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.