first majestic silver

Harmony Gold Proves Hedging Is Not Necessary

December 24, 2001

South Africa is the richest gold bearing region in the world and home to some recently successful winners among the gold crowd. One such clearly defined winner among the gold producers is a company called Harmony Gold Mine.

Harmony came into being on its own around five years ago. Harmony Gold Mine's first report to be carried by a US analyst was in July 2000 by gold analyst John Doody and reported in The Gold Stock Analyst. Doody, "Management is very well regarded and financially clever… Clearly very leveraged to a higher gold price." Other favorable comments come from David Tice with the Prudent Bear Fund, "Harmony has a knack for buying mines and making them work more efficiently, says Tice." And the favorable commentary continues. Harmony Gold Mine has established a "…track-record following 4 acquisitions in the last three years since becoming independent (a new gold mining company)…All in all, output has grown from below 500,000 ounces to established production for the 2001 financial year of 2,200,000 ounces," Michael Brush, CNBC/Money. That is GROWTH and a company worth paying attention to!

David Tice goes on to say, "I think gold will be in a 5 to 10 year bull market." This is the reason I spend every day following the gold market & writing these letters. For those who prepare now there will never be a better opportunity to make this kind of serious money again in our life times. Pay attention to all that I have to say about Harmony Gold Mine.

In a statement by the CEO of Harmony, Bernard Swanepoel, "Four years ago Harmony's management set out to grow the company into a world class gold producer through acquiring marginal operations and turning them into profitable business units by introducing low cost mining methods. Since their inception, the company has grown from a marginal lease bound mine producing approximately 600,000 ounces of gold per year to 2.5 million ounces a year, making it one of the largest gold producers in the world."Harmony is also one of the largest gold companies in the world committed to zero hedging.

"Swanepoel expects to add 2 million ounces again to Harmony's output… Of this increased output, 500,000 ounces each will be sourced from Australia and Canada. Swanepoel has repeatedly stated his company is NOT a passive investor…" David McKay, Miningweb

"Harmony Gold Mining Company's growth has been conducted through acquisition in a declining industry." What this means gold investors is that this company has the wisdom and foresight to purchase unpopular gold mines that are not presently economical. Harmony management then with their blessed talent & skills turn these companies back around by reducing overall production costs, thereby turning losers into winners.

"...Fundamentally, gold (and silver) are poised to LEAP upwards. The only remaining questions are when?" Bill Buckler, The Privateer, 12-14-01

"The day is coming when spot gold's price will surpass $300 an ounce…. look for grudging acceptance of gold as an alternative investment for nervous Main Street investors, the ones who are becoming bewildered by a finicky, overpriced American stock market. Best bet: South African gold companies that benefit from this year's spectacular decline in the rand, that nation's currency. Rand prices for gold are rising like, well, like NASDAQ. That means South African producers are bringing home great profits as they sell their gold in dollars and pocket thicker and thicker wads of rand. " Thom Calandra, CBS MarketWatch 12-6-01

I have tried to explain in previous letters that we are entering a new era. All of history is forever changing and there are events on the horizon of time that are warning investors everywhere to batten down the hatches & to buy gold and gold related investments. What are some of the recent disruptions affecting this new first decade of our new century?

"The Senate hearing on the Enron collapse, like last weeks House hearing, focused on the discrepancy between Enron's officers, who sold more than $1 billion in stock over the last three years, and rank and file workers, who were constantly encouraged to plow their savings into Enron stock," USA Today, 12-19-01. These Enron shareholders lost EVERYHING! A 1 million dollar portfolio of Enron stock PLUMMETED almost overnight to around 2,900 dollars. Here lies the virtue of gold & gold related investments readers. As proven leaders such as Enron begun to tumble in value gold and gold equities hold their GROUND.

In other recent news around the world have you followed current events in Argentina?

"Fearing their savings could be wiped out or confiscated by the cash strapped government, Argentines poured what money they had into anything they could find with real value -stocks, real estate, and jewelry (gold)…. U.S. Treasury Secretary Paul O'Neil said it was "quite clear" Argentina could not service outstanding debts; "They're working through the difficult options that a sovereign nation has to look at to put itself on a sound financial footing." Stephen Brown, Reuters, 12-20-01

"Argentina's president resigned after violent protests left at least 20 people dead and the country on the verge of a political and economic abyss…. The unrest was sparked by Mr. Cavallos attempts to restructure an economy staggering under the burden of (132 billion US dollars) in debts…. Many analysts say the economy is now sliding inexorably towards defaulting on its debt…potentially the biggest default in history…We don't have a government now. We are in a total void. This is anarchy…"Sophie Arie, News.telegraph, United Kingdom 12-21-01

What other additional changes are occurring within the political & financial dominion?

"Indications are that the domination of the US dollar is coming to an end, and with it, the great barrier to gold performance. As a company that remains unhedged by choice, this is the prize that we and our loyal shareholders have been awaiting for so long…. The prospects for profits never looked better." Adam Fleming, non-executive chairman, Harmony.

"But we see gold moving back above $360 dollars an ounce in the short to medium term. Only Gold Bulls survive in this business…In two years, Harmony has moved from the abominable "closure with dignity" to what is now a long life mine - a new lease on life," Bernard Swanepoel. Julie Walker, Business Times

I believe it is evident from the testimony of Harmony's executive leadership that they believe in gold. What other evidence proves the fact that this company truly believes in the never-ending monetary value of GOLD, that ole' barbarous relic?

The declining gold price has resulted in nearly all the gold mining companies hedging their production thus capping the upside for their shareholders. Harmony does NOT believe in hedging. It is currently one of the largest, unhedged gold producer in the world. Bernard Swanepoel, CEO, "We are unhedged and we've ALWAYS been unhedged at Harmony, and over the last six years certainly that's been THE RIGHT STATEGY…"

Harmony clearly does not believe in the practice of hedging. They go further in their beliefs. While some gold companies have made a policy of playing with the devil by engaging in complicated & dangerous hedging & derivatives financial horseplay to gain a buck, Harmony has been quietly moving in the opposite direction. Instead of cheating the system and shooting ones own foot, Harmony believes in old-fashioned business principals. What are these old-fashioned business principals? Merely being the best at what they do in their industry and making every effort to reduce costs thereby adding to their profit margin.

This is clearly something the hedgers are afraid and unable to do. Rather than practice sound business principals by strengthening their business gold companies that hedge like to employ shortcuts that eventually, if continued, will destroy their own industry. The concept of hedging is similar to a cargo vessel lightening its load by dumping its cargo into the sea so that it can make it to its destination faster. Sure, they get to their port in record time but upon arrival their cargo is gone. So what was the point & what was accomplished?

What is another example of the destructive long-term results of the practice of hedging gold production? Probably the best way of examining the eventual destructive effects of hedging is to look at the practice of slavery in the days of "The Old South". The southern plantation owners were getting very rich planting and harvesting cotton using free labor through the decadent practice of slavery. It was obvious at the time to all the rest of the civilized world that the practice of keeping men in chains would eventually be abolished. But the rich plantation owners merely smiled and pointed to their balance sheets and continued to reap vast profits every day as they watched their slaves struggle under the yoke of their iron collars. But slavery did eventually come to an end and the plantation owners became bankrupt and poor.

So it is with these gold companies who practice hedging, which is really just another name for slavery. They are making vast profits at the expense of keeping the gold industry in bondage and in chains. These companies that hedge laugh at the rest of the world and point to their short-term profits. They laugh at the human misery they have caused and the pain they have indirectly inflicted on others. But the day is coming when ALL of the gold industry will rebel and discard the yoke and chains of hedging. And when that day of freedom and emancipation comes those companies that hedged will be the ones who become bankrupt and poor.

As a final reflection on the practice of hedging, only ONE major gold company in South Africa continues its practice. The other major South African gold mining companies out of respect for the African black community do NOT practice hedging because they know the practice of hedging keeps the African population in slavery & economic hardship.

Harmony Gold Mining Company is working toward the emancipation and empowerment of ALL of Africa. Harmony knows that emancipation & economic prosperity will NOT come to a people if the majority of its people are kept in shackles and oppression due to evil business practices such as the act of hedging.

I am so tired of hearing some gold companies argue that the principal of hedging is economically necessary. Hedging does bring about a quick short dollar profit but it destroys the future of an entire industry for the next generation. It has been argued by the gold companies that they have to hedge to make the banks happy so they can borrow money.

But what does Harmony prove?

"You will remember we did a very successful capital raising in June, in anticipation of this deal, so we effectively have the bulk of the cash, in the bank. SO THIS IS BAD NEWS FOR THE BANKERS. THIS TIME WE DON'T NEED THEM," Harmony Executive Leadership. Alec Hogg, Miningweb, 11-22-01

How about that! They raised their own money for acquisition purposes and told the banks to go take a hike! Now that takes courage and sound business daring. Can you imagine if more gold companies had this ability? The banks would no longer be able to use the act of hedging as a golden collar to keep the gold companies under THEIR yoke. But Harmony is proving that a gold company can survive & prosper WITHOUT relying on hedging.

Harmony now stands, because of their wisdom and business acumen, as the 5th largest gold company in the WORLD.

"The world's fifth-largest gold producer, South African company Harmony Gold (HGMC) has been buying high-cost mines and reengineering them to drive down the cost structure… It also has a "great management team." Devaluation in the South African Rand also is bullish for earnings since it sells gold and receives U.S. dollars." Myra Saefong CBS MarketWatch 12-10-01

"A consortium led by Harmony Gold (HGMCY), South Africa's third largest gold producer, has won the race to buy AngloGolds Free State province operations. The four mines, producing 1.3 million ounces of gold a year…Harmony's bid, which is in cooperation with black empowerment company, African Rainbow Minerals, will add further momentum to Harmony's impressive rise to prominence in the world's mining stakes. It has developed from a single lease-bound operation in 1997, producing about 500,000 ounces, to a company with output of about 2.5 million ounces a year…" Stewart Bailey & David McKay, Miningweb 11-20-01

It is also important to note that Harmony is also making every effort to improve race relations in South Africa. Recently they have worked in a partnership helping a totally black owned gold mine to become a powerhouse in their own right, African Rainbow Minerals. There are no other white owned gold companies anywhere contributing to this extent in helping the black majority within South Africa get a leg up economically.

Harmony strives at being the best in everything it does.

For the past several years Harmony has experienced a production yearly growth rate of 32%. Harmony has a principal strategy of acquiring gold mines that are losing money and are considered high cost. Their expertise is then turning these losers around into moneymaking ventures. Harmony is the only gold mining company in the world that owns its own refinery and it has just started to sell gold bars on the Internet to the public.

Let me repeat that last important statement. HARMONY HAS EXPERIENCED A PRODUCTION YEARLY GROWTH RATE OF 32% SINCE ITS INCEPTION FIVE YEARS AGO.

"With an outstanding record of driving down operating costs, Harmony is ranked as the second lowest cost underground gold miner in South Africa… The company is following a deliberate, and very successful, strategy of bringing these strengths to account by acquiring high cost producers, then immediately adding value by driving down the operating costs of the newly acquired mines… Importantly, Harmony has steadfastly resisted the temptation to hedge any of its production." Brien Lundin, Gold Newsletter

I like that last comment, "…Harmony has steadfastly resisted the TEMPTATION to hedge any of its production." And, most importantly, they have PROVEN that for a gold company to grow and make money they do NOT have to practice this depraved act. Harmony has proven that hedging and slavery does NOT have to be a way of life and an accepted practice of business among the gold industry to make money and profits.

A lot of people that read this may wonder why I am equating hedging to slavery. First of all lets see how the dictionary defines slavery. "Submission to a dominating influence…a person who has lost control of himself and is dominated by something or someone," Webster's Dictionary. Does this not adequately describe what happens as a result of the practice of hedging? Entire nations & peoples derive their sustenance & make their living off of the mineral industry. We are not talking about natural market behavior but actions taken with the deliberate, desired goal of subjecting a market & a people for ones personal economic goals. I have explained in other letters how a lower gold price is making a few of the senior gold companies rich because it is driving their weaker competition bankrupt. How convenient. But, oh, this kind of thing really doesn't happen in the real world? Give me a break!

I don't care what anyone thinks of my analogy. I will call a spade a spade. And if the shoe fits, "WEAR IT!". HEDGING IS JUST ANOTHER FORM & TYPE OF SLAVERY. Just look at its affects and I will rest my case. And the point I am trying to get across in this letter is that it is NOT necessary.

You have to ask yourself. Why do some gold companies hedge and others like Harmony don't? It is a question of honor & dignity. This is why Harmony proudly says, "We are unhedged and we've ALWAYS been unhedged at Harmony," Bernard Swanepoel, CEO. I believe the better question to also examine is why did some plantation owners 150 years ago choose to hire free men to work their fields who were paid good wages while other plantation owners chose to bind men in iron chains and to work them as SLAVES. I will answer that in one word. GREED.

"Harmony's strategy is to win general investors and therefore complement holdings by specialist gold funds. There are signs this interest is beginning to take hold: "We had the highest liquidity of all South African gold stocks on NASDAQ with some 165 per cent of the company's shares traded last year…. Business principles are strictly applied at Harmony's operations…Swanepel insists Harmony's value as a company is not dictated by volume but by financial returns such as return on capital employed and investor equity. "We want to appeal to the non-specialist funds and not just those taking a position on the gold price," says Swanepoel. Nonetheless, Harmony is geared to gold price gains as almost all of its gold output is unhedged (free & not under the yoke of slavery)…Harmony Gold Mining Company's success as a miner is derived from its obsession with costs…Costs are not just a focus, we are obsessed with them." Says (executive director) Neal Froneman." David McKay, Miningweb

Yes, Harmony has definitely proven that they are winners. I believe their most important accomplishment is that they have proven that hedging, which will always be just another name for slavery, can be avoided if a gold company makes every effort at avoiding the practice by coming up with alternative strategies.

Maybe other gold companies will follow their examples. A zero hedging policy has definitely been a profitable strategy for Harmony Gold Mine.

Between 1997 & 2001 cash costs have dropped over 28%. Harmony has shown steady growth in its reserve base from approximately 8 million ounces in 1996 to approximately 33 million ounces today. Cash costs have decreased from 360 US dollars in 1996 to 234 US dollars an ounce by June 2001. Their continued growth objectives are to continue to acquire gold assets with turn around potential through operational potential.This is Harmony's EXPERTISE, buying gold mines that are losing money and turning them around into money making golden opportunities.

The Proven & Probable reserves calculated within the past year are almost 30 million ounces. The Gold Stock Analyst Thirty million ounces of proven & probable gold. That means the Securities Exchange Commission recognizes 30 million REAL ounces of gold in the ground. If all of that gold eventually sold on the market for just 300 dollars an ounce that would be a gross value of 9 billion US dollars. And what is Harmony's present market cap? As of December 20, 2001 Harmony had a market cap of a LITTLE under 992 million dollars.

And how much did we say Harmony produced last year for all of 2001? Almost 2.5 million ounces. 2.5 million ounces will bring 700 million dollars at a 280-dollar an ounce gold price. So their market cap is around 30% higher than JUST one year's gold production. That means in my opinion that the market does not even recognize nor give value to the rest of that 30 million gold that has been PROVEN to be there by the SEC. Now you tell me. Is Harmony just slightly undervalued? I will let you answer that question.

The contention & point that I am trying to make in this letter is that South Africa is the most difficult environment in which to mine gold for a profit. If a gold mining company, such as Harmony Gold Mine, in this most challenging of all environments can succeed at staying in business profitably WITHOUT HEDGING their future production why cannot this be accomplished by other gold companies?

Readers, this is an HONORABLE company that is significantly undervalued & DESERVES our support! If I don't see a mass of investors rushing out to purchase their stock next week - and a decent rise in their stock price, I'll make this my last letter on GOLD! Get out there and jump on this WINNER's bandwagon! It'll make you money.


The periodic symbol for gold is AU which come from the Latin for gold aurum.
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