How could Harmony have got Kusasalethu so horribly wrong?

Kusasalethu mine

I am gobsmacked by Harmony Gold’s announcement that it will chop the remaining life-of-mine at Kusasalethu from 24 years to five years through a decision to “high grade” the mine.

The ramifications of this move by new CEO Peter Steenkamp are huge. It means his predecessors – Graham Briggs and Bernard Swanepoel – wasted a lot of capital on Kusasalethu. It also has negative consequences for ‘South Africa Inc’ in terms of lost jobs and lower foreign exchange earnings, taxes and income because of the gold that will now be left in the ground and not mined.

It also focuses attention on the key role of that piece of tightly-written legalese which precedes every presentation by a mining company – the safe harbor clause concerning forward looking statements.

When you look back what was predicted for Kusasalethu during the past ten years and check it against actual delivery you can only shake your head at how Harmony’s executives got it wrong.

For the past decade Kusasalethu – the former Elandsrand which Swanepoel acquired from AngloGold – has been touted as one of the five pillars on which Harmony intended building a solid South African mining business.

Since 2007 some R4bn has been pumped into Kusasalethu to turn it around from a marginal operation into a world-class mine. The 2007 Harmony annual report stated the new Elandsrand would produce 415,806 ounces of gold annually when the project was completed by 2010.

But, in the year to end-June 2016, Kusasalethu produced only 124,198 oz. The 2007 annual report also predicted Harmony’s growth projects would add some 1.4 million oz over the next four years to the group’s then total annual production of 2.3 million oz. Harmony produced a total of 1.1 million oz in the year to end-June 2017.

Steenkamp is now predicting that Harmony will boost production to 1.5 million oz over a three year period. As part of this plan, Kusasalethu is to be high-graded because, according to Steenkamp: “I don’t believe – and the current plan does not show us – that we should spend any more money on developing the lower grade part of the mine so we are looking at five  very profitable years during which we can make very good money out of Kusasalethu”.

Let’s give Steenkamp credit for being prepared to make such a tough call. 

But are the unions and the Department of Mineral Resources really going to go let him get away with this seeing as how the major beneficiary of high-grading Kusasalethu is likely to be Papua New Guinea which is where Harmony’s key Golpu project is situated? 

If they do, it would represent a complete reversal of the normal government/union Marxist/socialist approach to the South African mining industry.

Under apartheid era legislation, there was a requirement that gold mines should mine to the average grade of their reserves because this maximized the life of mine which had major benefits for the country in terms of foreign exchange earned and, of course, employment.

That requirement no longer applies, although I see Harmony still claims it is part of the group’s grade code – but dare I suggest at least this element of apartheid era mining legislation was more beneficial for jobs than the current MPRDA?

For the ordinary investor, the key takeaway from all this has to concern to what extent you can believe predictions made by any mining company CEO.

How could Harmony have got it so wrong?  Well, firstly; all miners are incorrigible optimists. Secondly, ten years ago investors wanted to hear a growth story from gold producers. If you did not have one then they were not interested in your group so all the CEOs dutifully served up high growth scenario forecasts.

Today, of course, it’s all about increasing profit margins and return on investment hence Steenkamp’s focus on producing “safe, profitable” ounces.

I should also point out that everything that could possibly go wrong at a mine – illegal work stoppages, major strikes, invasions by illegal miners, plunging gold prices – have hit Kusasalethu over the years.

But I come back to the crucial role of the safe harbor clause which is essentially a CYA (cover your arse) provision to safeguard executives from legal action by investors outraged over inaccurate predictions. It’s there for a very good reason and best you keep that in mind.


  1. Dear Brandan, I believe you are modest in your criticism. Harmony is a real value destroyer, since 2008. Principally, its management team needs be changed totally. The following were “Growth Assets” LoM yearly averages :
    2008 2012 2016
    Kusasaletu 415 000 oz 300 000 oz 140000 oz
    Hidden Valley 285 000 oz 135 000 oz 47000 oz
    Doornkop 355 000oz 200 000 oz 85000 oz
    Phakisa 280 000 oz 200 000 oz 135000 oz

    From the above, given the shear underperformance , and you hear a CEO @ R20M/yr salary, dreaming up a 1,5Moz / yr without elaborating/detailing a linkage to their Capital Allocation Framework, is disturbing. Harmony’s ROIC is a mere 2% in this high R/kg gold, with Invested Capital = $4300 M. Randgold , with similar IC ( ± $3500M) earns 15%. Therefore, they really need to do something regarding their assets portfolio which continues to underperform. You are correct that they are high-grading , given that their grades keep improving by 5% yearly, yet they have been mining these mines for years. So they are chasing grades , which in turn increase costs , hence their margins have stayed stagnant , whilst price the R/kg gold has been improving for >10 yrs in a row. So nothing to do with the R/kg, its all management of the mining assets.

    Truly, with the target of 1,5Moz ( excl Wafi-Golpu)now communicated, expect another 3yrs of madness. Going prices for Gold mines is $200 – $350/ oz 2P reserves.The additional 500 koz production will costs ± $1,5Bn , from the current $131M net CF from Ops ( OPs CF – Net Investing CF). That is a tall order , and the debt load to come with this will be significant. On our call with IR , the chap told me they will issue shares. Therefore for this meagre returns , they will dilute such returns further. THAT IS SHEAR MADNESS! Institutional Investors ought to reject such, and van eck will certainly not allow such stupidity and shareholder value destruction.

  2. why should companies ,shareholders,execs be subjected to the abuse threats etc in the mine,
    money is an orphan it has no parents
    .It goes where it is wanted and respected
    the politicians union organisers etc know in their hearts that their actions shorten mine lives and leave thousands of poor families

  3. Poor shareholders are being raped again by CEO’s of SA gold mining companies and then they pay themselves for doing that! The gold mining industry has been killed by lies of executives that only look at themselves and how much they can get out of the share owners in the shortest time.

  4. If they can,t manage projects and assets in home ground South Africa how will they manage in the rest of Africa. PNG Hidden Valley already a failure. CEO just buying time some assets will soon be running out of high grades like Bambani .

    • Ken, i agree fully. It’s been an utter failure yet it was declared a growth asset by harmony BUT NOT by Newcrest. So the warning signs were there! Newcrest has since written Hidden Valley off. It’s only kept alive for goodwill for Wafi-Golpu, but NOT at $40M/yr sus.CAPEX according to Sandeep. It costs the Marobe JV $600M to built , plus to date it has only been +CF once and for ±$20M , since coming into production 2009. The HV mine is what I term CAPEX-JUNKIE! ( anything >5% carrying value for sus.CAPEX), and they are always perennial laggards ( refer to Ezulwini).

      I truly believe some of these actions/lies by Harmony execs are criminal. We need activists investors in this country badly to expose such blatant shareholder rip-offs. Our boards are at times filled with people who have never seen a stope let alone assess a mine economic & operational performance. I feel extremely strongly about Harmony’s value destruction ways. Its got to stop!

      The shareprice moves from R160/s to R8/s , then back to R60/s THEN you tell shareholders that on a mine asset base (book-value) of $1500M YOU WILL ISSUE SHARES FOR M&A FOR UNKNOWN $1500M!!!! Thats recklessness, when you are trading at 50% less than Invested Capital Book Value. More so after an M&A of Hidden Valley which has failed and Still to be loaded with Wafi-Golpu’s $1300M over an above the M&A’s $1500 for a return of IRR of 10%??? Of a project which is Cu price sensitive in the current Fcasted Cu market glut for the next 10 yrs? Really Harmony? Thats a load of $2800M ( over a 5 yr period) for a Co. of MCap of $2000M ? Thats NOT going to end well for shareholders, GUARANTEED!

  5. GoldInvestor you are correct about the price tag being circa US$1500M.

    I hereby offer gratuit advise to Harmony. Qinisile will charge them >R50M for the below advise, but from me c’est gratuit!
    Since a mere US$80M CF is burning holes in Harmony’s pockets, including their undrawn facility of US$500M. Harmony can go shopping for the following companies :
    Teranga Gold : R&R= 12,7Moz @ EV = ± $450M with Prod = 200Koz/yr
    Perseus : 2P = 6,3Moz @ EV = ± $ 300M with Prod = 150Koz/yr
    Asanko Gold : 2P = 4,7Moz @ EV = ± $1,2Bn with Prod = 100 Koz/yr

    So the silly & naive execs at Harmony will have their 500 Koz/yr production increase for a cool US$2Bn, and with it some true african adventure fun NOT Melrose Arch latte! And certainly loose their shirts & shorts whilst at it!

    Acacia : 2P = 8,75Moz @ EV = ±$3,5Bn with Prod = 800Koz, but chances are ABX will be hoping for something > $4,5Bn!
    Endeavour Gold : 5,4 Moz @ EV = ±US$3,5Bn for 600Koz/yr!!

  6. You only have to look at the plans against the wall to see that since the CAD system was implemented Planning Managers copied and pasted the same from East to West, from level to level. Absolute no imagination. Nobody that will sit down and look where savings can be made. In any low grade mine you need to change some of the ratio’s they get taught on varsity. These comes from the 1950’s and are still used today.

  7. I wonder if the management team(s) don’t belong in jail really and the analysts who aid and abet the share price – talk it up – with them. Malfeasance of the greatest sort. And I a miner

  8. Value destruction : St Helena , Target north , Sun ???? This guy is becoming the image of piet promises the government minister from the days of the nat government – nothing happens but plenty of promises

  9. As a Mining analyst, I recommend that mining companies that need financing in the next 3 – 5 years ,or else they sink, should be avoided irrespective of growth prospects. If a South African gold mine cannot self finance in this gold price climate , be very wary, more so if they promise growth. Or when their payout ratio of dividends defy logic given their forecasted CAPEX spend on projects. This recent gold market seems to be showing signs of maturity, therefore a down-leg is near. When things are bad only cash flow can validate a mining company, not hopes of future production growth in a bad market.

  10. What a relief to hear Steenkamp telling it like it is.
    Why would any rational investor be interested in a long life without cash flow?
    Three cheers for rationality.
    Now please apply the same logic to PNG

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