JOHANNESBURG (miningweekly.com) – Gold mining company Harmony Gold intends raising $200-million equity capital to fund the first tranche payment of its acquisition of the remaining South African assets of AngloGold Ashanti.

Harmony FD Boipelo Lekubo said in response to Mining Weekly during a conference call on Wednesday that the company would be holding an electronically conducted extraordinary general meeting (EGM) of shareholders on June 11 for this purpose and that its result would be released the next day, June 12.

This follows the Competition Tribunal unconditionally opening the way for the Johannesburg- and New York-listed Harmony to acquire from AngloGold Ashanti the Mponeng underground gold mine and Mine Waster Solutions surface gold  assets, which "remain a good fit for our portfolio, providing quality replacement ounces to our reserves and resources and potential synergies with our existing surface infrastructure".

Collectively, the assets add more than 350 000 oz/y to Harmony's portfolio.

An EGM circular, the company said, would provide shareholders with all relevant information on the issue ordinary shares for cash including securities convertible to ordinary shares to enable shareholders to make an informed decision as to whether or not they should vote in favour of the resolutions set forth in the EGM notice.

Although Harmony had intended to pay for the assets using cash or debt or a combination of both, uncertainty arising from the Covid-19 pandemic had resulted in the board deciding to shore up the balance sheet to cash preservation.

“It was for that reason that we have opted instead to do a capital raise through a share issue to fund the first tranche of payment of the $200-million,” Harmony Gold CEO Peter Steenkamp stated.

“We believe it is a most appropriate alternative to the cash or debt or cash/debt mix we envisaged earlier given the uncertainties posed by Covid-19. Our ability to preserve cash and maintain the strong flexible balance sheet, with low levels of debt, will allow the company to emerge from these uncertainties in a much stronger position.

“Furthermore, a share issue presents an incredibly attractive opportunity for investors to invest in a robust cash-generative gold mining company while rand gold prices are trading at near all-time highs,” Steenkamp said.

He described Mponeng as a very good operation with a very good quality orebody.

“It’s got very, very good potential going forward. In the current nine years of life, we believe it’ll be a very good asset for us to mine. We’re very excited about the Mponeng being part of our portfolio.

“We’ve been quite good at mining deep-level gold mines and mining surface operations and, specifically on surface, there are quite a few synergies to unlock,” he said.

Lekubo said in response to analyst questioning that Harmony would not be assuming any debt from AngloGold and no cash balances were transferring over, other than rehabilitation loans.

“We believe that the dilution of our shareholders will be more than made up by the gold and the profits that we’re going to make from these assets, especially at these gold prices. But we don’t have a crystal ball, we can’t foresee exactly what the prices are going to be and for that reason we’ve taken this decision that we’d rather remain conservative. The gold price and the currency are already big volatilities, and therefore we’ve decided to go for the equity raising,” said Harmony executive director of business development Frank Abbott.

Abbott pointed out that Harmony's significant growth in the last three years had been largely self-funded. This self-funding took in the recapitalisation of Hidden Valley for $180-million, the acquisition of Moab Khotsong for $300-million and it had every intention until the outbreak of Covid-19 of laying out another $200-million for Mponeng and Mine Waste Solutions. It has gone to the market only once in that period to raise equity capital of $100-million. Even Mponeng and Mine Waste Solutions would have been funded from cash flows and debt but under the current uncertainty and volatility, prudence pointed to raising equity capital ibeing the best option, against the background of the Harmony share price having done extremely well.

To ensure that the AngloGold transaction is concluded timeously, Harmony is also arranging a bridging finance facility in the event any delays or disruptions are experienced in the equity capital markets.

An estimated 50% return to operational capacity, permitted in terms of the eased lockdown regulations pertaining to the mining sector, has been attained, with resumption of mining having progressed smoothly. Surface operations and Hidden Valley mine in Papua New Guinea continued to operate during the lockdown period and sales of one tonne of gold in South Africa took place during April.

Owing to Covid-related uncertainty, annual production guidance of 1.4-million ounces of production in the company’s 2020 financial year to June 30, has been withdrawn. Production in the nine months to March 31 was 30 814 kg or 990 681 oz.

HEDGE RESTRUCTURING

Harmony has restructured its hedge book and rolled forward some hedging transactions to better match the hedges to the lower Covid-impacted gold production profile.

The dollar-based gold and silver hedges were not restructured as they relate to Hidden Valley, which has continued operating.

Harmony's operating free cash flow margin more than doubled in the nine months to March 31, to 13% from 6% in the corresponding period last year, owing largely to a 21.6% increase in the average rand gold price received for the period to R704 965/kg.

Operating free cash flow increased by more than 100% to R3-billion from R1.3-billion in the same period of last year.

Total gold production was 8.5% lower at 30 814 kg or 990 691 oz, affected by South Africa's Covid-19 national lockdown regulations, compliance with which resulted in six full days of operation lost at the company's nine South African underground mines at the end of the reporting period, and load-shedding by Eskom earlier in the quarter.

The average underground recovered grade was 3.6% lower at 5.40 g/t, due primarily to the negative impact of Kusasalethu's previously reported geological challenges and seismicity.

Quarter-on-quarter, however, Kusasalethu mined above the planned grade, reporting an increase of 14% to 5.08 g/t, reflecting the positive impact of ongoing remedial actions to address geological challenges and seismicity.

Harmony achieved a recovered grade of 5.68 g/t for its underground operations for the March 2020 quarter. The grade performance at most of the South African operations was good with an overall increase of 0.37 g/t, or 7%, quarter on quarter.

March quarter production at Hidden Valley in Papua New Guinea was impacted by a 14-day mill stoppage in January 2020, owing to a fault in the mill's electronic management system, which has since been resolved.

For the nine months, Harmony's all-in sustaining unit costs were 14.5% higher at R622 458/kg (8.3% higher at US$1 298/oz) due to the lower production recorded.

BALANCE SHEET AND LIQUIDITY

In the nine months, net debt increased by R697-million to R5-billion, taking the net debt to earnings ratio from 0.7 times at the end of December 2019 to only 0.8 times at the end of March 2020.

At the end of the quarter, Harmony had combined cash balances of R1.65-billion ($92-million). In addition, the company drew down R1.8-billion ($100-million) on its existing loan facilities shortly after the March  quarter end to ensure it had sufficient liquidity to see through the disruption caused by the Covid-19 lockdown period.

Harmony has to comply with these bank covenants:

• net debt to earnings must be below 2.5;
• earnings to net interest paid must be above 5; and
• tangible net worth to net debt must be above 4;

Harmony believes that compliance with the first two covenants will be comfortably achieved, as the benefit from the higher rand gold price supports earnings significantly.

Given the volatility in the financial markets, the company is engaging with its lenders to relax the tangible-net-worth covenant as a precautionary measure.

RESPONSIBLE STEWARDSHIP

Harmony stated that its business strategy and decision-making is embedded with sustainable development principles. It stated that responsible stewardship was the fourth pillar of its strategy, underpinning its operating philosophy of profit-with-purpose, which hinged on maintaining strong relationships by engaging and collaborating with stakeholders.

Harmony's response to the Covid-19 pandemic had further demonstrated its commitment to involving all of its stakeholders in risk management and the application of environmental, social and governance practices.

Its own Covid-19 standard operating procedure was aimed at ensuring a safe return to work for each of its employees and meeting the conditions contained in the amended lockdown regulations gazetted on April 16 for the safe resumption of operations.

It had been informed by guidelines provided by the Department of Mineral Resources and Energy, the National Council for Infectious Diseases, the World Health Organisation and discussions with its trade unions and the Minerals Council South Africa.

The company said it remained committed to protecting the health of its employees and ensuring a safe working environment.