Does Harmony have a serious growth story?

Peter Steenkamp couldn’t have had an easier introduction as the newly-appointed CEO of Harmony Gold following a 155% improvement in the firm’s share price since December.

To be fair to his predecessor, Graham Briggs, however, the appreciation has had little to do with the change in leadership.  

As the owner of the most marginal of SA gold assets, Harmony has benefitted from last year’s 45% depreciation in the value of the rand against the dollar, most of it in the final months of 2015. As a result, Harmony receives roughly R130 000 more per kilogram for gold it produces today than it did in December.  

Consequently, Steenkamp and Harmony’s long-serving CFO, Frank Abbott, are talking of a more aggressive pay-down in net debt and even of dividends, even though shareholders have enjoyed some pretty impressive capital gains in the share.  

“We want to pay a dividend if we can,” says Steenkamp. “But we will look at our capital requirements, the cash-on-hand and debt before we do that. Yes we would like to resume dividends,” he tells finweek in an interview.  

That will be music to the ears of shareholders such as African Rainbow Minerals (ARM), Allan Gray, and the gold fund of New York-based asset management firm, Van Eck, which own a combined 40% of the company.  

It will also serve as a degree of vindication for Patrice Motsepe, executive chairman of ARM and Harmony.   

Motsepe has long been criticised for hanging on to the firm’s 15% stake in Harmony, even in the face of an informal approach last year by Neal Froneman’s Sibanye Gold for Harmony shares. Motsepe will no doubt point to the wisdom of keeping faith with gold.   

Motsepe will also be heartened by the fact that the improvement in Harmony’s fortunes is not just informed by exogenous factors. Harmony’s operating metrics have been rising by dint of the more than two years’ restructuring efforts of Briggs who retired from the company in December.

Production is higher for the third successive quarter and there have been some important improvements in grade – the ratio of gold versus waste rock the company is able to retrieve.  

The one problem in the group is Kusasalethu, the West Rand mine that continued to be loss-making in the December quarter and which has had a querulous, restive workforce in the past related in part to the change in union dynamics, which has seen the Association of Mineworkers and Construction Union (Amcu) become the majority representative.  

“We have commissioned someone to do [a] full assessment of the mine,” says Steenkamp. “It has had infrastructural problems but it’s stuff that we can fix. We think the labour is okay at the mine; it has always had good teams, so we’ll give it six months. It can make money at this gold price,” he says.

Steenkamp, incidentally, was previously the chief operating officer of Harmony Gold before leaving for the ill-fated Pamodzi Gold. He was last head of Sasol’s mining division.  

Above all of these factors, however, is whether Harmony has a serious growth story. Steenkamp thinks so:  “We have assets in SA that have good reserves and offer expansion potential,” he says.

The improved rand gold price may also allow for a restatement of reserves the company will be able to economically mine – although Steenkamp states: “We will be careful not to start following the gold price by going into low-grade areas. We’ll continue to budget on R450 000/kg,” he says.

The current price is about R570 000/kg.  

And then there’s Wafi-Golpu, the enormous Papua New Guinea gold project Harmony shares in joint venture with Australia’s Newcrest Mining. Analysts have wondered through the years whether

Harmony has the balance sheet to raise the tens of millions of dollars required to build the project.  

Citi analyst Johann Steyn thinks not and recommended Harmony sell its stake in Wafi-Golpu, especially since it doesn’t get any credit in its share price for the holding. Says Steenkamp: “That would be like winning a ticket to take out the Rag Queen and then give it to your mate.”  

Details of the cost, feasibility and scheduling for development of the project is due in the current quarter.

“The cost of building the project in the first few years is not big and I think we will demonstrate this,” says Steenkamp. “We may sell it in the future, but the issue is getting it into the share price,” he adds.

This article originally appeared in the 18 February 2016 edition of finweek. Buy and download the magazine here.