Cash-strapped Harmony's 2008 gold output to dip
Allan Seccombe
Posted: Fri, 12 Oct 2007
[miningmx.com] -- HARMONY Gold will produce less gold in 2008 than the 2.334 million ounces of output in 2007 as the world’s fifth-largest gold miner continues with the struggle to turn its operations around, find capital for expansion and extract full benefits from continuous operations, management said.
It has been a torrid year for Harmony, with founding CEO Bernard Swanepoel resigning on the back of an a reporting disaster caused by new accounting software. Costs have spiralled higher and production slipped, forcing Harmony to issue its first ever profit warning.
“While Harmony is likely to produce marginally less gold in financial year 2008, these should be higher quality ounces which directly benefit the bottom line,” Chairman Patrice Motsepe said in Harmony’s 2007 annual report.
The government has forced Harmony to shut its important Elandsrand mine for more than a month after a shaft accident, in which no one was killed or hurt, trapped 3,200 workers underground for up to 30 hours in the first week of October.
Elandsrand’s loss in production has been estimated at between 600kg and 700kg (19,290 oz to 22,506 oz), which was not included in the annual report’s outlook.
Harmony’s gold output fell to 2.334 million oz in 2007 from 2.387 million oz the year before. Cash operating costs shot up by 27% because of increased input costs and decreased production.
“Costs remain of foremost concern to management and stringent cost control mechanisms are actively being implemented, particularly regarding capital expenditure, overheads and services,” acting CEO Graham Briggs said in the report.
Exploration has been hit hard by the expenditure cutback, with Harmony putting the brakes on some projects and suspending others.
“While we recognise that exploration is an important part of the reserves and resources pipeline, the company’s current cash situation dictates that exploration activities at Evander South and Target North be slowed down, and activities in Senegal and West Africa be suspended,” Briggs said.
Harmony increased exploration expenditure in 2007 by 173% to $27m.
Exploration in Papua New Guinea, the home to one of Harmony’s growth projects designed to bring in long-life, lower-cost ounces into its portfolio, will continue. “Although in the short term we will refocus on extracting optimal value from our investment,” he said.
Costs at the Hidden Valley project in Papua New Guinea have increased 23% to $365m according to a budget review conducted during 2007. The project will be completed in March 2009 and have annual production of 285,000 oz and 3.85 million oz of silver.
In the 2008 financial year, Harmony secured a R2bn debt facility with Nedbank towards the Hidden Valley project and to settle short-term debt of R500m. Briggs said it meant Hidden Valley would be completed with the cash.
Harmony spent R1.17bn on its five growth projects, half of which went on Hidden Valley. The projects are designed to lift Harmony’s output to 3.1 million oz by 2011, but a question now hangs over them.
“These projects require a great deal of capital expenditure over the next two to three years and, given the current cash position of the company, we are re-evaluating the planned capital expenditure, together with project timelines,” Briggs said.
“Additional funding options are being investigated, including debt raising and the disposal of certain assets, such as the Cooke uranium dump,” he said.
It is widely understood that Harmony is talking to Russia’s Renova about the sale of the Cooke dumps.
Harmony has already sold two of its mines, Orkney to JSE-listed empowerment miner Pamodzi Gold for R550m, and South Kal in Australia to Dioro Exploration for R150m cash and R120m in that company’s shares.
Harmony is talking to interested parties for the sale of Mt Magnet in Australia and hopes to complete a transaction before the end of calendar 2007, said Alwyn Pretorius, chief operating officer.
Harmony has spent many long hours trying to convince investors and sceptical analysts that continuous operations (conops) are the best way to extract full value from its South African mines by increasing usage of the assets to 95% of the year from 75%.
The annual report contains a startlingly frank admission that conops have been disappointing.
“We had high hopes for conops, and we still have, but to date the system has not fulfilled its potential to improve production in the way that it should have,” Pretorius said.
“The challenges that we faced during the year included the underperformance of our recovered grade, the declining productivity of our workforce which led to underperformance regarding production, and the fact that conops has not really lived up to our expectations,” he said.
Conops has added operational costs at two thirds of Harmony’s South African mines, with extra people, infrastructure and allowances.
“This means that if you do not achieve the right level of production, then you completely erode the benefits. This is a significant issue for us,” he said. The biggest challenge has been overcoming the negative attitude of the workforce to the system.
A team has been set up at Tshepong to analyse conops practises and take lessons learnt there to other shafts.
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