Harmony Gold pushed the boat out in an unexpected way earlier this month, announcing the R4.1bn purchase of Eva, a copper project in Australia. When last the FM visited the gold firm’s business case (September 15) it was to point out the risk to dividends of a two-year, R17bn capital outlay in SA.
Harmony CEO Peter Steenkamp tells the FM his company can take the strain of buying Eva, which requires $600m in capital development in addition to the acquisition cost. Dividends are not endangered.
“The dividend is always at the discretion of the board, but also, we’ve put a policy out there and we don’t want to change that as soon as we ‘go over,’” he says, referring to the undoubted pressure that developing Eva will visit upon Harmony’s balance sheet. Harmony had $500m in cash at June 30, its financial year-end, and debt of $47m.
In addition to the R17bn in project development already announced, Harmony is running a study on the multibillion-rand extension of its Mponeng mine. It is duty bound to do it, as the operation was bought from AngloGold Ashanti for $300m with the intention of expanding it.
Eva, however, represents an entirely new revenue stream in copper — a proposed £100m of the stuff every year. That’s a major departure for Harmony, which has only ever mined gold, mostly in SA. Copper is feted as “future facing”, meaning heap-loads of it are required for electric vehicle batteries. Steenkamp has also made much of Eva landing Harmony in a new prospective district.
Analysts are reserving judgment until an updated feasibility study of the Eva project is completed in about a year’s time, as per Harmony’s project timeline. But some characteristics of the proposed transaction are hard to ignore.
“While it is not unprecedented, we are intrigued by the idea of using higher-cost SA mining equity to buy projects in developed markets,” says Bank of America Merrill Lynch analyst Patrick Mann.
Mann fears the impact of inflation on the project development cost and the unpalatable fact that is facing all SA-based miners competing in international markets: that their cost of capital will be high, possibly more than 8%. He adds: “While we do see the strategic rationale, we are not sure [of] the value proposition.”
Eva’s development sends a message regarding Harmony’s view on another Australasian project — its Wafi-Golpu endeavour in Papua New Guinea
Steenkamp says the project inflation is unlikely to be heavy and project finance will be easier to attract than the doubters forecast. Lenders have “a responsibility” to finance certain minerals for their environmental, social and governance properties, he says. Taking on the project was also a case of “now or never”.
Eva is the forced sale of owner Copper Mountain Mining Corp, which is trying to finance a project in Canada, its preferred development. So while Harmony had been “scanning the market” for opportunities, Eva was unsolicited. There may have been two or three bidders, says Steenkamp.
Eva’s development sends a message regarding Harmony’s view on another Australasian project — its Wafi-Golpu endeavour in Papua New Guinea (PNG). Wafi-Golpu, which also has copper output, is mired in PNG politics. Even its approval looks a protracted engagement.
Steenkamp says he’s hopeful yet that Wafi-Golpu will get the green light, but it has been edged down Harmony’s list of priorities. In any event, Harmony has a Brisbane office, established for Wafi-Golpu and Hidden Valley, a small operating mine in PNG, that will now be properly utilised.
There is one final aspect of this transaction worth acknowledging, and that’s the tacit acceptance that if the Witwatersrand Basin, a century-old treasure trove for opportunists, rogues and adventurers, has anything left to offer, Harmony probably has it already.
While it’s probably imprudent to bring the curtain down right now on SA gold, it’s fair to say Harmony’s departure for other shores feels important. Steenkamp says he’s even holding out for possible expansion elsewhere in Africa, though there’s nothing immediately in the pipeline. “Four or five years from now we’ll have a totally different suite of assets,” he says.
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