Harmony seeks profitable mine to fill gap
HARMONY was willing to use debt and equity to buy a profitable mine that would offset falling production in South Africa and help fund a major new project in Papua New Guinea, chief executive Peter Steenkamp said.
With the company likely to lose about 40 percent of its current production over the next six years due to mines reaching the end of their lives, a big acquisition is “a necessity”, Steenkamp, 56, said.
“We have a gap emerging and what we need to do is fill that,” Steenkamp said. “We have to look for something fairly big.”
Harmony, South Africa’s third-largest gold producer, lost money for three years to 2015 but has been revived by a price for the metal that is 26 percent higher this year and a weak local currency, which has lowered costs.
The company’s ultimate goal is to build a $2.6 billion (R35.4bn) mine on its Golpu copper-gold deposit in Papua New Guinea that will reduce costs, as well as boost production and reserves.
It has a 50 percent stake in the project with Newcrest Mining owning the rest.
The stock has more than tripled to R54.88 this year, giving the company a market value of $1.8bn.
“We’re trying to beef up the current engine to be able to build Golpu, which is the prize,” Steenkamp said. “We want to do the right acquisition at the right time to have enough firepower to build Golpu.”
Harmony had the capacity to raise about R5bn in debt, but would consider using its stock to make a big acquisition, financial director Frank Abbott said. “It’s difficult to put a value on the size of what a merger or acquisition would be.”
Declining to name specific targets, Steenkamp said Africa and Papua New Guinea would be preferable locations for an acquisition. “In South Africa, it’s limited,” said Abbott, 60.
“AngloGold has got some assets and Sibanye. It depends on whether they’re prepared to sell any of those assets. I don’t think Sibanye is a seller, but AngloGold might be a seller.”
Any purchase would have to have at least 1 million ounces of reserves, produce 100 000 ounces a year and bring the company’s overall production costs down to $950 an ounce.
Harmony produced 1.1 million ounces of gold in the year to June 30 at an all-in cost of $1 003 an ounce. Historically, the company has been an endof-life operator for ageing mines in South Africa. That’s now coming home to roost, with six of its 14 operations reaching the end of their scheduled lives in the next six years.
Masimong and Unisel “are basically mined out”, while Kusasalethu needed R2.6bn of capital to extend its life beyond five years, Steenkamp said.
The three closures mean Harmony would lose about 220 000 ounces a year, he said. Bambanani, Hidden Valley and some of its surface operations will also cease by 2022.
As well as a future acquisition, Steenkamp plans to boost production by combining two of its mines, Tshepong and Phakisa. Together, they produced about 290 000 ounces last year. The company should be able to maintain current production for about five years, Steenkamp said.
“Harmony is not up against the wall like last year, but it has to do something,” said Rene Hochreiter, an analyst at Noah Capital Markets with a buy rating on the stock. “The current gold price has provided a big windfall and they want to take advantage.”
With gold up by almost a third this year and competitors also on the prowl for acquisitions, Harmony is aware that any deal would be “fairly expensive”, yet it would be a price worth paying. “We can’t buy at any cost,” Steenkamp said. “But I’m pretty sure we’ll be able to find what we want in Africa.” – Bloomberg