Harmony aims to dispel fears
Company says it has full confidence in Papua New Guinea mine and has tackled concerns raised by sceptics
Harmony Gold says it is absolutely confident about delivering on its $180m investment in the silver and gold Hidden Valley mine in Papua New Guinea and proving that the many sceptics were wrong.
Harmony bought its Australian partner, Newcrest Mining, out of its half of the mine and has opted to invest heavily in the operation as part of its strategy to grow its production to 1.5-million ounces a year in the next three years, replacing declining output from its South African mines, which make up about 1-million ounces of annual production now.
In the February presentation of Harmony’s interim results, analysts questioned the board’s wisdom in investing in the historically underperforming mine, which had a poor reputation, let alone increasing the company’s exposure to the asset.
During an interview on Wednesday, Johannes van Heerden, Harmony’s CEO of its Southeast Asia business, said this financial year’s $70m investment in Hidden Valley and the associated work was on or ahead of target and this could "optimise" a five-month mill shutdown from June, bringing forward commercial production at the mine and, by extension, cash flow. The mine would deliver about 90,000oz of gold in 2017 from tailings retreatment and mining a portion of the Hamata pit.
From the end of June, Harmony will pump another $110m into the open-cast mine, tackling phase five and six of pushing back the wall of the pit to access ore and allow the mine to reach commercial production in the June quarter of 2018.
"We are not convinced Hidden Valley is an effective allocation of its capital," SBG Securities analyst Adrian Hammond said in a note on Wednesday, pointing out the company’s prevailing cash margins were "not sustainable unless management improves the fundamentals of the existing business".
He said net debt would continue to rise to pay for Hidden Valley, but a hedge over 20% of production until next June would underpin margins.
Harmony forecasts that the mine will deliver 180,000oz of gold and 3-million ounces of silver a year at steady-state production at an all-in-sustaining cost of between $850/oz and $950/oz.
That would make it one of the best assets in its portfolio.
Management was keenly aware of the deep scepticism investors and analysts had about the merits of Hidden Valley, Van Heerden said, outlining a broad range of measures to tackle the underlying reasons for these misgivings.
Harmony’s management systematically went through the key concerns and legacy issues raised by investors and analysts and put in place risk-mitigation measures, ranging from an appropriate crusher feeding a 5km-long conveyor belt – a weak point in the production cycle – to derisking the logistics chain to give the mine development team realistic targets.
"We think it’s a smart business decision but we understand we will have to demonstrate to the market we are not frittering away scarce cash. That underpins their concern, having seen some horror stories … where a lot of money is pushed into projects that never deliver a return," Van Heerden said.
“This will be a class act. It’s mechanised, without a large workforce, which has now matured over the past five years, it’s an open pit, it’s a 365-day a year operation and it gives us good diversification,” he said. “It will be one of our top performers from a production and cost point of view,” van Heerden said.
As Hidden Valley’s new general manager Harmony brought in Australian Gary Davis, the former GM of AngloGold Ashanti’s opencast Geita mine in Tanzania, where he helped make the underperforming mine of the best operations in the company