THE challenges Harmony Gold Mining has been facing in recent months that have caused its share price to underperform its global peers, including AngloGold and Gold Fields, have eased.
In a note to clients, RMB Morgan Stanley analysts listed some of those headwinds as rand/dollar strength, a dip in underground grades, and the pricing of Harmony’s hedge book.
The analysts estimated that Harmony’s free cash flow, at 15% at current spot gold prices, is above AngloGold and Gold Fields’, at 10%, and even though Harmony is more operationally geared, the gold price would have to fall sustainably below $4,000/oz for Harmony’s free cash flow and dividend yields to fall below those of its SA peers.
RMB Morgan Stanley’s commodities team sees upside for gold in the second quarter of this year to $5,200/oz, after the meaningful drawdowns in gold and gold equities in the first quarter. The team’s view is based on the likelihood that US Federal Reserve interest rate cuts are more likely than rate hikes this year.
In the medium term, the team believes the themes driving gold’s bull cycle (real asset demand, dollar diversification and a multipolar world), remain intact. Even in a bear case scenario of stagflation, gold has historically performed well, they said.
As a result, the analysts have upgraded their recommendation on Harmony Gold Mining shares to overweight, with a price target of R340, after 15 months when the share price underperformed its peers.
But there are still risks in Harmony’s shares. One is that returns from Harmony’s recently-acquired CSA Copper Mine in Australia may fall short of expectations. Another is progress on the construction of the Eva Copper Mine. Still, CSA contributes only 5-6% of group revenue and the analysts said the risks are already priced into the shares.
Harmony’s shares are currently trading at R312.
