Gold: Harmony

Harmony has gold mining operations (primarily in South Africa) with 10 underground mines, several surface operations and two open pit mines. Harmony has a 50% interest in the Morobe Mining Joint Venture (Newcrest Mining Limited is the other 50% partner) in Papua New Guinea (PNG), which includes a mine at Hidden Valley, as well as the Wafi-Golpu project and exploration tenements.

During the financial year ended 30 June 2011, Harmony made excellent progress in key areas. It commissioned gold mines in South Africa and PNG, while the company expanded the world class Wafi-Golpu resource (on a 100% basis) to 9 million tonnes (Mt) of copper and 26.6 million ounces (Moz) of gold. The Wafi-Golpu resource delivered a phenomenal 57% increase to over 1 billion tonnes in resource during the year. Golpu’s grade is over 1% copper, which confirms that it is one of the highest grade copper gold porphyry systems in South-east Asia, and these excellent results validate the long-held belief that PNG is a game-changing region for Harmony. Over and above Golpu, Harmony’s exploration exposure in PNG is over 7 200 km2.

The resource base in PNG now represents 10% of Harmony’s total gold resources (or 21% of the resource on a gold equivalent basis), which is in line with Harmony’s strategy to increase its geographic diversification.

For the financial year ended 30 June 2011, Harmony’s annual gold production was lower at 1.3Moz, largely due to the shaft closures during the 2011 financial year. Total revenue for the year increased from R11.3 billion to R12.4 billion, or 10%, due to the 16% increase in the rand gold price received to R307 875 per kg. This increase was offset by the 7% decrease in gold sold.

Cost of sales increased from R10.5 billion to R11.6 billion for 2011, as a result of increases in labour, electricity and consumable costs, and amortisation and depreciation. Cash operating cost in R/kg terms increased by 16% from R195 162 per kg last year to R226 667 per kg, while the Rand per tonne unit costs remained stable at R469 per tonne.

Harmony’s cash operating profits increased by 12% to R3.3 billion for the year and headline earnings from continuing operations were higher at R957 million, in comparison to R4 million in the previous year. Harmony recorded a net profit of R617 million for financial year 2011, compared to a loss of R192 million in the 2010 financial year.

Over the last year, total exploration expenditure was R353 million with R296 million for the PNG region alone.

Harmony’s financial position has been strengthened following the recent signing of a revolving credit facility that adds financial flexibility. It diversifies the company’s funding sources and it ensures funding for the feasibility and exploration expenditure for Wafi-Golpu over the next three years.

ARM’s dividend receipt from Harmony will be R38 million and this will be accounted for in the 2012 financial statements.

The team at Harmony has created an asset portfolio with assets that will produce higher grade, lower cost mines. The older, non-core assets have been closed or sold, unnecessary costs are being removed from the system and what is emerging is a collection of truly world-class assets designed to build significant shareholder wealth going forward.

The ARM balance sheet at 30 June 2011 reflects a marked-to-market investment in Harmony of R5.7 billion, which is based on a Harmony share price of R89.95. Changes in the value of the investment in Harmony are accounted for by ARM through the statement of comprehensive income net of deferred capital gains tax. Dividends are recognised in ARM’s income statement. The investment reflected at market value in the statement of financial position represents approximately 14% of ARM’s market capitalisation of R40.2 billion at 30 June 2011, which compares to 15% at 30 June 2010.

Harmony’s full results for its financial year ended 30 June 2011 may be viewed on the company’s website at www.harmony.co.za

* Gold equivalents based on US$950 oz Au, $4 412/t Cu at 100% recovery for both metals.

Operational performance

		F2011	F2010
Gold produced	Kg	40 535	44 433
	000oz	1 303	1 429
Operating cost	R/kg	226 667	195 162
	US$/oz	1 009	801
Financial performance
Revenue	R million	12 445	11 284
Production costs	R million	9 170	8 358
Cash operating profit	R million	3 275	2 926
Net profit/(loss) for the year (includes discontinued operations)	R million	617	(192)
Total headline(loss)/earnings per share (includes discontinued operations)	R million	223	(7)
Total capital expenditure	R million	3 143	3 353
Market performance
Average gold price received	R/kg	307 875	266 009
	US$/oz	1 343	1 092
Market capitalisation	R billion	38.7	34.9