Harmony Gold takes tough and bold action

20 April 2010 | 04:41 Code : 19926 Geoscience events
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Harmony, one of three Tier I global gold miners based in South Africa, has announced...

Harmony, one of three Tier I global gold miners based in South Africa, has announced the closure of its domestic Virginia shafts at Harmony 2, Merriespruit 1 and Merriespruit 3, as the country’s inexorable decline in production of the precious metal continues. Production from the Witwatersrand basin, the biggest gold province in the world, peaked at 1,000 tonnes in 1970 and is likely at just 200 tonnes for 2010.Harmony’s Virginia operations are amongst the oldest shafts in the group, with mining that dates back between 30 and 60 years. The shafts are intermediate in depth, by Witwatersrand standards, ranging from 1,000 to 2,000 meters. The closures, however, also highlight more general gold industry concerns in the country, not least intractable increases in costs, labour inflexibility, and the challenges of dealing with one of the world’s strongest currencies.The closures mark Harmony’s continued strategy to restructure with a focus on profitable ounces, and significant growth in output. The fiscal year to 30 June 2009 saw Harmony reverse five years of accumulated losses, its move to zero net debt, the restoration of strong cash flows, the establishment of Rand Uranium, in which Harmony owns 40%, and creation of a 50:50 partnership in assets in Papua New Guinea with Australian gold major Newcrest.There has also been the start of production at all five of Harmony’s major projects - Phakisa, Doornkop South Reef, Elandsrand and Tshepong in South Africa and Hidden Valley in PNG, and stepping up exploration, with a focus on the Wafi-Golpu copper-gold tenements in PNG, South Africa’s Evander South project, the St Helena tailings project, and several underground areas associated with existing operations in South Africa.Harmony’s extraneous funding during the financial year to 30 June 2009 amounted to more than USD 400m in cash, with USD 235m cash received from farming out 30% of the Hidden Valley project in Papua New Guinea to fellow Tier I global miner Newcrest, later increased to 50%. Harmony raised a further USD 209m from selling off its Randfontein Cooke asset, into Rand Uranium.Recent rights issues have raised around USD 200m. During the 2008 financial year, USD 184m in cash was raised from selling residual Gold Fields  shares, after an earlier bid to acquire Gold Fields fizzled out.

Harmony

 

 

 

USD m

2009*

2008*

2007*

Operating cash flow

208.0

421.0

-17.0

Capital expenditure

-381.0

-509.0

-457.0

Disposals

175.0

284.0

268.0

Other

0.0

0.0

0.0

Net

2.0

196.0

-206.0

 

 

 

 

Free cash flow

 

 

 

Operating cash flow

208.0

421.0

-17.0

Capital expenditure

-381.0

-509.0

-457.0

Free cash flow

-173.0

-88.0

-474.0

 

 

 

 

 

 

 

 

Debt repaid/(raised)

200.0

119.0

-163.0

 

 

 

 

Equity raised

96.0

108.0

8.0

 

 

 

 

Cash on hand

110.0

177.0

63.0

Debt

-139.0

-307.0

-565.0

Net debt

-29.0

-130.0

-502.0

 

 

 

 

Dividends

-29.0

0.0

0.0

* Calendar

 

 

 

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. Pressures in South Africa are bound to remain high on Harmony’s agenda, including the normal complaints that the mining sector has not done enough on the empowerment front.Harmony, however, was the victim of an extraordinary so-called black economic empowerment deal, an area where it ventured boldly as a pioneer. On 24 May 2002 one time freedom fighter Mzilikazi Godfrey Khumalo was owner - disputed, of course - of ZAR 2bn in unencumbered Harmony Gold shares. He sold the shares, raising close to ZAR 2bn in cash. Khumalo had hijacked Simane, a so-called BEE entity.An original deal with Harmony, forced by empowerment legislation, had been structured on 3 April 2001, when Harmony was trading at ZAR 37.30 a share. The Industrial Development Corporation was party to the deal, which involved about ZAR 400m in debt. This deal worked beyond recognition because Harmony’s stock price exploded: on 24 May 2002, the price hit ZAR 186.80 a share.Khumalo had maneuvered the Simane minorities to sell their stock to him for an aggregate ZAR 82m, practically all financed from recycled Harmony shares. Much of the ZAR 2bn was spirited offshore by Khumalo.


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