Feb 3, 2017 | Moneyweb
Harmony delivered another superb set of results for the six months ending June that will have investors smiling on the way to the bank.
A solid operational performance saw gold production rise by 8% to 553 862 ounces versus the prior six-month period ending June 2016. This was supported by improved grades, with the recovered grade rising from 5.02 to 5.04 grams per tonne during the interim period. “We have spent a lot of time making our mines more predictable in terms of production, and grade discipline is important for a marginal producer like Harmony,” said CEO, Peter Steenkamp.
Cost discipline was also evident by the fact that all-in sustaining costs (AISC) only rose by 4% to R510 506 per kilogram over the period. The company reported headline earnings per share (Heps) of R1.50.
In contrast to some of its peers, Steenkamp said relations with the principal inspector from the Department of Mineral Resources (DMR) and other safety inspectors in the Free State (where most Harmony mines are located) are generally excellent. Harmony’s mines did not experience any “unjustified” or “disproportional” stoppages during the period. “We have to keep our nose clean and do our part to avoid them, and I am extremely pleased with the conditions I see when I go underground.”
The strong operational performance, together with the containment of costs, resulted in epic cash flow generation; R1.9 billion in cash was generated by operating activities during the period, aided by the R627 million the company received from the currency and gold hedge it initiated in December 2015.
This allowed Harmony to declare a dividend of 50 cents per share, returning an aggregate of R218 million to shareholders. The company has also aggressively paid down debt over the last twelve months – net debt fell from R2.5 billion at end December 2015 to R289 million at the end of the reporting period.
Steenkamp reaffirmed the company’s commitment to becoming a 1.5 million ounce-per-year producer by the end of financial year 2019 (December) despite some pointed questions from analysts that suggested it might be better to just “harvest” the assets it currently owns.
Existing operations and projects currently underway should get Harmony to about 1.1 million ounces by the deadline, meaning that it will be looking to make acquisitions over the next few years that will add another 400 000 ounces a year. The company believes an annual production base of 1.5 million ounces will support the development of the Wafi-Golpu project in Papua New Guinea.
Included in the 1.1 million ounce production runrate is approximately 180 000 ounces a year the company will mine from Hidden Valley (also in Papua New Guinea). Just six months ago, the 50% of Hidden Valley Harmony owned (in conjunction with Newcrest) was an investment it was hoping to dispose of, and plans were being drawn up to place the mine on care and maintenance. But in a complete about turn, Harmony decided to double down on its investment by purchasing the other half of the project it didn’t already own late last year, and then committing $180 million to get it to commercial production by June 2018.
This raised the question of whether, given the huge cash windfall the company has been the recipient of in the last twelve months, the re-investment into Hidden Valley was a case of the “money burning a hole in its pocket”, or whether Harmony really believes this is the best use of its capital. In response, Steenkamp said they understood the orebody of the project extremely well, and the re-invesment exceeded the company’s minimum hurdle rate of a 15% IRR (Internal Rate of Return).
Time will tell.
