Harmony said the share and dividend deal with African Rainbow Minerals Gold Ltd (ARMgold) would value the new company at around $2.8 billion.
Harmony would issue 63.67 million new Harmony shares to ARMgold shareholders, giving a merger ratio of two Harmony shares for every three ordinary shares held in ARMgold.
ARMgold would also pay a special dividend of five rand a share before the merger takes effect, the two firms said in a joint statement. The new company will keep the Harmony name.
Based on Harmony's closing price on Wednesday, and the special dividend, the deal values each ARMgold share at 56.33 rand. ARMgold closed at 56.60 rand on Friday, before the announcement.
"The market cap of the new company using today's prices is about $2.8 billion," Harmony Marketing Director Ferdi Dippenaar told Reuters.
ARMgold Executive Chairman Patrice Motsepe, a leading black businessman who listed his small mining group last year, would become the new Harmony non-executive chairman. Bernard Swanepoel remains CEO of Harmony.
The two groups said the new Harmony would have the biggest South African production, but with some six million ounces of output a year AngloGold remains the largest gold producer based in South Africa.
Peer Gold Fields produces about 4.1 million ounces of gold a year, most of it in South Africa.
The news of the merger came after Harmony and ARMGold surprised the market by announcing they had bought Anglo American Plc's 34.5-percent stake in Anglovaal Mining (Avmin) for 1.7 billion rand ($231 million).
This translates into 43.50 rand per Avmin share -- a steep premium to Avmin's closing price of 32 rand on the Johannesburg bourse on Friday - Reuters.