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Alberto Abaterusso
Alberto Abaterusso
Articles (1988) 

Harmony Gold to Report 1st Quarter Results

Gold hedging strategy and higher production drive results

October 17, 2016 | About:

Today, Harmony Gold Mining Co. (NYSE:HMY) announced through its website that "gold production in first quarter 2017 was approximately 10% higher than fourth quarter 2016".

Keep in mind that the fiscal year starts July 1 and ends June 30 of the next calendar year so fiscal year 2016 started July 1, 2015, and ended on June 30, 2016.

The fiscal year 2017 started on July 1, 2016, and will end on June 30, 2017.

First quarter 2017 results drove by gold hedge. The key in times of extreme market volatility:

“Harmony continued to benefit from its currency and gold hedge, which - in addition to higher production - aided strong cash flows. Underground grade at above 5 grams per tonne was maintained.” (Harmony’s NR).

To create further cash certainty to reduce its debt and strengthen the balance sheet, taking advantage from a strong gold price, the miner entered into short-term gold forward sale contracts for 432,000 ounces over two years, representing about 20% of the miner’s total production.

Harmony says the limited size and duration of the hedge means shareholders retain full upside exposure on 80% of the company's future gold production for the next two years, after which shareholders will have 100% exposure to the gold price.

In 2016, hedging strategy helped Harmony to strengthen the balance sheet:

For full-year 2016, the miner produced 1,082,035 ounces of gold, a 0.42% increase from the previous fiscal year. But in spite of the higher gold production reported by the miner in 2016, revenue in U.S. dollars was lower due to a decrease in the average gold price received from $1,222 per ounce in 2015 to $1,169 per ounce in 2016.

For full-year 2016, cash operating costs and AISC were $841 per ounce (-16% from full-year 2015) and $1,003 per ounce (-19% from full-year 2015). Operating costs in rand were higher due to increases in labor costs, electricity and contractor costs at South African operations.

For full-year 2016, the production profit was $350 million, a 43% increase from full-year 2015, and the net profit was 949 million South African rand ($64 million) compared to a net loss of 4.5 billion rand in fiscal year 2015. Consequently, headline earnings amounted to 221 South African cents per share compared to a headline loss of 189 South African cents per share for fiscal year 2015.

Harmony has operations in South Africa and Papua New Guinea.

In South Africa, the company operates nine underground mines, one open-pit mine and several surface operations.

Harmony’s attributable gold and gold equivalent mineral reserves, as declared June 30, amounted to 36.9 million ounces of gold, a 13.3% decrease year-over-year, and attributable gold equivalent mineral resources were 105.2 million ounces, a 4.6% decrease year-over-year.

Hedging strategy helped Harmony to offset the decrease in cash and cash equivalents by 611 million rand due to the debt repayment of 1.12 billion rand in the second quarter of 2016. As a matter of fact, in spite of a down trend in the gold price during the second quarter of 2016, the miner was able to increase with 145% the cash flow.

The net cash generated was 501 million rand and as of June 30 (fourth quarter 2016 and end of fiscal year 2016), cash and cash equivalents amounted to 1.256 billion rand. On a year-on-year basis, the net debt decreased 54% to 1.08 billion rand the miner is determined to see itself as net debt free by the end of the calendar year. We should see a positive effect of it already in fiscal 2017.

According to this July 26 news release, Harmony is one of the gold mining companies approached by Barrick Gold Corporation (ABX) with an offer of selling its 64% stake in African unit Acacia Mining (NYSE:ACA).

Acacia owns three producing gold mines in Tanzania as well as exploration projects in the country and other parts of Africa.

The miner will release the first quarter 2017 production report in November, and will report strong cash flow results.

The company is improving its financial health and the reinstatment of the 50 South African cents dividend after about four years is a sign of it.

Harmony should continue to pay dividends based on an improved outlook concerning the ability to generate positive cash flows and profits.

Today, Harmony opened at $2.96 per share and at the moment is trading at $3.03 per share, up nine cents (or +2,89%) from the previous close. The miner gained 226% year to date.

Enterprise Value/EBITDA is 4.69 and price-to-book (P/B) is 0.65.

The stock should up trend as gold moves higher, as long as the Federal Reserve keeps interest rates low (at least until December 2016).

Disclosure: I have no positions in Harmony Gold Mining Co.

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About the author:

Alberto Abaterusso
If somebody asks what being a value investor means, Alberto Abaterusso would answer, “The value investor is not just the possessor of the security that represents the company, but he is the owner of that company. As an owner of the company the value investor is actively involved in the dynamics of that company and his first concern is how to have sales progressively growing. Also, the value investor is probably one of the most demanding persons in the world concerning sales.”

Abaterusso is a freelance writer based in The Netherlands. He primarily writes about gold, silver and precious metals mining stocks. His articles have also been widely linked by popular sites, including MarketWatch, Financial Times, 24hGold, Investopedia, Financial.org, CNBS, MSN Money, Zachs, Reuters and others. Alberto holds an MBA from Università degli Studi di Bari (Italy), Aldo Moro.

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