JOHANNESBURG (miningweekly.com) – While South Africa's third-largest gold-miner Harmony Gold won plaudits on Monday for unexpectedly declaring its first dividend in half a decade, its CEO Graham Briggs was quick to point out to Mining Weekly Online that the company would not be saddling itself with a dividend policy at this stage of strong rand uncertainty.

"The rand's strength and the rand gold price's weakness are of considerable concern," Briggs confided.

While Harmony was bullish about the dollar-gold price and of $1 000/oz being likely from the end of calendar year 2009, the company believed it prudent to assume the worst case scenario of continuing rand strength for as long as the South African currency remained attractive to speculators.

The company had, consequently, planned "very conservatively" for the year ahead, on the basis of a gold price of R225 000/kg.

Should the rand gold price remained below R250 000/kg, incremental cutbacks from marginal mining operations and capital reduction could be expected. At the time of going to press, the spot price of gold was R247 000/kg.

Being unhedged, the company has always focused on producing ounces that are mineable at a cost below gold's spot price.

JP Morgan mining analyst Steve Shepherd was the first off the mark to dish out the plaudits on the 50c-a-share dividend, but all was brought back down to earth when stablemate Allan Cooke quizzed Briggs on on costs and what a stronger rand of R7 or R7,50 to the dollar would do to the company that produces virtually 100% of its gold in South Africa, where costs are on the rise.

While debt-free Harmony achieved a record net profit of R2,9-billion for the year to June 30, a tell tale sign of the strong rand taking its toll is the 36,8% decline of the company's cash operating profit to R743-million in the June quarter, compared with the R1,17-billion of the previous quarter, as a result of a lower average rand-a-kilogram gold price received.

Briggs told Mining Weekly Online that, while the company would labour through a short-term, three-month margin squeeze, six months of strong rand would have it discussing capital-expenditure cutbacks, the placing of certain high-cost operations on care-and-maintenance, and the focusing of mining on higher-grade areas.

Harmony CFO Frank Abbott reported that the winter electricity tariff would add R40-million a month to costs, the winter-tariff months being June, July, August and September.

Abbott said that electricity costs, excluding the winter tariff, had, on their own, risen from R170-million a quarter to R230-million a quarter.

While Harmony, which produced 1,55-million ounces of gold in the year to June, was targeting a production level of 2,2-million ounces in 2012, Briggs gave notice that the company would suspend the pursuit of the 2,2-million-ounce target if the strong rand forced it to restructure its operations.

"We won't pursue that target if we have to restructure things," he said.

However, he did concede that the 2,2-million-ounce target excluded the anticipated contribution of 150 000 oz from Pamodzi Gold Free State, which Harmony is in the process of buying out of provisional liquidation for R405-million, which in dollar terms translates into a give-away price of $2 per resource ounce.

Besides the growth projects of Phakisa, Doornkop, Tshepong and Elandsrand in South Africa and Hidden Valley in Papua New Guinea that will contribute to the 2,2-milion-ounce target, there are 17 other short-term and medium-term projects, including the "very encouraging" St Helena 10 Shaft project, that are also in Harmony's project pipeline.

The company spent R1-billion capital on its projects in the June quarter and will spend another R1,1-billion in the current September quarter.

The company has R1,9-billion of net cash, which provides additional flexibility in the event of unexpected occurrences.

"Financially, the company is healthy, and that's what we're showing shareholders through the declaration of the dividend," Briggs added.