Motsepe’s ham-fisted Harmony defence

[] — AFRICAN Rainbow Minerals (ARM) chairman, Patrice Motsepe, gave troubled Harmony Gold a ringing vote of confidence at today’s ARM full year results (to June) presentation, although at one point he seemed to be clutching at straws to do so.

Motsepe has to back Harmony in public. Not only is he chairman of the gold group but ARM is one of the largest shareholders in Harmony with a 16% stake and that stake is by far ARM’s largest single asset.

At end-June, the Harmony stake was worth R7.3bn equivalent to 50% of ARM’s total assets which amounted to R14.6bn.

That’s a problem as far as some analysts and fund managers are concerned because Harmony did not contribute to ARM’s profits or cash flow last year.

The recovery in the Harmony share price from the depths it plumbed during the failed hostile bid for Gold Fields did allow ARM to add back R3.6bn onto its assets.

That was through a mark-to-market adjustment of the value of the investment which helps the balance sheet but not the bottom-line.

Some fund managers would prefer to see ARM realise some of the value locked up in the Harmony stake through selling it down and investing the proceeds in its other business divisions – platinum, coal, ferro-alloys and base metals.

Alternatively, they would like to see ARM split into separate base metal and precious metal operations.

Motsepe kicked off the presentation promising to make just three brief points about the business but, as usual, that was spun out into a lengthy monologue.

During it, he got around to the subject of Harmony and, while delivering his seal of approval on the operation, drew attention to a recent press report speculating that Harmony could be a takeover target.

He did not identify the report – he could not remember precisely where he had read it – but Motsepe seemed to using this report as support for his own positive view on Harmony.

Whether or not Harmony might be a takeover target is a subject in its own right but any regular reader of mining-related stories will know that, as a breed, mining company executives abhor press speculation about their operations.

“That is market speculation and, as you know, we do not comment on market speculation,” is the industry-wide mantra used by spokesmen responding to pesky journalists asking questions like – are you doing a due diligence on South Deep? – to choose one recent example.

So now you have the chairman of the country’s third largest gold group using market speculation to back up his positive view of the operation.

Motsepe came back to the topic at the end of his speech just to make it clear that he, personally, wasn’t saying Harmony was a takeover target, he was merely bringing the speculation to our attention.

Motsepe vigorously rejected the suggestion put to him at question time that perhaps ARM was hoping a takeover offer for Harmony would offer it a handy way to reduce its stake in Harmony.

He pointed to the cyclical nature of the gold mining business and Harmony’s previous successes in realising value from buying marginal gold mines cheaply and turning them around.

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“We are very excited about Harmony and the good work that we see taking place there. We are very confident that future results will reflect what we believe Harmony is capable of,” Motsepe said.

The other operation on which ARM is very positive is its separately-listed exploration arm TEAL Mining & Exploration (TEAL) in which it holds a 65% stake.

TEAL is assessing a number of projects including the Konkola North and Mwambashi copper projects in Zambia and the Kalumines copper/cobalt project in the Democratic Republic of Congo.

ARM CEO, Andre Wilkens, told the presentation that: “TEAL has the potential to build a large copper-producing company within the next three to five years and that will create a lot of value for ARM. We have every intention of maintaining our shareholding in TEAL at the current level.”

So, looks like there’s no chance of a takeover bid coming there.