JOHANNESBURG (miningweekly.com) – South African analysts cautioned South Africa’s Harmony Gold on going ahead with its nigh-$5-billion Papua New Guinea (PNG) project, for which it was failing to get credit in its share price.
In an interactive Harmony Gold investor day session on Wednesday, Afrifocus mining analyst John Kransdorff, speaking spontaneously from the floor, said that in the Golpu project in PNG, Harmony had a “tiger by the tail”, which was of investor concern (also view attached video).
Harmony had earlier calculated that the cost of the initial stage of the Golpu project, in which it was in a 50:50 joint venture with Newcrest, of Australia, would be close to $5-billion.
Kransdorff also urged Harmony CEO Graham Briggs to review the company’s big-project strategy and look to smaller quick-cash projects to lift its share price, adding that Golpu was big in relation to the size of Harmony's $4-billion market capitalisation.
He said that shareholders, who were looking for yield, would have to wait another seven years before the exploration project became a producing copper/gold mine that would yield cash.
Until then, it would consume cash generated in South Africa, another analyst remarked, while urging Harmony to devote more presentation time to producing South African mines and refrain from continuing to give its PNG assets, which were really ‘tomorrow’s gold’, disproportionate exposure.
In his response, Briggs said that the value that Harmony had added to its PNG assets by taking them up the value curve had not been reflected in the company’s share price.
In response to a query from Deutsche Bank mining analyst Anna Mulholland, Harmony South East Asia CEO Johannes van Heerden said that there were no specific terms in the agreement between Harmony and Newcrest that included the right to buy out one another’s interests.
Elaborating on Kransdorff’s comments, JP Morgan analyst Steve Shepherd said Harmony was too "tiny" a company to start developing massive orebodies and that it was clear from Harmony's stock trading at way under half of its net present value that the market did not believe it was big enough to develop the PNG orebodies.
Shepherd asked whether the time had come for Harmony to house its PNG assets in a separate exploration company, in which Harmony could be a significant shareholder.
Briggs responded that while Harmony might be a relatively small company from a market capitalisation point of view, it was the world’s eighth- or ninth-largest gold producer and was turning out gold at a good margin of profit.
With gold at $1 600/oz, the company would be able to fund the development of Golpu from its own financial resources.
In its 2012 financial year, Harmony cash funded all of its capital expenditure, additional exploration and a dividend for the third year in a row.
Its operational profit was up 80% in the 12 months to June 30, on a gold price increase of 36%, and its cash flow rose by R2-billion to R4.7-billion.
“We’re a big company when it comes to gold production,” Briggs pointed out, adding that the company continued to engage with shareholders, ten of which owned 65% of the company and twenty 75%.
“Obviously, if our shareholders want to make 19 phone calls, they can actually instruct us what to do, but they haven’t,” he said.
Because gold would be produced as a by-product of copper at Golpu, the gold would be more than fully paid for by the copper alone, assuming a gold price of $1 650/oz and a copper price of $3.50/lb.
Golpu would be a mine that was on the lowest cost quartile of both the copper producers and the gold producers, with an expected copper cash cost of $0.54/lb.
SOUTH AFRICAN MINING
Kransdorff said that the South African mining industry, as a whole, had done a poor management job, which had resulted in the problems being experience the platinum sector.
He said that many of the far higher price-earnings ratios of the shares of other Johannesburg Stock Exchange companies were indirectly dependent on the success of South African mining companies.
If local mining companies failed, those price-earnings ratios would no longer be sustainable, but that message had failed to get across, for which he criticised the management of South African mining companies.
He said everything came back to management as far as the current platinum-sector impasse was concerned.