The effort required to keep the home fires burning for SA’s gold sector appears to be catching up with Harmony Gold, if the response to its 2022 year-end results is anything to go by.
Shares in the company fell to their lowest level in a year — a 19% decline — just after CEO Peter Steenkamp said it would spend R8.5bn in capital expenditure in the current (2023) financial year. That’s about R1.6bn more than previously guided. Capital spend for 2024 will be an equally onerous R8.2bn. For 2022, to date, Harmony stock has sunk 43%.
According to RMB Morgan Stanley, the bump in 2023 capex will result in a 518bp reduction in free cash flow in 2023, which might imperil the dividend. Asked about this, Steenkamp tells the FM there are no plans to cut the payout. Harmony wants to remain a dividend payer despite the significant spend on organic growth, he says.
It’s debatable whether investors buy shares in Harmony for its dividend, set at a relatively modest 20% of free cash flow. Harmony’s best pulling point is rather its leverage to the gold price. Unfortunately that’s not assisting, as gold has been subdued, despite the global geopolitical distress.
Harmony could do with some safe-haven buying right now. Even assuming it meets last year’s total costs of R835,891/kg (described in the industry as all-in sustaining costs), it would make only a fairly slim R100,000/kg margin today, such is the static nature of the gold price.
The company consists entirely of mature assets acquired through merger & acquisition activity
The capital spend is for the next wave in resource renewal, a process that is continuous for all mining firms but particularly so for Harmony. The reason for this is that the company consists entirely of mature assets acquired through merger & acquisition activity. In the past five years Harmony has twice bought assets from AngloGold Ashanti for a total cost of $600m. One of them, Moab Khotsong, contains an extension project called Zaaiplaats, which Harmony needs to help replace depleting production elsewhere.
But at what cost? For one thing, R680m of the capital required for Zaaiplaats has been redirected from Tshepong, one of Harmony’s mines in the Free State the company was planning to extend for another 19 years. Tshepong mine will now be “harvested”, a process called “high-grading”, which will reduce its life to seven years.
Adrian Hammond, an analyst for Standard Bank, questions the reallocation. “Redirecting capex to brownfields expansion Project Zaaiplaats seems imprudent, in our view,” he says. “Notwithstanding [the] few options [that] exist, Zaaiplaats is deep, [demands] high capex and brings elevated technical risk to the company.”
The problem is that Steenkamp has little choice, as Moab Khotsong was bought with Zaaiplaats specifically in mind.
Similarly, Harmony is committed to expanding Mponeng, the other mine from Anglo, in a project called Mponeng Deeps — a potentially huge project costing billions of rands.
It’s likely to proceed. “This year we will spend time on the feasibility study,” says Steenkamp. “With the grades available at Mponeng we will most likely give it a go. It’s a fantastic orebody, and adds 30 years of life, so can be quite substantial.”
But even with the Zaaiplaats and Mponeng expansions, Harmony is still running hard to stand still. According to its annual results presentation, gold production is expected to rise slightly from about 1.49-million ounces in its 2022 financial year and to rise again marginally to 1.5-million ounces the year after, before falling off. By 2028, Harmony will have lost a third of current output, even with the current reinvestment.
Gold companies will, it seems, do almost anything to preserve gold production
Gold companies will, it seems, do almost anything to preserve gold production. Despite their claiming quality over quantity, bragging over size remains important as well. Take Gold Fields: it is prepared to pay $7bn for control of Yamana Gold, a Canadian gold producer, to avoid a drop in gold output from 2027. “There is some correlation to size as long as you’ve got those other things in place,” said Chris Griffith, Gold Fields CEO in an interview with industry website Miningmx last year.
Unlike Gold Fields, Harmony doesn’t have the heft to do Yamana-type deals. It does, though, have a greenfields project most other companies would love to own. This is Wafi-Golpu in the Pacific Ocean island Papua New Guinea (PNG). Steenkamp describes Wafi-Golpu as “the best copper/gold project in the world”. That’s quite a claim, and might be proved true if — and it’s a big if — Harmony and joint venture partner Newcrest Mining can get permission for it.
An all-important special mining licence has been delayed for three years by the turmoil that is PNG politics. A country that has almost 850 mutually incomprehensible languages has a consequently widely fractured political composition.
James Marape, PNG’s prime minister, recently won re-election, but only through a precarious coalition. Encouragingly, Marape is supportive of Wafi-Golpu and wants the country to take a 30% stake in the project, thus reducing Harmony’s stake to an affordable 35%.
According to Steenkamp there’s a valuable 18-month window in which to get the licence signed. That’s the period allowed a new premier before parliament can call a vote of no confidence. Only once the licence is signed can Harmony truly talk about Wafi-Golpu production, which would go some way towards transforming its long-term fortunes.
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