Harmony Gold: Rand Gold Price Leverage a Plus, Concerns Remain
Cost improvement
Precious metal producers (GDX) (SLV) like AngloGold Ashanti (AU), Barrick Gold (ABX), New Gold (NGD), and Eldorado Gold (EGO) are focusing on reducing costs to improve their margins in this volatile metal price environment. Harmony Gold (HMY) is also focusing on cost improvement. Its all-in sustaining costs (or AISC) improved by 7% quarter-over-quarter in rand terms. In US dollar terms, the improvement was even better at 15% to $950 per ounce, thanks to the rand’s weakness. Harmony has done an admirable job of reducing costs over the last few quarters.
Continuing exploration
Harmony is among the few precious metals companies that continue to spend on exploration. Its exploration expenditure increased quarter-over-quarter to $4 million due to an additional rig commissioning at Kili Teke.
Grade improvement
One of the significant cost drivers was the improved underground grade, which was 5.33 grams per ton. The improvement was 7% quarter-over-quarter. This grade is also higher than the company’s fiscal 2016 guidance of 5 grams per ton.
Management clarified during the call that the improvement isn’t on the back of high grading operations or over-mining. Management also added that many operations are still under-mining their reserves. While they’re pleased with the grade performance, there’s still a way to go to get to the optimal grade.
Going forward, if the rand gold price improves, lowering costs will widen margins even further. This effect could lead to significant free cash flow generation.
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