Harmony may yet prove Hidden Valley doubters wrong, but familiar SA costs weigh

Peter Steenkamp, CEO, Harmony Gold

HARMONY Gold claimed advances at its Hidden Valley mine in Papua New Guinea which turned cash flow positive in the first quarter of the 2019 financial year. However, the onset of winter electricity tariffs and above-inflation labour costs in South Africa dragged back the firm’s overall performance.

Production was also lower quarter-on-quarter at some 378,250 ounces compared to 385,583 oz in the June quarter, including a weaker performance at Moab Khotsong – a mine bought from AngloGold Ashanti which will lift overall gold production by about 300,000 oz for the year. In the quarter, though, production dropped off about 7,000 oz.

Harmony CEO, Peter Steenkamp, said Moab Khotsong would hit higher grade sections throughout the remainder of the financial year.

South African power utility, Eskom, charges a higher rate in July and August – representing the coldest months of the winter – whilst Harmony also signed above inflation wage increases for labour of R700 per entry-level miner per month, and just over 6% for its artisans in the first year of the three-year deal. It employs about 31,000 people represented in the wages bargaining unit.

On a rand basis, cash operating costs increased 8% which more than offset the benefit of an 11% depreciation in the rand against the dollar which averaged 14.04 in the quarter. The average price received was R570,454 per kilogram (Q1: R566,636/kg) for the period.

The outcome was a decline in production profit to R1.68bn for the three months which compares to a R1.88bn profit in the first (June) quarter, a decline of 11%. The fall in dollars was 20% quarter-on-quarter.

“Hidden Valley and Moab Khotsong have boosted the group’s production and free cash flow generation compared to the September 2017 quarter,” said Steenkamp in notes to Harmony’s numbers published today. “We are confident that we will achieve our annual production and cost guidance as we continue to focus on safety, production and cost management,” he added.

Commenting at the 2018 year-end presentation in August, Steenkamp said the company planned to produce approximately 1.45 million oz at an all-in sustaining cost (AISC) of about R515,000/kg in the current year. The AISC for the first quarter totalled R526,747/kg.

Steenkamp will be hoping Hidden Valley continues to deliver free cash as he was heavily criticised for re-opening the mine after buying Newcrest Mining’s 50% stake in the operation for $1 and assuming its liabilities. That was just over two years ago at which point Steenkamp forecast 180,000 oz/year in production from the mine – a target he upgraded in August to 200,000 oz at an AISC of under R515,000/kg.

Production from Hidden Valley came in at 44,529 oz for the quarter and some 178,116 oz on an annualised basis. Shown in Harmony’s figures as a percentage of its operating margin, free cash flow was 9% after showing a negative 4% in the previous quarter. On the same basis, however, the writing appears to be on the wall for Joel which lost money again. Kusasalethu and Tshepong were also cash flow negative in the quarter.

Harmony said it took the opportunity to “top up” its currency hedges during the quarter as the rand proved volatile, and weaker to the dollar. The firm has some rand gold forward contracts totalling 494,000 oz at an average rand gold price of R634,000/kg until the first quarter of its 2021 financial year.

It also provided an update regarding progress at exploration at Kalgold, an open-pit mine Harmony has operated since the Nineties, which it drilled at some 300m below surface. The final SAMERC complaint and audited mineral resource contained some 2.34 million oz, a near doubling from the 2017 estimate, at an average grade of 0.95 grams per tonne. Infill and scoping drilling continues, the company said.

Commentary regarding progress on Wafi-Golpu was sparing. Harmony said it continued discussions with the PNG government on the application for a special mining lease. The project has been described as transformative by Steenkamp who reflected on Harmony’s history – a company that has always operated with only five or six years of life-of-mine remaining in front of it.

“We are still here. We have always found a way to extend our lives. This is not something that worries me or keeps me awake at night,” he said in August.