| OPINION/ ANALYSIS
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Harmony's target will be a tough challenge
November 20, 2009
By Justin Brown
Harmony Gold finds itself stuck between a rock and a hard place. The gold mining company's mines are mainly old and declining.
However, over the next three years the company is going to face a crunch as tries to reverse a declining production trend by completing its growth projects as part of its plan to partly rebuild production.
If Harmony's growth projects fail to deliver, then the company's goal to increase output will founder.
From peak gold output of 3.3 million ounces in the year to June 2004 Harmony's production has been declining.
This trend has been marked by 20 000 jobs being cut and mines shut or sold off in South Africa and Australia.
Since June 2003 to the end of September, Harmony's accumulated losses have totalled R5.8 billion. For every profitable quarter during this time the group has produced two losers.
The latest announcement by Harmony to slash up to 2 100 mine jobs as part of plans to shut gold mines in the Free State continues the declining trend.
Harmony is planning to close three shafts at its Evander mine as well as the Brand shaft. These closures will cost it up to 120 000 ounces in annual production.
These closures as well as a number of threats faced by the company mean that the company's target of raising its annual output from a 10-year low of 1.46 million ounces to 2.2 million ounces in three years could be at risk.
The risks Harmony faces in meeting its 2.2 million ounces gold production goal includes its poor safety record threatening the group's production, a decline in the rand gold price and the proposed sharp increases in power prices which will push up the cost of production at the group and boost the group's already spiralling unit costs. Power blackouts are a further threat.
Harmony's production target will be further undermined if it has to close more loss-making shafts.
In recent years, Harmony has missed many production and cost targets.
Growth projects always have a level of uncertainty about them so investors are already factoring in that Harmony's 2.2 million ounce target might only be reached in 2013 or 2014 rather than in June 2012.
Since August 2007 Graham Briggs, Harmony's chief executive, tried to reverse the mess at the group by closing costly operations, retrenching workers and selling assets to get in money to improve the company's financial position.
As a result of these asset sales, Harmony generated a record profit last year of R2.9bn and it paid shareholders their first dividend in five years despite the fact that the company still faced risks to its profitability.
Despite record high gold prices, Harmony is unlikely to pay another dividend for the foreseeable future given the prospect of an electricity price shock and uncertainty about the rand gold price.
What Harmony needs is to build a portfolio of low-cost gold mines to replace high-cost local mines.
Along this path the company has a joint venture with Australian group Newcrest Mining which has built the Hidden Valley gold mine in Papua New Guinea.
Given Harmony's recent track record of overpromising and underdelivering - it is going to be difficult for the group to meet its target of 2.2 million ounces.
Unless the group builds and buys more low-cost mines, it is going to continue to battle against the odds because of its aging local gold mines.
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