Harmony chasing foreign gold

Harmony’s Wafi-Golpu copper/gold project in Papua New Guinea (PNG) keeps getting bigger and better, raising market speculation about a possible takeover bid for the company. Its share price rose 25% to R100 following publication of a bullish report by RBC Capital Markets analyst Leon Esterhuizen, who put a price target of R130 on the stock.

Esterhuizen published a follow-up report, in which he stuck to that price forecast despite the possibility PNG’s government might buy into the project, diluting Harmony’s share.

Wafi-Golpu is a 50:50 joint venture between Harmony Gold Mining Company [JSE:HAR] and Australian gold major Newcrest. However, the PNG government has the option to buy 30% of any mining project built in the country. That would reduce the stakes held by Newcrest and Harmony to 35% each.

PNG has recently exercised that option twice, buying into the country’s huge liquid natural gas project as well as Nautilus Minerals’ pioneering venture to mine high-grade copper and gold deposits from the ocean floor in PNG’s territorial waters.

Though Esterhuizen says there are a number of “significant hurdles” the PNG government must negotiate before exercising its option, he says the two deals struck so far indicate the government’s capacity to fund such large-scale resources deals.

He comments: “However, we don’t adjust our model at this juncture and continue to believe the implied size of the ‘prize’ – with or without government participation – should be reflected in continued upside to the Harmony share price.”

Harmony/Newcrest is currently carrying out a prefeasibility study, to be completed by year-end 2011. But simultaneously, exploration drilling work continues and it keeps increasing the size of the orebody while confirming attractive gold and copper grades.

At this stage the indicated size of the deposit is between 600m t and 800m t of ore that will be mined at a rate of between 20m t and 30m t/year to produce between 300 000oz and 700 000oz of gold and between 200 000t and 320 000t of copper.

Esterhuizen notes: “These ranges are wide enough to park a bus in there – sideways. Still, we believe current drill intercepts indicate a potential for the magic 1m oz/year gold number.”

Addressing a presentation to the financial media in Johannesburg, Harmony CEO Graham Briggs said any PNG government buy-in was subject to negotiation and would require a full contribution to equity. “There’s no free carry,” he said.

Briggs again stressed the message he’d given consistently to shareholders since May last year that Wafi-Golpu is a “company maker” for Harmony. “Wafi-Golpu is going to be a mine. It’s going to significantly change Harmony in future. The challenge is how do we get there as fast as possible?”

Esterhuizen also believes there’s a possibility a takeover bid could be launched for Harmony, specifically to gain control of its stake in Wafi-Golpu. He picks out Newcrest, AngloGold Ashanti and Gold Fields as the three most likely candidates and adds – should such a bid take place – it’s likely Harmony’s SA gold operations would be spun out in a separately listed vehicle.

Asked whether he thinks that theory is plausible, Briggs replies: “Any deal is possible here. A key factor would be somebody taking a view on what Wafi-Golpu is worth. You have to ask the question: Could Wafi-Golpu become as big as Grasberg, which is worth some US$20bn to $25bn in its own right?” The Grasberg mine – owned by Freeport McMoran – is located on the same geological formation as Wafi-Golpu and over recent years has produced up to 3m oz/year of gold and 700 000t/year of copper.