[miningmx.com] – SHARES in Harmony Gold lost 4% today taking losses in the last two days to 12%, a trading activity most likely rooted in the firm’s decision to divert capital from its Wafi-Golpu development in Papua New Guinea to its traditional South African domain.
Logically, it makes sense to delay significant funds to Wafi-Golpu which is expected to cost $4.8bn before first production, of which Harmony would be liable for 50%; Newcrest Mining, the balance of the project. This is not the gold price (or copper price for that matter), to be pledging huge capital commitments as demonstrated by capital cuts, impairments, closures, and sales of mining properties in all minerals around the globe.
Intuitively, however, Harmony has acknowledged a massive shift in focus that, given its near exclusive exposure to South Africa, potentially hurts it more than most.
It’s been said the North American gold market loves “a story’. In that context, Harmony has changed its investment proposition: it has a different story, or rather adopted a new, old story.
So it happens that Harmony Gold CEO, Graham Briggs, has turned his attention to buying up gold mining assets in South Africa, the ones others might no longer want to operate.
One can only imagine he’s talking about AngloGold Ashanti which earlier this month flagged plans to divest of as much high cost production as feasible once it introduces up to 600,000 ounces of low-cost production from its Tropicana and Kibali new builds.
“Harmony has demonstrated over years it can mine other peoples assets pretty good,’ said Briggs in response to questions at the group’s full-year results presentation. In fact, all of the 1.14 million ounces of gold production in the 2013 financial year were from mines Harmony acquired.
“I guess that says from a strategic point of view, we can acquire, and we can mine assets other people couldn’t, didn’t or wouldn’t want to. So have strategic advantage in South Africa,’ Briggs said.
One Johannesburg analyst says Harmony has effectively brought Wafi-Golpu to a close; at least in the foreseeable future. Briggs disagrees: there is a different timeline, more exploration, and a possible decision to sink a shaft straight into the known deposit rather than more expensive declines.
He has given Harmony until around 2015 before having to tap the market for funds. A review of the capital numbers is now underway and is not scheduled to be complete for another nine to 12 months.
Asked for the capital call shareholders might face in terms of a newly scoped Wafi-Golpu, Briggs said: “I don’t know quantum of capital but will be a heck of a lot less than $4.9bn to first production.
“If it was $1.5bn, we would look to how we could finance that. We will look at situation of the market at the time. We have clever bankers who have ideas on how to finance it and we will look at the quality of the operation at that stage’.
The “massive capital overhang’ that would have existed in Harmony Gold, will not be there in the future, he said.
Of course, there’s no particular pressure on Harmony to rush for new acquisitions anywhere. If the company doesn’t think it prudent to chase unprofitable ounces in Papua New Guinea, there’s no reason why it should apply a different criteria to South African gold. Briggs has said he won’t buy capital-hungry mines in South Africa.
Already, the group has organic growth in its ranks. Production for the 2014 financial year of 1.3 to 1.4 million ounces is being planned with four of its operations in build-up phase. It will be a case of making sure investment renders a clear return in the current year.
One investor asked Briggs whether the R1.4bn earned from the sale of Harmony’s Evander Gold Mines might just be returned to shareholders rather than subsidising unprofitable shafts or mines.
Briggs responded that was not the intention, but then the group had its own capital pressures such as funding Phakisa, a long-life 90,000 to 100,000 oz/year operation. “We should do what we should do,’ he said of plans to plough cash into the asset.
