Source: ItnewsAfrica

Investment Thesis

The South African Harmony Gold Mining (HMY) is mainly a South African gold miner compared to Sibanye Stillwater (NYSE:SBSW). The company released on September 18, 2020, its year 2020 results ending on June 30, 2020.

The company owns and operates nine underground mining operations, one open-pit mine, and several surface operations in South Africa. Also, Harmony is active in Papua New Guinea, where it owns the Hidden Valley mine, an open-pit gold and silver mine.

The gold production for 2020 was a total of 1,217,323 Au Oz, including three segments:

  • South Africa underground mining: 920,861 Au Oz or 75.6% of the total production
  • South Africa surface mining: 139,823 Au Oz or 11.5%
  • Papua New Guinea: 156,639 Au Oz or 12.9%

The investment thesis has not changed from my preceding article. I view the company as a long-term candidate for investors who want to get involved in the South African gold venture. However, the gold sector is very volatile, and I recommend trading about 30% of your long-term position to profit from the volatility and lower your risk.

Harmony Gold differs slightly from Sibanye Stillwater because it produces platinum, palladium, and Rhodium with much smaller gold production.

CEO Peter Steenkamp said in the conference call:

The company achieved a better-than-expected production performance in the fourth quarter of FY ’20 despite the COVID-19 challenges, and we are a 25% increase in the average gold price received. And so that is really been quite a tailwind that we had.

Harmony Gold Mining – The Year 2020 Ending June 2020 – The Raw Numbers

Note: I have indicated both the 6-month and year results – the South African miners HMY and SBSW.

Harmony Gold Mining 12/2018 6/2019

2019

12/2019 6/2020 2020
Rand/$US 14.18 15.66
Total Revenues in $ Million 973 924 1,897 1,054 813 1,867
Net Income in $ Million 5 -189 -185 91 -147 -56
EBITDA $ Million 23 -176 132 125 227 estimated
EPS diluted in $/share 0.01 -0.36 -0.36 0.16 -0.26 -0.11
Operating Cash flow in $ Million 187 143 330 186 116 300
Capital Expenditure in $ Million 169 186 355 155 108 230
Free Cash Flow in $ Million 18 -43 -25 31 -2 70 estimated
Cash and Cash Equivalent $ Million 97 70 70 89 317 367
Borrowing (including current) In $ Million 414 419 423 396 493 446
Dividend in $/share
Shares outstanding (diluted) in Million 537 533 540 549 547 547
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Data Source: Company documents

1 – Analysis: revenues (yearly and quarterly) and other financial indicators

Harmony Gold released its year-end results on September 18. Revenues for 2020 were $1,867 million, down slightly from the previous year. Net income was a loss of $56 million compared to a loss of $185 million in 2019. It was a good improvement due to a significant increase in gold price realized, which was $1,461 per ounce in 2020, up 13.5% from 2019.

Production costs increased by 8% year over year.

The rand versus the US dollar ratio was 15.66 this in 2020 versus 14.18 in 2019.

2 – Quarterly production analysis – historical data

Gold production was 1,217,323 Au ounces in 2020, down 18.1% year over year. It was not an excellent output, mostly below guidance. The company explained:

mainly due to the impact of electricity constraints during the third quarter of FY20, the COVID-19 national lockdown and the phased recovery in South Africa in the fourth quarter of FY20.

As we can see in the chart above, it is below 2017 production. The average gold price received during 2020 was $1,461 versus $1,287 in 2019.

The company grade was down by 2.5% to 5.45g/t year over year.

AISC for 2020 was $1,293 per ounce versus $1,207 per ounce in 2019.

Two mines have contributed significantly in the last results:

  1. Moab Khotsong in South Africa
  2. Tshepong Operations in South Africa

Harmony Gold completed a $300 million deal to buy AngloGold Ashanti’s (NYSE:AU) last two mines in South Africa, which will add 350K Oz starting next month.

3 – Mineral resources and reserves

The Company’s attributable gold and gold equivalent mineral resources are declared as 118.6Moz as at 30 June 2020, a 1.12% increase year on year from the 117.3Moz declared as at 30 June 2019

Image From Presentation

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4 – Production guidance for 2021

Harmony Gold’s production is estimated to be between 1.26Moz and 1.3Moz at an all-in sustaining cost of between R690 000/kg and R710 000/kg.

The underground recovered grade should be about 5.53g/t to 5.58g/t.

The company said that the guidance would be updated once Mponeng and Mine Waste Solutions have been integrated into Harmony’s asset portfolio.

5 – Free cash flow for 2020 was estimated at $70 million

Note: Free cash flow is the cash from operating activities minus CapEx.

The company had a profit of $70 million (estimated) in 2020 and versus a loss of $25 million in 2020. It is impressive progress, especially for next year’s gold price, now above $1,950 per ounce.

5 – Net debt as of June 2020 was down to $78 million

Note: The details above indicate six months and a yearly situation.

From the presentation above, we can see that Harmony Gold has an excellent debt profile.

Conclusion and Technical analysis

Harmony Gold’s recent results were encouraging despite a feeble production level in 2020 due to the impact of electricity constraints during the third quarter of FY20, the COVID-19 national restrictions.

The bottom line is that the company generates free cash flow with lower gold production and even slightly lower average grades yearly. It is a good omen, considering that the gold price is now well above $1,900 per ounce and production be much higher with the recent acquisition of the two mines Mponeng and Mine West Solution.

I have one concern about the Happy Valley in PNG and the project called Wafi-Golpu. Barrick Gold (NYSE:GOLD) is experiencing a lot of trouble in PNG with its Porgera mine. You can read about the issue in my article here.

In April this year, the government of Papua New Guinea has decided not to extend the mining lease for the Porgera gold mine. It was a real surprise for Barrick Gold and its joint venture partner Zijin Mining in which Barrick Gold owns 47.5%.

Technical Analysis

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HMY is trading within a descending wedge pattern with resistance between $6.30 and $6.60, where it would be wise to take about 25% off the table and support between $5.55 and $5.65. I recommend adding slowly at or below the support level, depending on the price of gold.

If the gold price can resume its positive upside and cross again $2,000 per ounce, I believe HMY will cross the resistance and eventually retest $7.50. Conversely, if gold cannot hold above $1,900 per ounce, we may experience a breakdown with a retest of the lower that I see between $4.50 and $4.00.

In conclusion, watch gold like a hawk.

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Disclosure: I am/we are long SBSW, GOLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I trade short term HMY but do not own a long term position in the company. However, I own a tiny position in SBSW now and GOLD.



Via SeekingAlpha.com