Harmony Gold has “pathway” for 1.5m oz/year until 2038

Peter Steenkamp, CEO, Harmony Gold. Source: Harmony Gold

SHARES in Harmony Gold hit a 20-year high in mid-April at just over R186 per share. Were the share to maintain its current value, equal to a market capitalisation of R110bn, it would be the perfect sign-off for Peter Steenkamp who retires as CEO in December, after nine years.

Analysts (and media) scoffed at his plan in 2016 of increasing Harmony’s gold production to a sustainable 1.5 million oz a year. At the time, the company was producing a million ounces annually. But he has proved his detractors wrong.

“We have a nice pipeline ahead of us, and it’s beginning to be realised we can produce 1.5 million oz up to 2038 – if we do a lot of things currently in our plans,” he said in an interview on May 16. Production for this year is guided to 1.55 million oz.

One project is to expand production by processing more gold tailings. Steenkamp says Harmony is running the rule over potential surface ore resources in the West Wits and Free State regions where its mines are among the few still operating.

The acquisition in 2022 of Mine Waste Solutions, a tailings reprocessing business formerly owned by AngloGold Ashanti, has been a major success for Harmony. Production costs are low and there’s a significant reduction in technical risk.

Says Steenkamp: “We need to extend the surface resources and make that bigger. We are busy with the feasibility studies”.

The extension of the giant Mponeng mine, acquired with MWS from AngloGold, will also support production for the next 20 years. The project, expected to cost R7.9bn, also aims at opening up years of more profitable gold.

AngloGold intended to spend more time mining Mponeng’s low grade areas based on its plan, but Harmony’s extension will see it jump start access into the orebody’s inner treasures. Two declines, east and west of the orebody, will be sunk accessing higher grade areas earlier.

Elevated grades from Mponeng, coupled with record rand gold prices, helped generate stunning cash generation in the third quarter for the group. Assisted by a decision to defer some capital expenditure, Harmony reported cash on hand of R1.4bn by the quarter’s end. Steenkamp estimates Mponeng will be producing at “very good grades” for seven years.

With gold expected to remain above historic levels for the foreseeable future, the question of cash allocation is frequently asked by Harmony’s investors, especially as the company hasn’t been a big dividend payer in the past. Steenkamp says the current 20% of free cash flow dividend policy is unlikely to be changed.

Instead, the company will plough cash into its strategic move into copper production. Development of its Eva project in Australia is possible from next year. After that, Wafi Golpu, an enormous copper/gold porphyry in Papua New Guinea, awaits financing.

Wafi Golpu was last estimated to cost $5.83bn to build, to be shared with joint venture partner Newmont. Since the feasibility was completed in 2018, a new study is clearly needed, but Steenkamp says that – for perhaps the first time – there’s a clear pathway to Harmony would finance it.

“When the big spending comes it will be from Mponeng’s extension, MWS going at full steam and the Eva project complete,” says Steenkamp. “Provided the current margins prevail, we will be in a very good spot.”