[miningmx] — ON A day when Harmony Gold wanted to show off some new detail
about its game-changing Wafi-Golpu resource, CEO Graham Briggs and his
management team ran into scepticism over the company’s plans for the prized asset
and its ability to fund the development thereof.
A number of analysts representing Johannesburg’s leading financial institutions
didn’t disguise their lack of faith in Harmony’s chosen strategy for Wafi-Golpu when
the company unveiled the results of a pre-feasibility study at an investor day in
Sandton on Wednesday. It was difficult to determine whether it was Briggs or said
analysts who were left more perplexed by the other party’s seemingly unshakable
belief in their respective points of view.
This wasn’t a disagreement over whether Wafi-Golpu – a porphyry copper/gold
deposit – could live up to the hype Harmony has created during the past year or two.
The pre-feasibility on the Golpu section alone has enabled Harmony to increase its
overall declared reserves by 31% over the past year, with Golpu holding 38.9
million ounces of gold and gold equivalents. Harmony is entitled to 50% of this as it
owns Wafi-Golpu in a joint venture with Australia’s Newcrest Mining.
Among some of the remarkable specifics unveiled about the resource was that
copper production would enable the JV to extract gold at a significant negative cash
cost level of $2,600/oz – assuming a gold price at $1,650/oz and copper price at
$3.50/lb. There was also the promise of more to come once Wafi’s resources were
added, together with some other exciting prospects Harmony held in PNG.
The bone of contention, however, was whether Harmony would be able to fund its
50% of the estimated $4.9bn to commission the first phase by 2019. Coupled with
this was the notion that Wafi-Golpu and Harmony’s 14-odd higher cost South African
mines – which collectively produced just under 1.2 million ounces of gold in the year
to end-June – didn’t sit well in the same portfolio and that Harmony already could
crystallise some value for shareholders by spinning off the PNG assets in a separate
entity.
“The portfolio mix of the two is very contradictory,’ one analyst told
Miningmx. “Harmony has all that exploration material in PNG and it would
make sense to package it as such. The type of investor looking for that longer term
exploration play differs a lot from the one investing in your typical South African
mining business.’
He said large-scale gold miners typically held no more than 20% of their reserves in
exploration assets, while the figure for Harmony was 42%.
During a question-and-answer session another analyst put it to Briggs that
Harmony’s intention to finance the majority of its portion from South African cash
flows was at risk from the group’s habitual tendency to miss its own production
forecasts. The group said on Wednesday it would increase production from this
year’s 1.17Moz (this excludes Evander’s contribution; recently sold to Pan African
Resources), to 1.7Moz by 2016. For 2012, it initially predicted 1.55Moz (including
Evander), revising it to 1.33Moz and eventually achieved 1.27Moz.
The analyst put it to Briggs that the discount on Harmony’s shares – between 30%
and 50% depending on who one asked – was the market’s way of telling the group it
was not “big enough’ to develop these orebodies.
Briggs retorted that 65% of the group’s shares were held by its 10 biggest
shareholders, and if they were not happy with Harmony’s strategy they would’ve
instructed management to follow a different approach.
Asked about the issue of financing during a question-and-answer session with
journalists, Briggs said he didn’t understand why people were questioning Harmony’s
ability to fund the project.
“This is not a company that is struggling,’ he said. “A company that is struggling will
not spend R500m per year on exploration. It will not spend R2.3bn on capital. It will
not spend R430m on dividends. On top of that, we’ve reduced our debt by R800m.
“We don’t have debt and we can easily raise the money if we need it because we’ve
got the cash flow to support it.’
He said the company would definitely not need any additional finance until 2016
when the bank feasibility was scheduled to be completed.
“The really big expenditure will come in the following three years,’ he said.
“Obviously it depends a lot on what the gold price [and rand] would be doing in the
period leading up to that, but if you’re talking $1,500/oz or $1,600/oz then we’re
okay. We may need a small top-up, but that’s okay.’
Harmony’s JSE-listed shares closed lower 0.81% at R74.99 on Thursday.
