Harmony strikes a sour note
Harmony Gold shares came in for two days of battering after it unveiled a R4.1bn transaction to buy gold and uranium assets from AngloGold Ashanti. Investors were clearly not buying the management narrative that this was a wonderful transaction.
Harmony Gold shares came in for two days of battering after the mining group unveiled a R4.1bn transaction to buy gold and uranium assets from AngloGold Ashanti. Investors were not buying the management narrative that it is a wonderful transaction for the company.
For AngloGold, the deal may just have made it a target for other gold miners wanting its international portfolio after the hard work to reduce the company’s exposure to SA.
While its peers are investing heavily in offshore assets — with Sibanye-Stillwater investing $2.2bn in buying an American palladium company, AngloGold pouring money into offshore assets as well as its local Mponeng mine, and Gold Fields spending in Ghana and Australia — Harmony at a stroke upped its exposure to SA by 25%.
This comes while investors are deeply sceptical of SA as a safe destination because of the rampant corruption within the government and parastatals, crippling regulatory uncertainty, growing hostility between the Department of Mineral Resources and the Chamber of Mines and growing social demands on mining companies around their assets.
To be fair, Harmony, with its R9.7bn market capitalisation, doubled up its bet on the Hidden Valley gold and silver mine in Papua New Guinea by buying out its Australian partner, Newcrest Mining. Harmony CE Peter Steenkamp now says there is a chance that the company’s 14% shareholder and empowerment partner, African Rainbow Minerals, could become a partner with Harmony at the future $1.6bn Golpu copper and gold project, or buy out the gold miner’s stake.
Analysts say shareholders’ negativity possibly stems from the rather full $300m or R4.1bn bill Harmony has to pay.
A third of the cost will be paid from existing loan facilities and two-thirds from a bridging loan for which Harmony could issue shares.
“This is a sensible deal for Harmony, but there’s certainly a preference at the moment from shareholders for a return of capital, cash in their own pockets,” Investec portfolio manager Hanre Rossouw says.
“The market is not necessarily protesting against the deal itself, but it’s the financing. The $200m bridge loan to set up and the possible rights issue to finance that will put pressure on the share price,” Rossouw says.
By reducing the company’s South African exposure to below 20%-14% once it has concluded the Harmony deal and sold the Kopanang mine — AngloGold could secure a rerating of its shares.
“AngloGold becomes a very obvious takeover target if you look at the huge discount compared to its peers. AngloGold is the third-biggest gold producer, but they are trading at a big discount looking at their market capitalisation. It puts them into play by reducing their [South African] exposure,”
Jhe says. AngloGold’s production from SA will decrease from 1.6-million ounces in 2011 to 450,000 oz. While in 2009 it had 37,500 employees, the workforce will be nearer 10,000 after the deal with Harmony, selling Kopanang mine to China’s Heaven-Sent and closing the TauTona mine.
Analysts have long questioned the wisdom of Harmony’s insistence on being involved in Golpu. At a presentation last week on the AngloGold deal, Steenkamp sounded a more moderate tone in Harmony’s attitude towards Golpu, saying it could sell or reduce its stake, bring in another partner or remain with the project, with the AngloGold assets giving its fresh options.
Steenkamp points to the 62% increase in free cash flow from SA, with the 250,000oza-year Moab Khotsong mine becoming the most profitable mine in Harmony. However, it is the size of debt that appears to be of concern to the market, with the purchase representing nearly half of Harmony’s market capitalisation.
“Harmony is marginal, so it can’t afford to carry large amounts of debt,” Nedbank mining analyst Arnold van Graan says. “So the market is probably put off by the higher financial risk and the mention of a rights issue. We don’t think Harmony has the same international following as Sibanye, so it will be tougher to get a big rights issue away for Harmony,” Van Graan says.