HARMONY Gold pushed the boat out in an unexpected way earlier this month, announcing the R4.1bn purchase of Eva, a copper project in Australia.
The transaction is bold given that analysts questioned recently whether the South African gold producers could sustain dividends given its two-year, R17bn capital outlay.
Peter Steenkamp, CEO of Harmony, told the Financial Mail in a recent article that his company could take the strain of buying Eva which requires $600m in capital development in addition to the acquisition cost. Dividends are not endangered, notwithstanding.
“The dividend is always at the discretion of the board, but also – we’ve put a policy out there and we don’t want to change that as soon as we ‘go over’,” he said, referring to the undoubted pressure developing Eva will visit upon Harmony’s balance sheet. Harmony had $500m in cash at June 30, its financial year-end, and debt of $47m.
In addition to the R17bn in project development already announced, Harmony is running a study on the multi-billion rand extension of its Mponeng mine. It is duty-bound to do it as the operation was bought from AngloGold Ashanti for $300m with the intention of expanding it.
Eva, however, represents an entirely new revenue stream in copper – a proposed 100 million pounds a year of the stuff. That’s a major departure for Harmony which has only ever mined gold, mostly in South Africa. Copper is much-feted as ‘future-facing’, meaning heap-loads of it are required for electric vehicle batteries. Steenkamp has also made much of the fact that Eva lands Harmony in a new prospective district.
Analysts are reserving judgement until an updated feasibility study of the Eva project is completed in about a years’ time, as per Harmony’s project timeline. Some characteristics of the proposed transaction are hard to ignore, however.
“While not unprecedented, we are intrigued by the idea of using higher cost South African mining equity to buy projects in developed markets,” said Bank of America Merrill Lynch analyst, Patrick Mann in a recent report.
Mann fears the impact of inflation on the project development cost and the unpalatable fact facing all South African-based miners competing in international markets that their cost of capital will be high, possibly more than 8%. He added: “While we do see the strategic rationale, we are not sure on the value proposition”.
Steenkamp said the project inflation is unlikely to be heavy and that project finance will be easier to attract than the doubters forecast. Lenders have “a responsibility” to finance certain minerals for their ESG properties, he says. Taking on the project was also a case of ‘now or never’.
Eva is the forced sale of owner Copper Mountain Mining Corp. which is trying to finance a project in Canada, its preferred development. So whilst Harmony was “scanning the market” for opportunities, Eva was unsolicited. There may have been two or three bidders, said Steenkamp.
Steenkamp said he was even holding out for possible expansion into Africa, though there’s nothing immediately in the pipeline. “Four or five years from now we’ll have a totally different suite of assets,” he said.