JOHANNESBURG (miningweekly.com) – New long-term electricity-intensive gold projects are being rendered unbankable in South Africa because of the uncertainty surrounding the future price of electricity, says Harmony Gold CEO Graham Briggs.
"Increased electricity cost risk is one thing that comes out very strongly in feasibility studies," Briggs tells Mining Weekly Online in a video interview.
Because of that, South African projects are failing to gain bankable status, and are thus losing out to more attactive projects outside the country.
Increased electricity tariffs plus winter surcharges were among the main reasons for Harmony's cash operating costs rising 11,2% or R238-million in the three months to September 30.
Cash operating profit of R652-million was 30,8% lower than the previous quarter. Harmony's operating margin was at 20,4% for the quarter.
"When you do ten-year planning, you have to know what the electricity price is going to be," says Briggs.
With deep, underground gold mines a characteristic of the South Africa gold-mining industry, the country has both power-intensity and labour-intensity counting against it.
Gold-mining opportunities outside South Africa are more attractive because they generally involve either far shallower opencast mining or mechanised bulk mining that is capital intensive and thus safer.
"The more people you have underground, the more likely you are to hurt somebody," he adds.
Until the surge in electricity prices – aggravated by the high surcharge during winter – Harmony regarded its underground project at Evander in Mpumalanga as a good ten-year project, which currently fails to make the cut because of power price uncertainty. At one point, Harmony studied the possibility of a separate listing for its Evander assets, but later declared that to be unfeasible. Gold One's new Goliath Gold, which is planning to build Megamine in the Far East Rand area, is known to be keen to consolidate gold assets in the region, which takes in the Evander area.
The company has decided that it is far more economically feasible for it to direct its investments towards attractive opportunities in Papua New Guinea rather than turn its South African projects to account.
There are also far more promising opportunities in continental Africa.
"There's a lot happening everywhere in the world in minerals, but unfortunately it's not happening in South Africa," Briggs says.
Most of the capital has already been spent at the long-standing underground Doornkop, Kusasalethu and Phakisa projects that Harmony has had under way in South Africa for the last five years are beginning to yield, but with the company's biggest excitement centring on Papua New Guinea, where the Hidden Valley project has begun producing commercially and Wafi-Golpu is showing "tremendously positive" exploration results.
"This could conceivably be the gold find of the century. It has good grades, both copper and gold, and a project like Wafi-Golpu is just so fantastic, it will be easily funded," he adds.
Production from the Doornkop, Kusasalethu, Phakisa and Hidden Valley projects during the quarter took Harmony a step closer towards achieving its production target of two-million ounces of gold a year from 2013. The company produced 1,46-million ounces in the 12 months to June 30.
These four projects were responsible for a 193 kg rise in gold production quarter-on-quarter, which largely offset the closure of seven older shafts, a lower grade at Bambanani and continued work on Joel's shaft bottom.
Overall, however, gold production declined by 2,9% to 10 471 kg or 336 650 oz.
The gold price in rands dropped by 2,8% to an average of R287 401/kg, from R295 580/kg in the previous quarter. However, gold sold increased by 130 kg, which a provided a R38-million increase in revenue.
Harmony returned to profit in the quarter with earnings of 33 c a share, compared with a loss of 6 c a share in the previous quarter.
From 2014, Briggs expects to begin spending $1,5-billion, Harmony's contribution to the proposed $3-billion Morobe Mining joint venture with Newcrest of Australia. Production could potentially be between 400 000 oz and 700 000oz of gold and 100 000 t to 200 000 t of copper a year from the joint venture for more than 20 years.
A concept study just finalised shows that a copper-gold mine at Wafi-Golpu is technically and financially viable, and that a number of development options can be considered in a prefeasibility study.
Harmony has the liability for all seven of the shafts that it has closed, most of which is covered by obligatory rehabilitation funds.
Bids have been received for the takeover of some of the shafts, but Briggs cautions that the takeover of the shafts and the transfer of minerals rights is a lengthy process.
Harmony also has to be sure that the company that acquires these assets is financially able to take on the burden.
"Unfortunately, there are no bottom feeders in South Africa to take these over safely," says Briggs, who adds that current bidders may not be financially capable of taking over the operations.
The closed Virginia assets have grades of from 2,8 g/t to 3g/t with all the higher grades areas already depleted.
Alternatives to retrenchment are under consideration and, of the 1 470 employees who are affected by the latest Merriespruit closure, 1 200 can be transferred to Doornkop.
Harmony has been investing in infrastructure at the President Steyn gold mine that it bought from the liquidated Pamodzi Gold.
Briggs tells Mining Weekly Online that Harmony is focusing on the mining of the shaft pillar at President Steyn's No 2 shaft, which is expected to come into its own when Harmony mines the Bambanani shaft pillar.
"We'll probably mine both of those shaft pillars using the infrastructure of what used to be called Bambanani West shaft," he says.
The bottom of the former Lorraine 3 and now Target 3 sub shaft at President Steyn has been re-established.
"We're very pleased with the direction it is taking and it is going to have many years of good life when we get into it," says Briggs.
The plant cleanup is continuing as part of President Steyn's surface-mining operations.
WITS GOLD TRANSACTIONS
Wits Gold has obtained a prospecting right over Harmony's Merriespruit south area for R336-million, which will be settled in cash or cash and shares in Wits Gold. Harmony has also concluded a sale of assets agreement for Taung Gold to acquire the Evander No 6 shaft and Twistdraai areas in a R225-million cash transaction.
The assets, as well as the large Evander resource as a whole, are given no financial value.
"Generally, we have to clean up our portfolio and try to get value for these assets that are at zero value and in some cases negative value in analysts' financial models," says Briggs.
Financial director Hannes Meyer reports that Harmony has R941-million in cash and net debt of R405-million. He says that he would be comfortable with another R1-billion of debt on the balance sheet. Much of the company's capital expenditure is funded from existing operations, and project capital is coming to an end at Doornkop and Phakisa.
When Harmony will need to spend $1,5-billion at Wafi-Golpu in four years time, Doornkop, Kusasalethu, Phakisa and Hidden Valley are likely to be producing "substantial" free cash flow, Meyer says.