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Higher rand gold prices could help Harmony

Cape Town - Harmony Gold [JSE:HAR] posted a loss in the second quarter of its financial year, hit by a lower bullion price and production problems at its key Khusalethu mine.

The company said on Monday it also recorded a loss on foreign exchange adjustments due to rand weakness on dollar-denominated loans and gold inventories.

Its headline loss per share for the quarter to December was 21 cents compared to a profit of 5c in the previous quarter.

Harmony said it was positioned to benefit from a higher rand gold price as the rand trades near five year lows against the dollar.

Gold is priced in dollars and Harmony gets over 90% of its production from South Africa.

During the quarter its operating profit was hobbled by problems at its Khusalethu mine in South Africa, which has been the scene of labour violence rooted in a union turf war.

But CEO Graham Briggs told journalists on a conference call that the problems at the mine had been technical and related to spillage and flooding "and they are behind us now ... It had nothing to do with labour."

Costs

Harmony Gold has reduced overall costs quarter on quarter, while production was stable at 9 515kg.

All-in sustaining costs reduced from R404 694/kg to R397 503/kg quarter on quarter, and by 23% in dollar terms since commencing with austerity measures.

Operating profit for the December 2013 quarter was 5% lower than in the previous quarter at R986m.

This was due to a 3% decrease in the gold price received as well as underperformance in production, mainly at Kusasalethu, which resulted in gold production remaining the same quarter on quarter. 

The company said in a statement that by the end of this financial year (June 2014), it plans to reduce its costs to a sustainable average of between US$1 100/oz and US$1 150/oz.

"Harmony is sustainable, thriving with gold at the current price, and will continue to finance capital expenditure from working profit," the company statement said.

Profitability

"Five of our mines are very profitable at an all-in cost of below US$1 000/oz."

Target 1 (US$854/oz), Bambanani (US$742/oz), Joel (US$921/oz), Steyn 2 (US$811/oz) and Phoenix (US$861/oz) are each operating at an all-in sustaining cost of less than US$1 000/oz.

In addition, three of its mines are profitable at an all-in cost of below US$1 210/oz, being Kalgold, Unisel and Hidden Valley.

"We have restructured and right-sized Hidden Valley in Papua New Guinea (PNG), reducing all-in sustaining cost from approximately US$1600/oz in the previous quarter to US$1 209/oz in the quarter under review," the company said.

The focus at Doornkop, Kusasalethu, Masimong, Phakisa, Target 3 and Tshepong is to drive costs down to below US$1 250/oz.

At Doornkop it has eliminated the unprofitable lowest grade reserves (the Kimberley reef) and are already seeing improvements in grade and all-in costs.

Management changes

Management changes were made at Kusasalethu, Masimong and Tshepong.  Phakisa and Target 3, through infrastructure spending, will build up in production.

"The studies at Golpu on underground access, as well as a scalable or modular approach to the project, are underway. Exploration drilling continues to refine our knowledge of the Golpu resource," the company said. 

“Harmony’s strength has always been its ability to adjust quickly and efficiently to adverse conditions. We have positioned the company to remain sustainable for many years to come, managing costs and production to ensure profitability at all gold prices,” said Briggs.

"Harmony has positioned itself to thrive at current gold prices and provide investors with handsome returns when market conditions improve."

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