For Harmony Gold, free cash flow remains elusive
South Africa-based Harmony Gold continues to find itself precariously balanced between tail ends of heavy capital expenditure programmes, and the challenge of securing ongoing funding as production builds up at four locations that have swallowed up more than US$1bn so far, with about another quarter of a billion dollars to go. The group’s latest quarterly results once again show that the group is struggling to produce free cash flow, measured as operating cash flows less cash outlaid on capital expenditure.Extraneous funding during the financial year to 30 June 2009 amounted to more than US$400m in cash, with US$235m cash received from farming out 30% of the Hidden Valley project in Papua New Guinea to fellow Tier I global miner Newcrest, which is scheduled to increase its stake to 50%. Harmony raised a further US$209m from selling off its Randfontein Cooke asset.There was also a rights issue that raised close to US$200m. During the 2008 financial year, US$184m in cash was raised from selling residual Gold Fields shares, after an earlier bid to acquire Gold Fields fizzled out. It is these various extraneous cash flows, rather than net cash from ongoing operations, that have enabled the Harmony ship to keep sailing.Overall cash flows during the past few years have left Harmony debt free, and with net cash of close on US$100m at the end of the third calendar 2009 quarter. However, there is at least one sign that Harmony is relatively relaxed about the forward outlook for cash flows: it paid its first dividend in five years on 21 September 2009, amounting to some US$26m. On this score, the group says "We believe that paying a dividend is a sign of a healthy company and, depending on operational performance and revenue, we intend paying regular dividends to shareholders".Harmony has not been able to produce free cash flow (after capital expenditure) for several years now, given the ageing nature of its South African assets. The latter period has been further undermined by a stubbornly strong rand, which continues to hurt South African exporters of all kinds.Investors in Harmony are heavily backing the group’s plan to increase overall production from around 1.5m ounces this year to 2.2m ounces annualised, at some time in 2012. This leaves more than two years for Harmony to take possible action at one or more of its older and also more marginal South African assets. The outlook for these assets has taken on further risk following recent news that Eskom, the state-owned monopoly, wants to increase power tariffs by 45% for three consecutive years, constituting a 200% increase over the period.While gold miners are reluctant to place precise figures on what kind of damage this will do, given indirect flow throughs in the form of, say, rising steel prices, Harmony indicates that electricity could constitute 25% of total costs in three years, compared to 13% at this point in time. Overall, it’s going to be tough going at Harmony Gold, if comparisons are anything to go by.