Harmony surprises with R3.7bn capital raise for Mponeng buy
Harmony shares dive 11% on news that it cannot fund the $200m cash purchase of AngloGold mines off its balance sheet because of coronavirus curtailing SA gold output
Harmony Gold shares tumbled after it surprised the market with a decision to issue $200m (R3.7bn) worth of shares to fund its purchase of mines and other assets in SA from AngloGold Ashanti.
Harmony said in its update for the past nine months to end-March that its net debt had increased by nearly R700m to R5bn. It had cash of R1.65bn and had drawn down R1.8bn on debt facilities after the March quarter to see it through the coronavirus lockdown phase in SA.
Harmony's share price dived by 11% in late afternoon trade on Wednesday before closing 9.03% down at R64.50.
The decision to issue shares to raise the R3.7bn, equivalent to about a 10th of Harmony’s market capitalisation, comes at a time when it could possibly have relied on its balance sheet because of the high gold prices, and two of its debt covenants not being under pressure, said Simon Hudson-Peacock from Investec.
“I feel the market might have forgiven a dividend passing this year but this rights issue, I think, has probably caught a lot of people by surprise. Many investors might not feel it’s necessary,” he said on an analyst call with management.
Harmony had gross debt of R8bn by the end of March. “For a company the size of Harmony that could be bit of a stretch,” said finance director Boipelo Lekubo, adding that the mines in SA are only operating at 50% of staffing capacity and it is unclear when this will change. “It’s extremely important during this time that cash preservation is key, so that’s why we’ve gone for the more prudent approach of a capital raise for this acquisition.”
Harmony had spent nearly $700m on acquisitions over the past three years and of that only $100m had come from equity, said Frank Abbott, the executive director in charge of new business. Harmony will cement it position as SA's largest domestic producer of gold with the AngloGold deal.
Harmony addressed the question of whether it would continue with the purchase of the Mponeng mine — the world’s deepest at 4km below surface — and the Mine Waste Solutions tailings retreatment business, along with two mothballed mines, all of which would add 350,000oz of gold year to its output.
“A natural, strategic fit with its existing asset base, the acquisition of Mponeng and Mine Waste Solutions represents a compelling opportunity to enhance Harmony’s position as a robust cash-generative gold mining company, particularly at current gold price levels,” the company said.
Return to full workforce
SA’s competition authorities have given the deal their approval and Harmony must make the $200m cash payment once all the conditions are fulfilled.
Harmony will pay $200m in cash and $260/oz of gold from Mponeng and other underground assets included in the transaction based on production above 250,000oz a year. These payments will be made for six years from the start of 2021 and are capped at $100m.
In the nine months to end-March, Harmony’s gold output fell by nearly 9% to 990,691oz due to six days of full production lost at its nine SA underground mines as the country entered an extended lockdown to curtail the spread of Covid-19.
There was also load-shedding in the early parts of the March quarter, which negatively affected production.
Peter Steenkamp, Harmony CEO, said that while its mines in SA could withstand the financial difficulties of operating at 50% staffing levels in line with eased government regulations, there has to be a return to full workforce as quickly as possible.
Harmony is targeting high-grade levels underground in stopes that it has specially prepared with additional supports to prevent tunnel collapses to withstand a three-week shutdown from March 27, he said. However, there will be a time when these working areas will be mined out and specialist development crews will be needed underground to open up more stopes.
During April, Harmony sold one tonne or 32,100oz of gold, sourcing the metal from its opencast Kalgold mine as well as its tailings retreatment operations, Steenkamp said.
Harmony signed agreements with its unions to try recover as many shifts as possible of those lost in the initial 21 days of lockdown as the year unfolded, he said, adding the full impact could be only four or five days of lost production for 2020.
Harmony is pushing hard to have in-house testing for Covid-19 rather than relying on time-consuming private laboratories, as it would be a quick way to test employees showing any potential symptoms during daily screening activities, he said.
Analysts are concerned that shafts could be shut if any employees test positive, a worry shared by management, said Steenkamp, adding that there are detailed plans in place for such an eventuality and that the company is in constant talks with the departments of health, and mineral resources and energy, about how to handle a positive case.
Update: May 6 2020
This article has been updated with comment and new information throughout.