Golden op­por­tu­nity

Finweek English Edition - - INVESTMENT -

Har­mony Gold, the third-largest gold min­ing com­pany i n South Africa and the f ifth­largest gold pro­ducer in the world, al­most tested its all-time lows af­ter plum­met­ing in 2011. Dur­ing the Nineties and the early 2000s, Har­mony es­tab­lished it­self as a spe­cial­ist in min­ing low-grade gold de­posits through in­no­va­tive min­ing and re­fin­ing meth­ods. But be­cause of the strength­en­ing rand in 2011, the com­pany was forced to pur­sue a new strat­egy. It has closed a num­ber of high-cost mines, sig­nif­i­cantly in­creased its ex­plo­ration ac­tiv­ity and turned its at­ten­tion to longer-term, higher-qual­ity op­er­a­tions. Over the same years, fa­tal­ity is­sues and on­go­ing strikes crip­pled pro­duc­tion and se­verely dented its fi­nan­cial state­ments.

Last week Har­mony an­nounced that it will write down R1.4bn on part of an ex­pan­sion project into pre­vi­ously un­mined ar­eas at its Phak­isa op­er­a­tion to re­duce the net profit of the com­pany, which, ac­cord­ing to the com­pany, will not have an im­pact on re­ported cash bal­ances and free cash f low. Har­mony has been scal­ing back cap­i­tal ex­pen­di­ture in line with in­dus­try trends and plans to ‘sig­nif­i­cantly lower’ in­vest­ment in its Pa­pua New Guinea Wafi-Golpu mine, which has be­come its f lag­ship project.

With a sin­gle-digit P/ E ra­tio – an in­di­ca­tion that shares are val­ued cheaply – Har­mony is look­ing rather at­trac­tive. Though the gold spot is trad­ing within a sym­met­ri­cal tri­an­gle, it has lifted from pre­vi­ous lows, mean­ing buy­ers are grad­u­ally trick­ling in. The risk, of course, since 95% of Har­mony’s gold is still pro­duced lo­cally, is that in­creas­ing en­ergy and labour costs in South Africa are a sig­nif­i­cant chal­lenge.

How­ever, through its pro­jects in Pa­pua New Guinea, Har­mony is es­tab­lish­ing a base in one of the world’s most promis­ing gold re­gions, in­clud­ing its Wafi-Golpu joint ven­ture with Aus­tralia’s Newcrest. The ven­ture will be a ma­jor boost to Har­mony’s pro­duc­tion when the mine comes into op­er­a­tion, which is cur­rently planned for 2016. The group has also ac­quired ex­ten­sive ex­plo­ration rights nearby.

Har­mony has POS­SI­BLE OUT­COME: breached the re­sis­tance trend­line of its steeper two-year bear trend, and its rel­a­tive strength in­dex (RSI) on the monthly chart has turned bullish. On this daily chart, Har­mony has formed a f lag – a bullish con­tin­u­a­tion pat­tern, which would be con­firmed above 3 500c/share. The short-term bull trend would be re­sumed above 3 690c/share, with the short-term tar­get (one to six months) sit­u­ated at 4 425c/share. Be­cause we are cau­tiously bullish on Har­mony, I would rec­om­mend a neu­tral long po­si­tion with an in­crease at ev­ery re­sis­tance level break­out.

Har­mony AL­TER­NA­TIVE SCE­NARIO: may fail to breach the up­per slope of its pat­tern, and trade through the lower slope in­stead. In which case, the 2 675c/share prior low could be tested there­after.

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