Harmony Gold Mining Company Ltd.
/ (HMY-NYSE)We have maintained our Neutral recommendation on Harmony Gold. The company posted a loss in the second-quarter fiscal 2015 on lower gold pricing and stoppage of operations at one of its key mines. Revenues fell by double-digits, affected by lower gold volumes and pricing. Gold production also declined in the quarter. Harmony Gold is progressing well with its cost reduction program in a weak gold price environment. The company is also making good progress with its Wafi-Golpu project. However, its operations are likely to be impacted by a slower-than-expected ramp-up in production at mines and gold price volatility. It also remains exposed to geopolitical risks associated with potential mine shut downs and labor strikes.
/ Equity Research / HMY | Page 8
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 05/13/2014
Current Price (02/17/15) / $2.40
Target Price / $2.50
SUMMARY
/ Equity Research / HMY | Page 8SUMMARY DATA
52-Week High / $3.7752-Week Low / $1.56
One-Year Return (%) / -24.76
Beta / -0.14
Average Daily Volume (sh) / 3,240,987
Shares Outstanding (mil) / 436
Market Capitalization ($mil) / $1,046
Short Interest Ratio (days) / 1.20
Institutional Ownership (%) / 21
Insider Ownership (%) / 16
Annual Cash Dividend / $0.00
Dividend Yield (%) / 0.00
5-Yr. Historical Growth Rates
Sales (%) / -0.6
Earnings Per Share (%) / 11.5
Dividend (%) / -6.1
P/E using TTM EPS / N/A
P/E using 2015 Estimate / N/A
P/E using 2016 Estimate / 48.0
Zacks Rank *: Short Term
1 – 3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / High,
Type of Stock / Mid-Value
Industry / Mining -Gold
Zacks Industry Rank * / 64 out of 267
OVERVIEW
Incorporated in 1950, Harmony Gold Mining Company Limited (HMY) is based in Randfontein, South Africa. The company conducts underground and surface gold mining. It is also engaged in related activities such as exploration, processing, smelting and refining. Harmony is the third largest producer of gold in South Africa and the eleventh largest gold producer in the world. The company’s mining operations are principally concentrated in South Africa. Several of these are located in the Free State Province such as Welcom, Virginia, Tshepong and Bambanani, along with the Evander gold mine in Mpumalanga province, the Elandskraal mine at the West Rand goldfields in Gauteng province, and Kalgold operations in the North West province. The company has discontinued its mining operations at Mt. Magnet and South Kalgoorlie in Western Australia as a strategic move.
At the end of fiscal 2014 (ended June 30, 2014), the company’s mining operations reported total attributable gold equivalent mineral reserves of 49.5 million ounces (oz), down 3.9% year over year. Roughly 57% of gold reserve came from Harmony’s South African mines and around 43% came from its Papua New Guinea (PNG) operations. Attributable gold equivalent mineral resources were 133.8 million ounces (Moz) as of June 30, 2014, down 9.4% year over year.
Exploration Projects
· Domestic Projects: In South Africa, Harmony operates a total of nine underground operations, one open pit operation and several surface operations including an open cast mine, and nine processing plants, which are located in all of the currently known goldfields in the Witwatersrand basin of South Africa as well as the Kraaipan Greenstone Belt.
· International Projects: In PNG, Harmony has a 50% interest in the Morobe Mining joint venture, which includes Hidden Valley, an open-cast gold and silver project that began production in June 2009, and the Wafi-Golpu project. Harmony entered into a joint venture with Newcrest Mining Limited in fiscal 2009 to assist in the development of Harmony’s Morobe Province assets. Harmony’s exploration portfolio focuses principally on highly prospective areas in PNG and the Wafi-Golpu project in particular. Harmony expects that if Wafi-Golpu is developed, it will shift the company’s geographical mix from more than 90% South African production to 75% domestic output and 25% offshore.
REASONS TO BUY
Ø Harmony has been making good progress in producing better quality gold ounces. Hidden Valley in PNG is now an operating mine, Harmony’s first greenfields offshore development, which was formally opened in September 2010. In South Africa, the company has the Kusasalethu, Doornkop and Phakisa projects and Tshepong and Masimong, which have been steady contributors to production. Harmony has effectively dealt with production challenges to ensure that the mines achieve their targets. The company expects gold production of between 1.1 million and 1.2 million oz in fiscal 2015 and is focused on improving gold grades.
Ø Harmony has a diverse portfolio of gold development projects spread across South Africa and PNG. The company’s development projects currently in progress includes the development of the Wafi-Golpu copper/gold deposit in PNG, which, when developed, is expected to increase production. The Golpu project is believed to be a game changer for the company. According to Harmony, Golpu is a promising orebody which contains mineral resources of 20 million ounces of gold and 9.4 million tons of copper. The company’s board approved the updated prefeasibility study (PFS) of the Golpu project and also agreed to move the project to feasibility study stage in December 2014. The updated PFS covers the first stage (Stage 1) of Golpu’s development, which targets the upper higher value portion of the orebody. The Stage 1 project capital on a 100% basis is estimated at $2.3 billion, and is expected to yield an attractive return on investment with an internal rate of return of 17%. In order to support the feasibility study, the updated PFS proposes the development of twin exploration declines to establish further geotechnical and geological data. A decision on the declines is expected in first-half 2015. Work will continue on optimizing a second stage mine development (Stage 2), which will include the rest of the ore reserves. The feasibility study for the first stage and the updated PFS for the second stage of the project are expected to be complete by the end of 2015.
Ø Harmony is making good progress in reducing costs. The company reduced its capital expenditure by 30% to R2.5 billion ($244 million) in fiscal 2014 from R3.6 billion ($412 million) in fiscal 2013. Reduced spending in PNG is contributing to the capital cost saving. The company remained committed to its cash control initiatives manifested by a decline in cash operating costs on a sequential basis in the most recent quarter.
REASONS TO SELL
Ø Harmony is highly exposed to gold price volatility. Spot gold prices fell sharply in April 2013 to $1,360.60 per oz, the steepest fall in three decades, putting the yellow metal into bear market territory. Gold prices dropped roughly 28% in 2013 to end the year at around $1,200 per oz. The sell-off resulted from Fed’s announcement of a $10 billion cut in its monthly bond purchases in Dec 2013. According to Harmony, gold price received fell 19% year over year to $1,299 per oz in fiscal 2014, contributing to a double-digit decline in sales for the year. Gold price received also slipped 6% sequentially in the most recent quarter, affecting the company’s results. As such, weak gold pricing continues to serve as a headwind.
Ø Harmony remains the highest cost South African major producer and is struggling to make money, which may lead to further restructuring. We remain concerned about Harmony’s low output as it strives to reduce the cash cost of production. Effective March 1, 2010, Harmony has started paying royalties, increasing its costs further. Gold production remains affected by lower recovery grades of ores, which produce lower yields. Apart from electricity supply concerns, the company has labor issues, resulting in high operational costs.
Ø Harmony remains exposed to geopolitical risks with potential for mine shut downs and labor strikes. Following a five day strike, Harmony signed a two-year wage agreement with the National Union of Mineworkers (NUM), Solidarity and UASA in August 2011. The increase in wages will be offset by improvements in productivity aimed at the more effective utilization of the mining assets. Roughly 500kg of production was lost due to the strike. Moreover, miners at the company’s Kusasalethu mine went on strike in October 2012 and the mine was temporarily closed till February 2013. Roughly 2.5 tons of gold were lost during third-quarter fiscal 2013 due to the shutdown. Labor disruptions at Kusasalethu resulted in a decline in gold production in fiscal 2013 and cost the company roughly R1.2 billion ($116 million). The company faces tough labor and wage negotiations (with demand for significant wage hike) and the labor relation environment remains volatile in the gold industry.
RECENT NEWS
Harmony Gold Posts Loss in Q2 on Lower Gold Price – February 9, 2015
Harmony recorded net loss (excluding items) of $0.10 per share in second-quarter fiscal 2015 (ended Dec 31, 2014), compared with net loss of $0.02 per share recorded in the year-ago quarter. The bottom was affected by lower gold pricing and stoppage of operations at the Kusasalethu mine.
On a reported basis, Harmony posted net loss of $79 million or $0.18 per share in the second quarter as against net loss of $10 million or $0.02 per share in the prior-year quarter.
Revenues and Costs
Revenues decreased roughly 18.7% year over year to $327 million in the second quarter from $402 million registered in the year-ago quarter. The decline resulted from lower gold volumes and gold prices in the quarter.
Gold production decreased 11.1% year over year to 271,963 oz. Gold production also decreased by 10% from 303,341 oz recorded in the prior quarter. The lower production was due to stoppage at the Kusasalethu mine. The mine, which has been affected by illegal mining activities and a series of fires, has not returned to profitability.
Production profit for the second quarter fell 43.3% year over year to $55 million, compared with $97 million a year ago and $85 million in the previous quarter. The sequential decline was due to a 6% decrease in gold price received as well as lower gold production.
Gold ounces sold fell 12.4% year over year to 275,851 oz in the second quarter. Gold ounces sold also decreased 14% from 321,089 oz recorded in the prior quarter.
Cost of sales decreased 6.1% year over year to $354 million in the reported quarter. Cash operating costs increased 4.3% year over year to $990 per oz and declined 4% from $1,028 per oz in the previous quarter. All-in-sustaining costs rose 3.3% to $1,262 per oz from the year-ago quarter.
Financial Overview
Cash and cash equivalents decreased 46.4% to $119 million as of Dec 31, 2014, from $222 million as of Dec 31, 2013. Cash flow utilized by operating activities was $2 million as of Dec 31, 2014, compared with cash generated from operating activities of $70 million as of Dec 31, 2013.
Outlook
Management has positioned the company to remain sustainable for many years to come, managing costs and production to ensure profitability amid a volatile gold pricing environment. The company anticipates that gold production during the third quarter of fiscal 2015 will be higher after the Kusasalethu mine’s restructuring is finalized and Hidden Valley starts full production, backed by higher gold prices.
Harmony has positioned itself to thrive in the current gold price environment and provide investors with attractive returns by investing in the Golpu project. The company is also working on its cost control and cash-generation measures.
Harmony Gold Records Loss in Q1, Revenues Rise – November 5, 2014
Harmony recorded a loss of $0.06 per share in first-quarter fiscal 2015 (ended Sep 30, 2014) contrary to earnings of $0.03 a share in the fourth quarter of fiscal 2014 and earnings of $0.005 per share recorded in the year-ago quarter. Foreign exchange translation loss of $18 million on foreign debt as well as an increase in depreciation of $10 million contributed to the loss on a sequential comparison basis.
Revenues, Production and Costs
Revenues in the first quarter increased roughly 2.2% to $412 million from $403 million a year ago, and were also up 15.1% sequentially. The increase in revenues resulted from a rise in gold sold.
Gold production fell 2.1% year over year but rose 5.6% sequentially to 303,341 oz. Gold ounces sold rose 6.8% year over year to 321,089 oz and were up 15.7% from the sequentially prior quarter.
Operating loss for the first quarter was $27 million compared with an operating loss of $1 million a year ago and a loss of $136 million in the previous quarter.
Cost of sales increased 6.9% year over year but decreased 14.5% sequentially to $401 million in the first quarter. Cash operating costs increased 1.5% year over year to $1,028 per oz and increased 1.7% sequentially from $1011 per oz. All-in-sustaining costs went down 1.7% to $1,245 per oz from $1,267 per oz recorded in the sequentially prior quarter.
Financial Overview
Cash and cash equivalents decreased 11.4% to $202 million as of Sep 30, 2014, from $228 million as of Sep 30, 2013. Cash flow generated from operating activities was $101 for the reported quarter compared with $30 million for the year-ago quarter.
Outlook
Harmony Gold remains focused on improving its margins and funding its capital. The company owns 50% of the Golpu ore body in Papua New Guinea, which has the potential to develop into a world-class copper gold mine and will help it sustain its business in the future.
VALUATION
Harmony is expected to post a loss in fiscal 2015 and, therefore, it is not possible to value the company using a P/E multiple. With respect to the P/B metrics for the last quarter, the company is trading at 0.5x, below the industry average and the S&P 500 benchmark. Over the last five years, the company’s shares have traded in the range of 11.4x to 977x trailing 12-month earnings. While Harmony’s pipeline of growth projects bode well for increased production and top-line expansion, we are concerned about labor issues and a weak gold price environment. Our long-term Neutral recommendation on the stock indicates that it will perform in line with the market. Our price target of $2.50 is based on a P/B multiple of roughly 0.5x.