Carbon tax batters Harmony Gold
SA’s introduction of a carbon tax contributes to the company remaining unprofitable despite a big jump in production and revenue from its new mines
The introduction of a carbon tax in SA was one of the reasons Harmony Gold reported a full-year loss, despite a sharp increase in revenue and higher gold production.
Harmony, which has all but one of its mines in SA and is the largest producer of SA gold, reported an impairment of R3.9bn against its local mines because of the carbon tax that offset forecast improvements in the price of gold.
“An increase in the planned gold price was offset by an increase in costs (both working costs and capital expenditure), which was further compounded by the inclusion of carbon tax, in both the life-of-mine and resource base models,” Harmony said.
Harmony reported a post-tax loss of R2.6bn for the year to end-June, an improvement from the R4.5bn loss the year before.
Revenue jumped to R27bn for the year, up from R20.5bn a year ago, with the inclusion of the Moab Khotsong mine in SA and the Hidden Valley gold and silver mine in Papua New Guinea for a full financial year.
Harmony reported gold production of 1.44-million ounces, a 17% increase.
The inclusion of the two new mines and improved underground gold grades “should translate into better yields and profitability going forward”, Noah Capital Markets said in a note.
The cost of sales ballooned to R29bn from R24bn, with two notable increases in non-cash items.
Depreciation and amortisation charges increased to R4bn from R2.6bn, due to Hidden Valley and Moab contributing a full year of production, and the R4bn impairment charge.
Another notable increase in costs was for finance charges, or interest on debt, which came in at R575m compared with R330m a year earlier.
Taking account of the once-off items to give a better reflection of the underlying business, headline earnings were R1.1bn, up 40% from from R763m a year earlier.
For a second consecutive year, Harmony withheld its dividend. It paid 35c a share in its 2017 financial year.
Harmony has a hedging programme in place that sets the price for a percentage of its future gold production.
In the 2019 financial year, Harmony realised R477m from its forward gold sales.
Harmony was replacing the ounces it sold into those forward contracts, taking advantage of the higher rand gold price, which is now R740,000/kg.
Harmony has 24% of its 2020 production and 20% of its 2021 production under a gold hedge. It also hedges its currency.
However, looking at the contracts for the 2020 financial year, the first quarter’s rand hedged gold price of R626,000/kg to end-September is well below the sharp increase in the gold price that has been pushed higher by trade tension between the US and China.
Harmony financial director Frank Abbott said the company was able to achieve a gold price of R840,000/kg two years into the future as it replaced gold delivered into contracts.
“We are making use of this opportunity,” he said, adding Harmony kept about 80% of gold production exposed to the spot gold price.
In Papua New Guinea (PNG), where there has been a change in government, Harmony and its partner, Australia’s Newcrest Mining, were “compelled” to “defer and revise the planned work programme” for 2019 at its Wafi-Golpu project. The partners were hoping for a permit around the middle of 2019.
The $2.8bn Wafi-Golpu has come under fierce criticism from analysts, who argue that Harmony cannot afford its $1.4bn, or R21.6bn, to build the mine. Harmony’s market cap is R24.5bn.
“Permitting of the Wafi-Golpu project has been delayed by the period culminating in the PNG parliament’s election of a new prime minister, as well as the delay associated with legal proceedings between the national government and the Morobe provincial government regarding the internal distribution of PNG’s economic interests in the project.”
Harmony was looking at a number of assets that it could potentially add to its portfolio, said CEO Peter Steenkamp, adding one of those was AngloGold Ashanti’s Mponeng mine in SA, that company’s last mine in the country.
However, Harmony had a number of metrics that it applied to potential assets, including an all-in sustaining cost of $950/oz or less.
Mponeng reported a first-half cost of $1,233/oz, but Abbott said Harmony considered what the cost would be under its management rather than the prevailing performance.
Harmony forecast its 2020 production would be about 1.46-million ounces at an all-in sustaining cost of R579,000/kg.