential between yield vs 2P reserves grade is a classic “ Canary in the u/g narrow vein gold mine for upcoming cash losses” . It just does not bode well for profitability!

    HMY failed to make even a tentative announcement about any initiatives to improve PROFITABILITY, there was no word!

    ” Steenkamp had done a better job than many believed ”

    As Charlie Munger said: “ Show me the incentive….I will show you the outcome”

    I beg to differ that the current CEO has done a better job than even the failed ex-CEO of HMY (Mr Briggs). Firstly, HMY phony accounting disclosures continue to be appalling, therefore sullying anything positive he might be doing, which is not apparent. It’s a classic “ I did not do it, I found the practice in place”!

    As I have said before, one of a true measure of any management is when they deliver on their promises NOT necessarily production targets. When management seek to drive shareholder return. The TSR during this CEO tenure is atrocious, and he has been on the spending spree:

    TSR of HMY ( H2FY16 – FY18) = -ve 60%
    TSR for GDX (Van Eck Gold Miners Index) = +ve 46%
    TSR for JSE Gold Index = -ve 40%

    I have compiled (arduous task!) the table below. What this table illustrates is : WHAT % OF PRODUCTION IS WITHIN THE ±10% OF THE PLAN ( i.e % compliance to mining plan). The targets are 2P reserve grade (adjusted for recovery factors) and cut-off unit operating costs . Obviously if a mine’s yield grade is ±10% within its adjusted 2P reserve grade and cut-off unit costs are BELOW (or at worst NOT more than 10% above cut-off unit costs), it is classified as being mined within plan. The adjustment to 2P reserves vary depending on metallurgical recoveries, MCF etc , hence its such a pain to construct this table( Table 5).

    Prod (kg)___________33515_______33655_______33836_________38193
    Gold Price (R/kg)_____R450k/kg____R546k/kg___R546k/kg_______R535k/kg
    HMY Price (R/kg)_____R450k/kg____R545k/kg___R564k/kg_______R540k/kg
    % Compliance ______ 27%________25% _________8% _________0%
    % -ve Mine CF_____42%__________11% _________20% __________17%

    From above, NONE of HMY mines are complying to their mining plans and 17% (207Koz/yr) is Net Mine Cash Flow Negative, including Tshepong Ops. Worryingly, HMY is now carrying Debt and has low liquidity.

    Despite the losses incurred by the core portfolio of mines, the CEO is still pressing ahead with this loss-laden forecast for FY19 (Table 6):

    _____________________Q4FY17 AISC_______FY18 Koz__________eFY19 Koz
    Tshepong ___________R548k/kg__________302Koz____________287Koz
    H V__________________eR515k/kg__________93Koz______________202Koz
    Moab _______________R480k/kg__________106Koz_____________248Koz

    At current prevailing spot prices (±R550 000/kg), that’s 450Koz (31% of Forecasted production) of under water production.



    “He (STEENKAMP) has benefitted from the CapEx executed under ex-CEO Graham Briggs”

    Fellow readers, HMY has NOT always been like it is today. As I have commented before, the rot really settled in with the previous CEO. The current CEO inherited the deadwood executives, and he has not been able to change a thing. Now frankly, HE OWNS THE MESS…… AND THE PREVIOUS CEO CAN CLAIM “ IT WAS FINE WHEN I LEFT IT”

    In 2008 (yes, ten years ago), upon assuming the CEO post, Mr Briggs announced that HMY will be a >2Moz/yr producer, and to achieve this target he had the following projects (Table 7):

    ____________Bud CapEx _______Proj Koz (Year)_______Act CapEx ____Act Koz
    Kusasalethu ___$134M___________415Koz(2015)_______$320M________140Koz
    HV__________ $245M____________285Koz(2007)_______$665M________90Koz
    DNK SouthReef__$183M__________355Koz (2010)______$240M________85Koz
    Phakisa ________$125M__________280Koz(2015)_______$186M________129Koz

    All the above project have failed, I mean ALL…… And yet the executives responsible remain employees of HMY to this day, namely: Exec for Reserves; GM of Central Projects; GM of Business Development etc. Sure there are some infrastructural installations which were related to the project which are being used , BUT the operations above did not achieve their projected targets. Some of the failures are downright embarrassing and errors comical.

    Consider the Doornkop South Reef Project. This entailed deepening of the Doornkop shaft and associated infrastructure to exploit the south reef horizon. South reef has been exploited successfully by Crown mines, BUT TOGETHER WITH THE MAIN REEF. HMY thought they could successfully exploit this thin reef (1m) and thus minimal dilution , given MR is ±5g/t .Nobody has ever mined SR by itself , and its stratigraphically separate/isolated in the Westrand and nowhere else in the Witwatersrand.

    Phakisa it was a failure of geotechnical and hydrology technical work, even amalgamating it into Tshepong has not helped. Kusasalethu new mine was just pure incompetence, the list of technical failures reads like a phonebook. The most egregious being to apply the same mining strategy that was successfully implemented on the old shallower (less faulted) part of the orebody. On the deeper more Blyvoor-like part of the orebody.


    HMY share should be avoided like a plague. I certainly would not touch it with a 10ft pole wearing a hazard mat!

  3. U/G mines in SA are caught in an inflation doom loop. This is evidenced by the Rand Gold price rising most prolifically vs A$, C$, Yuan gold price. Reason – see falling gross domestic fixed investment spending (aka capital formation) in latest SARB quarterly bulletin. ..it has collapsed. Therefore productivity too goes into downward spiral.
    Prices of Mine consumables continue to rocket and as Gold Spectulator pointed out above, large scale mining is driven by senior management rearranging accounting principles to max and gouge bonuses as well as at lower levels (ops) where this culture is prevaient.
    Dore bar theft has become an industry in itself and in some cases is tye main reason why mines continue running.
    So while it us comforting to see rand gold price continue its surge in nominal terms this maies mine supplies and imported capital equipment more expensive and effectively culls the apparent windfall.
    The only way out of thus is to create a synthetic rand gold price, manage the furrency asoect with flexibility (no hedging) and this way yo be able to keep up with double digit on mine costs.
    But of course, mainstream mining media id owned by promotors and vested parties and it is much easier to befuddle results releases and paper over shaky areas.
    Nobody goes back to research historical figures, check promises and forecastes and if course new acquisitions skew old forecastes etc etc.
    Mning is not the main game. Face it. Therefore this philosophy plats out in the stock market where these mining shares are quoted. So be warned – unless you take a contrarian view using macro and technical analysid ……you will pay up for their errors.

    • Dear Observe,

      I am pleased that we can agree on facts , and debate based on the same.

      Yours truly,

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