Harmony Gold turns predator on deal hunt to fill output gap

JOHANNESBURG – Harmony Gold Mining is willing to use debt and equity to buy a profitable mine that will offset falling production in South Africa and help fund a major new project in Papua New Guinea, CEO Peter Steenkamp said.

With the company likely to lose about 40% of its current production over the next six years due to mines reaching the end of their lives, a big acquisition is “a necessity,” Steenkamp, 56, said Tuesday in an interview in Johannesburg.

“We have a gap emerging and what we need to do is fill that,” Steenkamp said. “We have to look for something fairly big.”

Harmony, South Africa’s third-largest gold miner, lost money for three years to 2015 but has been revived by a price for the metal that’s 26% higher this year and a weak South African rand, which has lowered costs. The company’s ultimate goal is to build a $2.6-billion mine on its Golpu copper-gold deposit in Papua New Guinea that will reduce costs as well as boost production and reserves. It has a 50% stake in the project with Newcrest Mining Ltd. owning the rest.

The stock has more than tripled to 56.48 rand this year, giving the company a market value of R25-billion ($1.8-billion).

“We’re trying to beef up the current engine to be able to build Golpu, which is the prize,” Steenkamp said. “We want to do the right acquisition at the right time to have enough firepower to build Golpu.”

DEBT CAPACITY
Harmony has the capacity to raise about 5-billion rand in debt but would consider using its stock to make a big acquisition, FD Frank Abbott said. “It’s difficult to put a value on the size of what a merger or acquisition would be.”

Declining to name specific targets, Steenkamp said Africa and Papua New Guinea would be preferable locations for an acquisition. “In South Africa, it’s limited,” said Abbott, 60. “AngloGold has got some assets and Sibanye. It depends on whether they’re prepared to sell any of those assets. I don’t think Sibanye is a seller but AngloGold might be a seller.”

Any purchase would have to have at least one-million ounces of reserves, produce 100 000 oz/y and bring the company’s overall costs down to $950/oz .

Harmony produced 1.1-million ounces of gold in the year to June 30 at an all-in cost of $1 003/oz . Gold dropped 0.6% to $1 329.45/oz at 2:16 p.m. in London.

Historically, the company has been an end-of-life operator for aging mines in South Africa. That’s now coming home to roost, with six of its 14 operations reaching the end of their scheduled lives in the next six years. Masimong and Unisel “are basically mined out” while Kusasalethu needs 2.6-billion rand of capital to extend its life beyond five years, Steenkamp said.

OUNCE LOSS
The three closures mean Harmony will lose about 220 000 oz, he said. Bambanani, Hidden Valley and some of its surface operations will also cease by 2022, according to the producer’s website.

As well as a future acquisition, Steenkamp plans to boost production by combining two of its mines, Tshepong and Phakisa. Together, they produced about 290 000 oz last year. Merging them would cut costs and could raise output to 350 000 oz/y to 375 000 oz/y, Steenkamp said. The company should be able to maintain current production for about five years, he said.

“Harmony is not up against the wall like last year but it has to do something,” said Rene Hochreiter, a Johannesburg-based analyst at Noah Capital Markets with a buy rating on the stock. “The current gold price has provided a big windfall and they want to take advantage.”

With gold up by almost a third this year and competitors also on the prowl for acquisitions, Harmony is aware that any deal would be “fairly expensive,” yet it would be a price worth paying to see the company through the mine closures and increase its ability to fund Golpu.

“We can’t buy at any cost,” Steenkamp said. “But I’m pretty sure we’ll be able to find what we want in Africa.”