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Cash-gushing Harmony levers 80% profit rise off 36% gold price hike
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16th August 2012
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JOHANNESBURG (miningweekly.com) – South African gold major Harmony Gold increased its operational profit by 80% in the 12 months to June 30, against a gold price increase of 36%.

“That’s what I call great leverage, when you’ve got a gold price going up 36% and the company increases its profits by 80%,” says Harmony Gold CEO Graham Briggs (see also attached video).

Net profit for the year was R2.5-billion, up from the R617-million of 2011.

Headline earnings a share were R5.51 compared with R2.23 a share last year.

Cash flow rose by R2-billion to R4.7-billion and the company paid a dividend of R431-million or 90c a share for the 2012 financial year.

“That’s what we do. We turn the advantage of the gold price into bottom-line profits,” Briggs comments to Mining Weekly Online.

Harmony’s gold production was down 2% for the year to 1.27-million ounces compared with the 1.3-million in the previous financial year, and the JSE-listed company is reserving the announcement of future production guidance to August 29, when it will provide a detailed plan for a business that has a “new platform of excellence” with a “thrilling” new reserve statement.

The company enjoyed a robust total-cost margin in the 12 months to June 30 of R56 171/kg and a cash operating cost margin of R141 953/kg. The average gold price for the year was R419 492/kg.

“The Harmony of today is a very different one to that of yesteryear,” adds Briggs, who is bullish on the gold price rising towards the $1 700/oz mark by year-end.

On the company’s virtual debt-free position, Harmony finance director Frank Abbott reports: “As we stand now, we can make out a cheque of R4-billion.”

That is after spending R3.2-billion cash on capital development and R500-million cash on exploration.

Harmony has already exceeded the Mining Charter’s 2014 deadline for management to consist of at least 40% historically disadvantaged South Africans.

“By 2014, we’ll probably be at a level above 50%,” says Briggs.

Listening to these comments at Thursday’s presentation of results was Harmony chairperson Patrice Motsepe, the executive head of the company’s black economic-empowerment partner, African Rainbow Minerals, which is Harmony’s biggest single shareholder.

The company is following the same strategy at its operations in Papua New Guinea: “Our Papua New Guinea mines must be run by Papua New Guineans and no expatriates,” Briggs adds.

Harmony has a suite of new ramping-up mines in South Africa, including Doornkop, Kusasalethu and Phakisa, and partners the Australian company Newcrest at Hidden Valley in Papua New Guinea, where it also owns 100% of some concessions.

Analysts queried the 4% fall in the grade from the South African operations to 4.42 g/t from 4.6 g/t and how the company intended funding the abundant capital required for the development of its projects in Papua New Guinea.

GOLD PRICE

With 2012 heading towards becoming gold’s twelth year of bull market, Briggs anticipates the bullion price lifting above the $1 600/oz mark on which it has settled for some time and ending the year closer to the $1 700/oz mark.

What is coming into play, Briggs adds to Mining Weekly Online, is recycled gold.

While gold production remains at about 2 600 t/y, recycled gold has increased to 1 800 t/y from a previous level of 400 t/y.

Gold recycling is taking place mainly in Europe.

“We know that Europe has economic woes and people are turning grandma’s old jewellery into cash,” he explains.

The level of the rand gold price at around $420 000/kg has been beneficial for local gold miners.

KOSH CASE

In response to Deutsche Bank analyst Anna Mulholland, Briggs reports that Harmony is challenging a court ruling that obliges the company to continue to foot the bill for pumping costs in the Klerksdorp, Orkney, Stilfontein and Hartbeesfontein (KOSH) basin, where it no longer mines and which involves a property sold to the now-liquidated Pamodzi Gold.

The pumping, which is not acid-mine-drainage related, is carried out to keep water out of operating mines.

Harmony takes charge of its own pumping in the areas where it mines and treats doing so as a normal operating expense, but  believes that in areas like the KOSH area, where it is no longer operative, it should not be required to continue to foot pumping bills.

Briggs reasons that if the judgement prevails, it could mean environmental exoneration for acquirers of mining assets and environmental responsibility remaining with the sellers of the assets.

It could mean that companies will be ill-advised to enter into sales transactions and may avoid future risk by closing the mines rather than selling them.

Harmony, which received the directive in November 2005 to contribute a third of the cost of the KOSH pumping, advised the Department of Water Affairs (DWAF) in 2009 that the ownership of the property had been transferred to Pamodzi Gold.

It ceased contributing its third of the pumping costs in 2010.

When the DWAF refused to withdraw the directive, Harmony took the matter to the High Court, but lost the case.

“We have filed for leave to appeal and we’ll see how that goes,” Briggs discloses.

Edited by: Creamer Media Reporter

 

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Harmony Gold has shown rocketing gold price leverage as CEO Graham Briggs outlines to Mining Weekly Online’s Martin Creamer. Cameraperson: Nicholas Boyd. Video Editor: Shane Williams.
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Patrice Motsepe
 
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Patrice Motsepe