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Harmony - Gold

ARM TEAL

Review of operations

PDF iconGold – Harmony (PDF - 334KB)


About Harmony

ARM holds a 16 percent interest in Harmony Gold Mining Company Limited (Harmony), which is the fifth largest gold producer in the world. Harmony's operations are located in the major gold-producing areas of South Africa (Carletonville, Orkney, Welkom and Virginia) and Australia. These are outlined below.

In South Africa

In addition, there are several surface operations, including Kalgold.

In Australia

Enlarge Harmony Gold map Enlarge map

Management

Harmony is managed independently of ARM, although the executive chairman of ARM is also the non-executive chairman of Harmony. ARM's financial director, Frank Abbott, also serves on the Harmony board as a non-executive director.

HARMONY AT A GLANCE
    FY2006 FY2005 %Increase/(decrease)
Total gold production kg 74 242 92 230 (20)
  000oz 2 386 2 965 (20)
Revenue R/kg 108 268 84 799 28
  $/oz 529 427 24
Cash operating costs R/kg 88 629 75 388 (18)
  $/oz 433 380 (14)
Cash operating profit Rm 1 459 869 68
Headline loss per share cents (269) (342) 21
Capital expenditure Rm 1 688 1 417 19
  $ 266 229 16

Review of the market

Renewed investor and speculative interest in the gold market over the past 12 months has resulted in the gold price rising to levels not seen in at least 25 years – it peaked at $730 per ounce in mid-May 2006. Gold has frequently been regarded as an inflationary hedge and the rise in the gold price, especially since January 2006, has been largely driven by fears of rising global inflation as a result of a rising oil price and a global economic downturn. The conflict in the Middle East, initially Iraq and more recently Israel and Lebanon, has helped to fuel speculative demand. However, South African producers have seen the price in rands soar to above R140 000 per kilogram, supported by the recent softening of the rand against the US dollar.

Fabrication demand for gold, which had reacted positively to the upturn in global economies in recent years, has fallen off in response to the higher price. On the supply side, production from South Africa has declined significantly over the years, but the country is still the largest gold producer in the world. Current price levels have led to a surge in exploration and expansion projects around the world.

Review of the year

The 2006 financial year continued to be one of consolidation for Harmony. The radical restructuring of operations embarked on in the 2004 financial year – closure of loss-making and marginal shafts, mining lower volumes at higher grades and the introduction of continuous operations at a number of shafts – was largely completed by year end, although the effects have yet to be felt on operating performance. In the 2006 financial year, gold produced declined by 20 percent to 74 242 kilograms (2 386 925 ounces). The average gold price received was R108 268 per kilogram ($529 per ounce), an increase of 28 percent over the previous year. The average rand/dollar exchange rate was R6.36/$ compared with R6.18/$ the previous year, reaching R7.17/$ at year end.

PRODUCTION AND CASH OPERATING COSTS BY REGION
  Production in FY2006 (000oz) Cash operating costs (R/kg)
SOUTH AFRICA    
   Quality Assets 1 141 78 382
   Leveraged Assets 683 100 779
   Growth Projects 214 108 437
AUSTRALIA 231 85 694
SURFACE OPERATIONS 116 87 090
TOTAL 2 386 88 629

Project capex
Project capex

Cash operating costs were up by 18 percent to R88 629 per kilogram (or by 14 percent to $433 per ounce) which is a creditable performance when considering the decrease in gold production. This increase was also affected by an increase in wages of between 6 percent and 7 percent with effect from 1 July 2005 following the two-year wage agreement reached with the unions in August 2005.

Operating profit margin increased to 18 percent while cash operating profit rose by 68 percent to R1 459 million ($229 million), both having felt the impact of the rising gold price and the slightly weakening rand, and are highly illustrative of Harmony's gearing.

Capital expenditure in FY2006 amounted to R1 688 million ($266 million), of which 33 percent (R561 million; $88 million) was allocated to the five growth projects in support of the company's robust project pipeline. In line with the company's policy of accounting for the capitalisation of mine development, there was a significant (R659 million: $103 million) decrease in operating costs and a commensurate increase in the figure for capital expenditure.

On 16 November 2005, Harmony disposed of its remaining 26.5 million Gold Fields Limited shares for R2 442 million, equivalent to an average price of R93.228 per share. The investment was acquired at a cost of R2 135 million, resulting in a profit of R307 million.

Harmony has acquired during the year under review a total of 44.99 million shares in Western Areas Limited, representing a 29.2 percent stake in the company.

The acquisition of this significant shareholding in Western Areas provides Harmony with a strategic exposure of 14.6 percent to South Deep gold mine, which is a 50:50 joint venture between Western Areas and Barrick Gold Corporation. The South Deep gold mine contains a reserve of 29.2 million ounces and a resource of 67 million ounces, which represents one of the biggest high quality gold ore bodies globally.

Subsequent to the financial year-end, Barrick Gold Corporation agreed to sell its interest in South Deep to Gold Fields Limited. Furthermore, Gold Fields has increased its holding in Western Areas and made an offer to minorities, including Harmony, to acquire all its shares in Western Areas in exchange for Gold Fields shares.

Harmony's focus on projects has also continued during the year, with good progress being made on all five of the company's significant projects (See table below).

Outlook and growth

Harmony's continued investment in its major projects should soon bear fruit as these projects come into production over the next few years. Production is planned to increase to 3.5 million ounces over the next four years with a corresponding decline in cash operating costs.

HARMONY'S GROWTH PROJECTS – SUMMARY OF KEY STATISTICS
   Project Location Description Expected peak production (000oz) Project completion date Life of mine (years)
Tshepong Decline Free State Province, South Africa Development of a decline to access lower reserves from bottom of the existing Tshepong vertical shaft 172 February 2008 13
Phakisa Shaft Free State Province, South Africa Sinking and equipping of primary shaft to 2 426 metres below surface; and the development of a 1 500 metre twin decline 282 February 2009 21
Doornkop South Reef Gauteng Province,  South Africa Deepening of the Doornkop main shaft to 1 973 metres 340 June 2010 11
Elandsrand  new mine Gauteng Province,  South Africa Development of a 'new mine' at depths between 3 000 and 3 600 metres below the existing mine infrastructure 445 December 2010 22
Hidden Valley Morobe Province, PNG Development of a new mine in two phases 285 September 2007 10

The information in this section is a summary of information that appears in the Harmony Annual Report.

More detailed information is available in the ARM Ferrous (PDF 334KB) section of the annual report.

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® 2006 African Rainbow Minerals Limited