Harmony on song for large rise in gold production
IF HARMONY Gold Mining Company succeeds in its takeout of the Randfontein Estates minorities, it will result in a 57% rise in gold production to 2.2-million ounces a year for only a 17.7% dilution in share capital. Even if all the Randfontein minorities accept the cash alternative, it will leave Harmony with debt of R400-million, but generating cash of nearly R200-million a quarter.
This is what encouraged Bernard Swanepoel, Harmony's chief executive, to make the offer for Randfontein when it was already the subject of an offer from JCI Gold stablemate Western Areas. Swanepoel says it was difficult to get hold of the circular to Randfontein shareholders (posted on December 20) to evaluate the Western Areas offer, which in his view undervalued Randfontein. Once Harmony's offer was lodged, Harmony became entitled to the same information upon which Western Areas had made its price of 12.13 Western Areas per 100 Randfontein after Randfontein distributed its 7.8-million Western Areas shares as a dividend in specie.
Former Randgold chairman Peter Flack acted as mediator between the two bidders and Randfontein; he proposed that the matter be settled on the grounds of price and the ability of the management team. The subsequent actions of former Western Areas chief executive Brett Kebble are under investigation. Meanwhile, JCI Gold accepted Harmony's offer for 34.9% of Randfontein at a cost to Harmony of R294-million.
Says Swanepoel: "We had expected some smart countermoves. We tried to be tactically smart by making the cash underpin. But we did assume people would play by the rules." The total value of Harmony's revised offer is R862-million - around twice the Western Areas price - and the offer closes on February 14.
Swanepoel is sensitive to the accusations of impropriety by three Randgold non-executive directors who were also on the Harmony board. Randgold is also the subject of an offer from Western Areas. Swanepoel says the three had intended to resign from the Randgold board a year earlier, but had been specifically requested by Brett Kebble to remain to help verify the restructure of the whole group. The proposed restructure has been much delayed. Swanepoel says he had no way of knowing the extent of the relationship between Durban Roodepoort Deep and Randfontein - Durban Deep was effectively running Randfontein under a joint management committee.
Cost-cutting is the thrust: Harmony develops its mines at a cost of R2 000 a metre, Randfontein's costs are R8 000/m, and it charges a 4% fee on capital purchases. "You don't need a planning department to make cross-cuts and box-holes."
And apparently, four senior executives at Randfontein were earning more than Swanepoel. Two rejoined Durban Deep.
Harmony avoids goldhedging, but Randfontein came with an already out-of-themoney position, marked to market at a negative 55-million. The hedge has been partly restructured at a cost of 10-million, resulting in a reduction in the opportunity cost of a rising gold price. Under the old hedge, the marked to market position would have worsened by 1.4million for every dollar rise in the gold price; this has been lowered to 300 000.
"The old hedge was inappropriate and badly constructed. Too much upside had been given away for downside protection," says Swanepoel. "They panicked and went short big time at the bottom of the market, and panicked again by going long big time right at the top when gold was 320/oz." He says that while the ball-park extent of Randfontein's exposure was as expected, the components differed.
Such is the effect of the gold price on an unhedged mine that the 12% overall improvement in the dollar price (297/oz average over the quarter) more than doubled Harmony's cash operating profit to R103-million. Earnings a share were lifted by 48% to 82c for the quarter. A 50c dividend has been declared.
Harmony's Free State mines almost trebled working profit to R59.2-million in spite of a lower grade; Evander's profit rose by two-thirds to R40-million even though its grade also slipped. Kalgold made R5.3-million (R3.2-million), and the stilldeveloping Bissett a small loss. Overall gold production was raised by 183kg to 11 000kg at a cash cost of R48 992/kg (249/oz). Production at Evander is being built up: the 220 Growth Plan aspires to mine 220 000 tons a month at a cost of R220/t. By June, it should be achieving 210 000 a month, at a grade of 6.6g/t and a cost of R237/t.
Swanepoel was obliged to comment on Randfontein's December quarter even though the mine was operated by other parties - the reporting format had to be harmonised with the rest of the group. The biggest area of concern is the Cooke 4 shaft, bought from Western Areas two years ago for R24-million, but it has since piled up losses of R150-million. Cooke 4 lost R10.6-million this quarter, but the mine's overall profit was R41.5-million - a little under what was expected.
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