General Information

Harmony Gold Mines is a South African mining company - listed on the Johannesburg Stock Exchange (HAR) and the NASDAQ (HGMCY). Its aggressive management is revolutionizing the heretofore staid way of developing the gold mining business in that country. The new strategy is to actively increase gold reserves, while relentlessly slashing production costs to the bone. In both efforts Harmony management has made great strides since 1995. Specifically, in 1995 Harmony had only 20 million in total resources; today it boasts 71 million, headed for 100 million in resources.

Harmony's principal gold producing properties are situated in the prolific Free State gold fields. Just recently it acquired shafts of the President Brand mine. It also operates in the East Rand area.

For some time Harmony has been implementing a new gold refining strategy. It has already started refining it s own gold production in a pilot refinery. Furthermore, it is already selling some of its refined gold directly to overseas banks.

Harmony's new strategy means it will bypass Rand Refineries - thus, economizing processing costs. This will also increase revenues.

Additionally, Harmony is using a revolutionary method of refining. The new process reaps substantial cost benefits. The cost benefit in the first year alone is estimated at about R5 million.

Gold refining innovations will produce substantial economies, which will considerably increase overall profitability in the not too distant future.

Gold Reserves Expansion

In less than four years the dynamic company has tripled its resources, and is rapidly reducing production costs to its objective level below $270. Furthermore, its energetic and forward looking management is intent on expanding its gold business internationally. Recently, it acquired the Bisset Gold mine in Canada, which has been producing gold since 1932.

In the pursuit of its reserves expansion objective through acquisition, Harmony has the highly prized Evander mines in its acquisition sights. The Evander mines are literally pregnant with 30 million ounces of reserves - which would substantially increase Harmony's growing dominance in this area. If the Evander deal crystallizes, it will give Harmony over 100 million ounces in reserves, and nearly doubles its annual gold production to more than 1.3 million ounces yearly. Now we are talking a world-class gold company.

Fabulous Fundamentals of Harmony Gold Mines

To highlight the fabulous fundamentals of Harmony, it is compared to Barrick Gold (ABX), the flagship and pride of the North-American gold mining industry. Please be aware that the comparison does NOT take into account the Evander potential.

Observations:

Market Cap Per Gold Deposits (Total Resources)


• Whereas both Barrick Gold and Harmony Gold Mines have world-class gold deposits (both have approximately 71 million ounces in total resources), Barrick's market price of its gold deposits is far more expensive per ounce than those of Harmony ($115 vs only $3.68). That is 31 TIMES MORE COSTLY (115/3.68).
  
  
• If the market place were to value Harmony using Barrick gold deposit price as the standard, the market price of HGMCY would necessarily have to be $165 per share. Please recall HGMCY price on 5/8/98 for its ADR NASDAQ listing was only $5.33.
  
  Market Cap Per Annual Production
  
  
• To be sure Barrick has an annual gold production of 3,050,000 ounces vis-ŕ-vis Harmony's 771,000, however, an investor pay's through the nose by buying Barrick shares. Every 1,000 shares of ABX represent about 8 ounces of gold production - whereas 1,000 shares of HGMCY represent about 15 ounces - TWICE AS MUCH. Therefore, an ABX investor pays $2,726/oz, as compared to HGMCY costing only $355/oz - making ABX shares nearly 8 times more expensive. If HGMCY were to have a value based upon annual gold production, and using ABX as the benchmark, then HGMCY would enjoy a market price of $41/share.
  
  

HYPOTHETICAL MERGER TARGET

Harmony's fabulous fundamentals makes it a prime target for the deep-pocketed and aggressive North-American gold mining companies. To illustrate the point this analyst describes a HYPOTHETICAL MEETING of Barrick Gold's President presenting a merger proposal to his Board of Directors. The meeting might go something like this.

"Gentlemen, our company is aggressively seeking to expand our gold reserves and geographic horizons. I present for your evaluation and approval the acquisition of all of the shares of Harmony Gold Mines. Here are the relevant data."

• Harmony possesses 71,000,000 ounces of gold resources
  
• Harmony has an annual production of 771,000 ounces
  
• Harmony has $261,000,000 market cap at current price
  
• Harmony has ZERO DEBT
  

"Based upon the comparative analysis supplied above, Harmony Gold's assets are severely and unreasonably under-priced by the market. Therefore, I propose Barrick make a tender offer to acquire all of the outstanding shares of Harmony on a 1:1 share basis. Specifically, we will exchange basis one share of ABX for one of HGMCY - which would represent QUADRUPLING HARMONY'S PRESENT MARKET PRICE OF $5.33/SHARE."

"Do I see raised eyebrows and wrinkled foreheads among the Directors? Are you thinking we are paying far too much for Harmony? Rest easy gentlemen, we are NOT. In fact it is A STEAL AT THAT PRICE."

"Let's go through the post-merger numbers together. Once the proposed merger is consummated, Barrick would boast the following statistics:"

• Total gold resourc of 142 million ounces - world's largest
  
• Annual production of 3.77 million ounces - world's largest
  
• Debt/assets ratio reduction on $500 million debt
  
• Share dilution of only 12%
  

"Gentlemen, allow me to summarize the data. In merging with Harmony by exchanging one share of ABX for one of HGMCY, we will have increased total gold resources by 100%, raised yearly production by 25%, and increased our credit worthiness by substantially decreasing Barrick's debt to assets ratio - all for just a small stock dilution of only 12%."

"Two immediate benefits will accrue to our company. Firstly, ABX share value will appreciate almost immediately in market recognition of the material increases to reserves and production - which will indeed make all the shareholders very happy. And secondly, our bankers will be pleasantly justified in increasing our debt level - which will enable us to make further acquisitions on a CASH BASIS, thus avoiding any further dilution of shares."

Although the above merger case is HYPOTHETICAL, the numbers are legitimate - which makes the situation entirely feasible. With Harmony shares selling for pittance, the cash-rich North-American gold behemoths - like Barrick Gold or Newmont Mining - must indeed be lusting for the South African gold producer. And it goes without saying, an immediate QUADRUPLING OF HGMCY SHARE VALUE will certainly make its shareholders very eager and willing to enter the marriage.

Recent Developments and Relevant Observations

Ironically, the only thing which might thwart the efforts of North-American giants from acquiring Harmony is the overt aggressiveness of its own effective management. Recent take-over overtures by Harmony bear careful watching. The looming acquisition of Evander will undoubtedly make Harmony a major world gold producing company… whereby the hunted may well become the hunter.

Harmony recently announced it will authorize a 2/3 increase in its share capital - worth Rand 1.9 billion (US$380 million). Harmony has been linked to large deals lately, the most likely of which is the purchase of Evander (which you may remember as Kinross). Evander also includes the old Winkelhaak mine. This will be similar to Durban-Deep's takeover of Blyvoor and Buffels. Only it will be BETTER, because Evander has 30 million ounces of resources - and only 40 million shares outstanding.

In addition to its JSE listing, Evander is also listed on the NASDAQ (EGMVY), and trades at less than $3/share.

Harmony's objective is to buy gold resources under $5.00 per oz. Although Evander appears to meet this criteria, right now the company is a huge mess. Nonetheless, we believed that Harmony's president, Swanepoel, can get Evander's production costs to below $270 in a matter of months. However, timid RSA shareholders will see this as a DILUTION of stock… because they are not sufficiently sophisticated to appreciate where Harmony is heading. To the left is the Rand price chart during the last five years - and its relative performance to the JSE All-Gold Index. Obviously, HGMCY is leading the way back to South African golds recovery.

Harmony's market cap is now about $261 million at a current price of $5.50/share ($5.33X49 million shares). If Harmony acquires Evander, it would then have over 100 million ounces of total resources. This means $3.68/oz. They will be adding roughly the same level as their own valuation. More importantly, Evander's PRODUCTION is 588,000 oz/year versus Harmony's 771,000. (Needless to say, Harmony will make good use of the extra gold production).

Incidentally, major shareholders are Standard Banks Nominees - 45%, First National Bank Nominees - 13%, and Randgold & Exploration (RANGY), who owns about 5% of Harmony. RANGY is listed on the NASDAQ - and is selling for a buck and change.