Executives at Harmony Gold struggled to recall the last time the company had net cash. “Not in my lifetime,” CEO Peter Steenkamp tells the FM.
Steenkamp is bidding Harmony farewell after nine years at the helm. He was previously head of operations before leaving for stints with Sasol Mining and before that, his misstep at the ill-fated Pamodzi Gold, where he was CEO. Steenkamp’s retirement comes just as Harmony registers record full-year earnings — and is arguably at its apogee.
Operating free cash flow was R12.7bn in the 12 months to end-June, another record. Net cash is R2.8bn as of June 30. What’s more, those numbers were achieved at an average gold price of $1,999/oz. Since July, the dollar gold price has surged from about $2,300/oz to $2,519/oz. While Harmony’s costs are forecast to rise between 13% and 22% this year, they include growth capital. All other things being equal, the company is primed for another blockbuster.
Despite this, Harmony didn’t add to its dividend declaration with a special payout. Shareholders will have to be content with R1.39bn, or 20% of net cash flow (2023: R136m). “I think shareholders will be happy with it,” says Steenkamp, adding that Harmony needs the money for a major transformation. “You return a lot of money to shareholders today, and then in another year approach them for money. It doesn’t make a lot of sense.”
An investment decision is due on Eva Copper, a project in Australia that Harmony bought last year for $170m and that represents a strategic departure into the energy transition supply industry. Eva Copper’s capital cost will exceed the $597m estimated by its previous owner but, as a 15-year project in a much-desired metal, it has a logic to it. “Our shareholders will be happy with Eva Copper because it is a good asset, a sizeable asset,” says Steenkamp.
Growth capital of R3.8bn is also projected in South Africa, R1bn more than in the 2024 financial year, contributing towards total capital (including stay-in-business) of just over R10bn. Over three years, Harmony plans to spend R30.5bn including just under R8bn at Mponeng, the much-fêted gold mine that descends deeper than any other.
To be fair to Harmony, gold shares globally have been reticent about going big on payouts. Barrick Gold CEO Mark Bristow says his firm is hanging tough on the balance sheet while it works through liabilities. In a year where a lot didn’t go right, Newmont is looking to consolidate. Both companies are investing in resource and reserve replenishment.
Only lately — amid a fresh pulse in the gold price — are the metal’s North American miners reflecting the market: Newmont is 26% higher this year while Barrick has gained 8%.
Similarly Harmony Gold, which has white-knuckle survival in its DNA, is preserving cash so it can at last spread its wings. The Wafi-Golpu project, which it shares with Newmont in Papua New Guinea, is waiting on a special mining lease from the government. The permit is tantalisingly close after years of delay. “If there’s one final box I want ticked before I retire, that is it,” says Steenkamp.
He adds that once Wafi-Golpu is approved, and given Harmony’s much-improved balance sheet, it will be able to “participate” in the project, which suggests that previously the company might just have been a seller of the project equity.
Our shareholders will be happy with Eva Copper because it is a good asset, a sizeable asset
— Peter Steenkamp
One company that has been criticised for investing in the resource pipeline is Gold Fields. Analysts ask why it bought Canadian firm Osisko Mining for C$2.16bn last month. They say the South African firm might have chosen to capitalise on the higher gold price instead, and do the transaction later.
Buying Osisko Mining increases Gold Fields’s stake in the Windfall project in Quebec from 50%, which was acquired in May 2023, to 100%. Gold Fields paid a 55% premium on Osisko’s share price.
Gold Fields CEO Mike Fraser said on August 12, when the purchase of Osisko was announced, that he was comfortable with the cost of the acquisition. “We see significant fundamental value and significant upside in this asset. On a 100% consolidated basis we are very comfortable with the price we paid for it.”
In a report, BMO Capital Markets analyst Raj Ray acknowledged the potential of the Windfall project but said he was “a bit surprised” by its timing. “Investors will look at the fact that Gold Fields has given up a significant portion of the expected cash flows over the next 12 to 24 months while undertaking development and execution risk.”
The transaction also puts pressure on Gold Fields to overcome technical challenges in ramping up its Salares Norte project in Chile, which has been beset by delays over the past 12 months. Ray added, however, that the Gold Fields balance sheet was not at risk in doing the deal.
Gold Fields cut its full-year production forecast by as much as 220,000oz to between 2.2-million and 2.3-million ounces — about 10% — due largely to Salares Norte, where wintry conditions impeded the ramp-up of the mine. In December it ran into delays because of a shortage of staff at its contractor, safety-related pre-commissioning delays and “late configuration changes” ordered by original equipment manufacturers to the project’s equipment control logic.
Arnold van Graan, an analyst for Nedbank Securities, questions whether a deal done when the gold price was pushing record highs would be value-accretive in the long run. “Windfall has all the hallmarks of a quality long-life asset, but the mine still needs to be funded and built. Buying a development-stage asset [for a junior miner] adds execution and funding risk,” he says.
Fraser said in August that Osisko had been trading sideways for the past 12 months, not unusual for a single-asset development company. He added: “Windfall is among the largest gold deposits in Canada and a top 10 gold deposit globally by head grade. Windfall is expected to produce about 300,000oz of gold at an all-in sustaining cost of $758/oz. This positions Windfall to be one of the lowest-cost mines in the Gold Fields portfolio, with a current projected mine life of 10 years.”
Shares in Gold Fields have traded down about 9% year to date and are flat over the past 12 months against AngloGold Ashanti, to which it is commonly compared, which is up 48% this year and 57% over the past 12 months.
On August 23, Gold Fields reported a 20% drop in production to 918,000oz of gold because of the delayed ramp-up at Salares Norte and production problems at South Deep.
Gold Fields’s hands were largely tied, however. “The timing was a function of a process that was run by Osisko,” says spokesperson Sven Lunsche. The implication is an interloper could potentially have stolen in. This happened before to Gold Fields when two years ago its bid for Yamana Gold was foiled by a joint bid from two North American companies. “We see significant value in owning Windfall, which will be a multidecade high-quality asset. In addition, there is value in being able to develop the asset as the full owner [in terms of the flexibility on how we approach its development and operation],” says Lunsche.
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