Har­mony Gold has fallen on hard times and is strug­gling to in­spire con­fi­dence; a quar­ter drop in its share price mid-year cer­tainly doesn’t help its cause. Pe­ter Steenkamp will be tak­ing the reins from out­go­ing CEO Gra­ham Briggs. Is he up to the chal­lenge

Finweek English Edition - - FRONT PAGE - ed­i­to­rial@fin­week.co.za

gra­ham Briggs, the out­go­ing CEO of Har­mony Gold, tack­led the ques­tion of who is to suc­ceed him by say­ing it was prob­a­bly tough for the com­pany’s board to find some­one “crazy enough” to ac­cept the post.

En­ter Pe­ter Steenkamp, for­merly Har­mony’s chief op­er­at­ing of­fi­cer be­fore leav­ing for other pas­tures. Iron­i­cally, one of Steenkamp’s first tasks at Har­mony will be to find a new COO fol­low­ing the de­par­ture of Al­wyn Pre­to­rius, who quit the firm only two months af­ter Briggs an­nounced his re­tire­ment plans in June.

The mid-year pe­riod was a tough time for Har­mony be­cause it had seen its share price fall a quar­ter in a month amid painful re­struc­tur­ing at the Doornkop and Kusasalethu mines, as well as project cur­tail­ments and im­pair­ments the pre­vi­ous year at the Phak­isa and Tar­get mines.

Briggs told fin­week in an in­ter­view, how­ever, that that pe­riod of re­struc­tur­ing was a turn­ing point, and Har­mony was now able to sur­vive the slide in the dol­lar gold price; a move no doubt aided by im­proved US job fig­ures that will give the Fed­eral Re­serve the con­fi­dence to raise rates.

“The re­struc­tur­ing has taken a lot of man­age­ment time, but we are over that – bar­ring any­thing chang­ing dra­mat­i­cally [due to] ex­ter­nal fac­tors,” said Briggs. “We’ve also gone through wage ne­go­ti­a­tions in a pos­i­tive man­ner.”

UBS an­a­lyst, Kane Slutzkin, said Har­mony’s re­cent Septem­ber quar­ter re­sults sug­gested “a po­ten­tial in­flec­tion point” for the share in which Har­mony’s man­age­ment could trans­late stronger rand prices for gold of over R500 000/kg into im­proved cash flow.

In the main, how­ever, the view from an­a­lysts was more cau­tious. “Our ini­tial read is that this busi­ness re­mains in trou­ble,” said Richard Hart of Arqaam Cap­i­tal. “While weak­ness of the rand may as­sist in con­tain­ing US dol­lar cost in­fla­tion, it is wreak­ing havoc on the bal­ance sheet.”

The com­pany pro­duced free cash from last quar­ter’s out­flow but it drew down R300m of a Ned­bank re­volv­ing credit fa­cil­ity fol­low­ing a draw­down of a dol­lar-de­nom­i­nated re­volver in the pre­vi­ous quar­ter, which trans­lated into R541m in debt. “This com­pany is presently un­able to fund its en­tire cap­i­tal ex­pen­di­ture bill from op­er­at­ing cash flows and will con­tinue to re­quire the as­sis­tance of its debt fa­cil­i­ties,” said Hart. That’s not the opin­ion of Briggs, how­ever. He told

fin­week Har­mony could zap its R2.5bn debt pile in two years, now that the re­struc­tur­ing was fin­ished.

He also dis­agreed with a note from Gold­man Sachs, which sug­gested Har­mony had un­der­in­vested in its as­sets. “We haven’t been shy on capex,” he said. “We haven’t been starv­ing our op­er­a­tions.”

The plan now is that in knock­ing out debt, the com­pany will be in a po­si­tion to fund Golpu, a cop­per and gold prospect in Pa­pua New Guinea it shares equally with Aussie gold miner Newcrest Min­ing.

In a sense, Golpu is Har­mony’s pur­pose with the SA gold mines pro­vid­ing the head­room to finance it. “If you go back five years we have spent R2bn to R2.2bn on Golpu, which has come out of SA-gen­er­ated cash. We get crit­i­cised for not pay­ing div­i­dends, but Golpu is very im­por­tant for the com­pany,” Briggs said.

A fea­si­bil­ity study on the first phase of the mine

“Har­mony’s mines are old and have been un­der-in­vested … to make the mines prof­itable will re­quire sig­nif­i­cant in­vest­ment which we be­lieve the gold price and Har­mony’s bal­ance sheet weak­ness do not al­low.”

de­tail­ing pro­duc­tion and costs is due for De­cem­ber with its of­fi­cial un­veil­ing most likely one of the first things that Steenkamp will do in Jan­uary. Based on pre­vi­ous stud­ies, Har­mony’s share of Golpu’s cap­i­tal cost has been put at $800m. This means it must still stump up $600m af­ter the $200m the com­pany has al­ready put in.

But can the SA mines sup­port the bal­ance sheet so long? No, be­lieves Gold­man Sachs, which has been with­er­ing of Har­mony’s per­for­mance in the past. “De­spite the strong re­sults, we re­main bear­ish on the stock,” the bank said.

“Har­mony’s mines are old and have been un­der­in­vested. In our view, to make the mines prof­itable will re­quire sig­nif­i­cant in­vest­ment, which we be­lieve the gold price and Har­mony’s bal­ance sheet weak­ness do not al­low,” it said.

In fact, net debt would rise from R2.2bn to R3.8bn by the end of Har­mony’s 2018 fi­nan­cial year. “As such, we do not see a delever­ag­ing, hence we think that Golpu project re­mains ques­tion­able,” it added.

“Har­mony an­nounced a num­ber of re­struc­tur­ing mea­sures over the past year. We see lim­ited scope for fur­ther re­struc­tur­ing and be­lieve that any re­struc­tur­ing would need to be ac­com­pa­nied by re­duc­ing staff costs which is a chal­lenge in South Africa,” said Gold­man Sachs.

If this view is borne out over time, one won­ders whether it would have made bet­ter sense for Har­mony to be con­joined with an­other gold pro­ducer along the lines of the big bang con­sol­i­da­tion voiced by Sibanye Gold CEO, Neal Frone­man.

In fact, there was spec­u­la­tion sev­eral months ago that Har­mony’s ma­jor share­holder, African Rain­bow Min­er­als (ARM), had turned down an of­fer for its shares in Har­mony from Sibanye – scut­tle­butt that Briggs said he could not sup­port. “It didn’t come that close,” he said. “You al­ways have to look at th­ese things as part of the job, but we did not have a dis­closeable of­fer on the ta­ble,” he added. Over now to Steenkamp. For­merly of Pamodzi Gold, the com­pany that at­tempted to breathe new life into the East Rand and Orkney gold mines with dis­as­trous re­sults (al­though not di­rectly of Steenkamp’s mak­ing), Steenkamp is faced with ex­e­cut­ing Briggs’s Brave New World for Har­mony.

“He has more than 30 years’ ex­pe­ri­ence in the min­ing in­dus­try and should lead Har­mony to greater heights,” said ARM chair Pa­trice Mot­sepe, no­tably us­ing the modal verb – a re­flec­tion per­haps of doubts in Har­mony that its crit­ics share.

Har­mony’s Phak­isa gold mine in the Free State

Pe­ter Steenkamp In­com­ing CEO of Har­mony Gold

Gra­ham Briggs Out­go­ing CEO of Har­mony Gold

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