We are maintaining our Neutral recommendation on Harmony Gold Mining Company Ltd., (HMY), which recorded a net loss of $0.01 per share in the fourth quarter of 2011 versus a profit of $0.08 last quarter.
However, revenues were up 22.0% sequentially and 25% year over year to $505 million, driven by a rise in gold price received, offset by a decrease in gold sold. With high quality assets and a large reserve base, Harmony has strong long-term prospects.
The company has significantly improved the quality of its production, which it will continue to do with better cash costs and free cash flow in the future. It has several world-class mines in South Africa currently in the build-up phase, and, together with Hidden Valley, will be significant contributors to Harmony’s set production targets.
As of 30 June 2011, Harmony’s mineral reserves amounted to 41.6Moz of gold, spread across Harmony’s assets in South Africa and PNG. The reserves of Kusasalethu, Doornkop, Tshepong and Phakisa in South Africa and Hidden Valley in PNG now constitute 45% of Harmony’s total mineral reserves. Once the pre-feasibility study of Wafi-Golpu is completed, more ounces from PNG will be added to Harmony’s reserves.
Harmony has strengthened its financial flexibility by obtaining a 4 year US$300 million revolving credit facility with Nedbank Limited and FirstRand Bank Limited. The loan agreement was signed on August 11, 2011. This facility is specifically earmarked for Harmony’s activities in PNG.
However, lower-than-expected rand−gold price, slower-than-expected ramp-up in production at mines and higher-than-expected input cost inflation are likely to impact Harmony’s operations in the near term.
Moreover, Harmony’s operations have been materially affected by inflation. At the end of fiscal 2010, inflation in South Africa was 4.2%. Working costs and wages have increased considerably over the past three years resulting in significant cost pressures for the mining industry. In addition, the effect of inflation in electricity tariffs was 25% during fiscal 2010, together with two more increases of approximately 26% each in the next two years, which will have a negative impact on the profitability of operations.
The company is showing significant progress both in the growth of resources as well as diversity. The company is focused on continuing to deliver its long-term targets and maximizing shareholder value.
The company competes with Newmont Mining Corp. (NEM) and AngloGold Ashanti Ltd. (AU).
Currently, Harmony has a short-term (1 to 3 months) Zacks #4 Rank (Sell), but a long-term (6 months and higher) Neutral recommendation.
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