Harmony’s Freegold: Another Grand Slam Homerun
Widely regarded as the best turn-around experts in the business, Harmony
Gold (HGMCY) has done it again, and this might even be
the most impressive acquisition to date.
Even smiling shareholders familiar with Harmony’s long string very
successful purchases have got to be stunned at this one.
Gold Limited. (ARMgold) and Harmony Gold Mining Co. Ltd. Joint Venture
called FREEGOLD, recently released its first quarterly report.
The Freegold Assets, located in South Africa’s Free State Province, were
purchased from AngloGold at the end of last year for 2.6 billion Rand.
From these latest figures, it appears that this is another Harmony
purchase that will pay for it self in short order.
I’ll admit, as a very bullish long-time shareholder I expected the
Freegold figures to be good, but when I started digested the numbers, I
was shocked! I encourage you to take the time to view these results
in their entirety:
Let’s first take a look at some of the highlights, then put them in
perspective with a view of Harmony’s rising share price.
Gold Joint Venture returns 54% increase in Cash Operating Profits
Johannesburg, 12 April 2002 – African Rainbow Minerals Limited (ARMgold)
and Harmony Gold Mining Company Limited today reported excellent
performance by their newly formed Free Gold Joint Venture company, and
that it had
exceeded all expectations.
The company assumed operational control on 3 January 2002 with all the
remaining conditions precedent having been met by 10 April 2002.
The Free Gold operations reported a
cash operating profit of R402,8 million,
an increase of 54% over the R261,5 million reported for the December 2001
These newly acquired mines are now
operating at a R50 717/kg or a 47% cash operating profit margin. This is
an improvement of 87% on the R27
144/kg margin reported during the December 2001 quarter.
Although the R/Kg gold price increased
by 22% from R88 530/kg to R107 657/kg, when measured in US$/oz terms, the
cash operating margin increased by 86% from
quarter on quarter. These increases occurred despite a mere
11,1% increase in the gold price in US$/oz terms, and a 11,9% depreciation
of our local currency.
Patrice Motsepe, executive chairman of ARMgold said: “The first quarter
following an acquisition, is usually a period during which the
re-structuring and changeover in management impacts on both employees and
the overall performance of the operations. This improvement in profit
margin reflects the gearing present from our restructuring process in
extracting value from mature turnaround assets.”
As Mining Web’s David McKay put it: “The
assets include a mine formerly earmarked for closure and a number of
projects which gain fresh impetus due to the higher rand gold price – a
factor that has turned the Harmony-ARMgold enterprise into
one of the gold industry's more fortuitous
I’ll say! Let’s take a closer look at
these numbers below, keeping in mind that these quarterly figures
represent ONLY Freegold (with annual production estimated at 1.2 Million
ounces), and do not include Harmony’s additional 2.6 Million ounces of
Gold sales $74 137 000
Cash operating costs $39 203 000
Cash operating profit $34 934 000
Amortisation ($2 326 000)
Other income – net $427 000
Interest paid ($3 492 000)
Profit before taxation $29 543 000
South African normal taxation
– Deferred tax ($8 864 000)
Freegold’s Net Quarterly earnings $20.68 Million
This being a 50/50
JV, Harmony’s chunk of this
quarter’s Freegold profits is
10.34 Million Dollars.
Using 160 Mil shares, this acquisition alone increases Harmony’s annual
earnings by nearly 26 cents per share.
At a P/E of 15, this adds another
to Harmony’s share price!
But wait, it gets even
To quote the recent Earnings Report:
purposes it is worth noting that production was affected by the quarter
under review being eleven days shorter than normal. During March 2002 only
58 production days
were used for reporting purposes, whilst
69 days were used in December 2001. This
was due to the contractual handover date agreed to being 3 January 2002.”
The increase in production from this
“short” quarter to a normalized quarter based on December’s 69 day figure,
results in an additional 19%! So now we’re looking at
a 15 P/E share price increase of $4.60
per share based solely on the earnings from Harmony’s Freegold!
And there appears to be even more
upside to the FreeGold earnings coming soon. As Harmony’s CEO Mr.
Bernard Swanepoel declared on 12 April, “YOU
AIN’T SEEN NOTHIN’ YET”.
Due to the lower cost structure now
envisaged at these operations, management commenced with the re-opening of
West, Sable and Kudu Shafts. These shafts will contribute approximately
184 kgs per month to overall production (an additional 70,000 ounces per
year -- cash operating profit of roughly $9,000,000.)
Also, discussions are in progress to
open additional shafts, and “the benefits from utilising
centralized services from either Harmony, ARMgold or outside contractors
will only accrue to Free Gold and become visible
over the next two
THE BOTTOM LINE
In my previous article
HARMONY GOLD: THE KING OF PROFIT!
to the FreeGold quarter’s numbers being released) I estimated the
quarter’s gold price at $290 and a Rand of 11.5. The FreeGold numbers
were reported at $290 and 11.53 on the Rand. So with this added
information, I feel confident that my previous estimate of 31 cents per
share is going to be close. With this figure I
estimated Harmony’s 15 P/E share price to be $18.44,
BUT THIS DID NOT INCLUDE THE FREEGOLD EARNINGS.