South African gold miner Harmony Gold Mining Co. Ltd. (HMY, Financial) has lagged the price of gold and its recent strike has come to an end. The stock is a buy.
The strike was at the company's Kusasalethu mine in South Africa. The strike cost the company three to four days of production. The mine produces 13% of the company's total 1 million to 1.1 million ounces per year in production and generates 10% of its total cash flow. The strike was encouraged by the AMCU union in response to the disciplinary procedures against 40 employees following a sit-in at the mine in January.
The company aims to hike its yearly gold production to 1.5 million ounces from the current 1.1 million ounces over the next three years as it undertakes expansions at its operations in South Africa, the rest of Africa and Papua New Guinea while also potentially acquiring low-cost, high-value assets.
Using GLD as a proxy for the price of gold, GLD hit a recent low of $107.85 in December. In February, it rebounded to $119. Then in March, it fell to $114. As of today, the price is at $118.83. In the past six months, GLD is down 6.82% while Harmony is down 30.29%. That iw pretty high gold to miner leverage. That leverage should close with the end of the strike.
In September of last year, Harmony was at $3.56. Now, it is at $2.40. The stock is volatile, as it should be. In South Africa, gold mining is tough. You have got electrical problems, labor issues and the mines are extremely dangerous. Death is not uncommon.
In the last six months of 2016, the company mined 553,862 ounces of gold. Cash costs were $974 and the underground ore grade was 5.04 ounces per ton. Earnings per share were 25 cents. A contrarian indicator is that JPMorgan downgraded shares. Buy, buy, buy!
Harmony has 440 million shares, the stock price is $2.40 and the market cap is $1.056 billion. The company hedges about 20% of its gold production and also hedges currencies. We have held the stock, off and on, many times. Sometimes making a bundle, sometimes losing. It is all about timing with Harmony. We bought shares today.
It takes 12.44 rand to buy one dollar. The asset side of the balance sheet shows 1.215 billion rand ($98 million) in cash, 1.616 billion rand in inventories (gold) and 820 million rand in receivables. The liability side shows 2.11 billion rand in payables and 1.504 billion rand in debt. I will take those numbers all day long. You can tell management keeps a clean balance sheet for rainy days.
Harmony has nine underground operations in South Africa, one open pit in South Africa and one open pit in Papua New Guinea. The company has 37.8 million ounces of reserves and 107.6 million in resources. Of these resources, 92% is in South Africa. As of last year's annual report, the company had 32.651 million ounces. Harmony has always traded cheaply compared to its resources (and compared to its peers).
The stock is a buy as long as the price of gold cooperates. If gold comes down, Harmony could come down at a slower pace. That is not a scenario we want. A great scenario is if gold stood still and Harmony caught up. Of course, the greatest scenario is gold skyrockets and Harmony goes back to $15 a share.
Disclosure: We own shares of Harmony.
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