Harmony to generate R4bn cash, but may yet have to tap market

Hidden Valley, Papua New Guinea

WHILST companies like South32 would appear to have cash to burn, the same couldn’t be said of Harmony Gold which is in a whole different universe in terms of balance sheet firepower. In fact, analysts think it may have to turn to equity in order to finance its next major transition.

From its very beginnings in the Nineties, Harmony Gold was a company that built a strategy on buying mines other firms couldn’t manage profitably. With a low cost, innovative approach to mining ‘the old’, it flourished for years. At one stage, it was among the largest gold producers globally.

However, there were only so many tired, old mines available for the Harmony treatment in South Africa. Now, the company’s long-term survival is doing what it has never achieved – or attempted – before: building a mine from scratch in the form of its Papua New Guinea prospect, Golpu – an enormous orebody of gold and copper it shares with joint venture partner, Newcrest Mining.

It will cost more than a billions dollars to build Golpu, however, and many years to realise a return. The fear, though, is that Harmony has a deficit in both time and capital given the largely exhausted nature of gold resources available to it back in South Africa.

It recently bought Moab Khotsong for $300m from AngloGold Ashanti, and brought its Hidden Valley mine out of mothballs – a step that has taken production up to 1.5 million ounces a year which is more than it has produced in years. But analysts think it can’t continue for long at this production level, raising questions over the firm’s ability to generate the kind of cash flow that can help position it to see Golpu through to production.

“With the majority of mines coming to an end within seven years, Harmony’s ability to generate cashflow to fund Golpu comes under pressure,” said Macquarie’s Yatish Chowthee in a recent report. “Whilst we always viewed funding Golpu as a concern for Harmony, now with the addition of Moab and Hidden Valley reaching commercial levels of production …. We forecast Harmony to generate R4.2bn in free cashflow.

“With Golpu’s project capex pegged at R20bn – the R4bn generated falls significantly short as a starting point,” said Chowthee. “Harmony would have to come to the equity market to raise capital,” he said.

One of the other options – outside of heavy debt – is that Harmony’s 13% shareholder – African Rainbow Minerals – becomes a significant shareholder in the project, or at the top level by under-writing or directly participating in an equity issue. Only then, using the heft of a company that like South32 has the benefit of diversification, could Harmony hope to live on in the long-term.