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Harmony Gold Mining Company Limited 06 June 2018 by Mark Ingham

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Harmony-Gold-Fundamental-Analysis-by-Mark-Ingham

As part and parcel of the Moab Khotsong acquisitions, Harmony has successfully raised new capital via an initial share placement and a subsequent share subscription. When all is concluded, R1 262 million or around $100 million will have been collected. This is a net positive for the stock as Harmony is raising less than I had modelled and indicated in previous notes. The placement and subscription will be less dilutionary to EPS therefore and the dilution will be temporary. The announcement of the successful capital raise also brings clarity and puts the acquisition of Moab Khotsong behind Harmony.

Gold Mining            

Harmony Gold Mining Company Limited                      

“Equity raise rounds off the Moab deal”

Share price: R19,84

Net shares in issue post placement and subscriptions shares: 511,3 million

Post equity raise market cap: R10,1 billion

Blended fair value post equity raise: R22

Trading Buy and Portfolio Buy

Trade Now!

 

 

Harmony-Gold

 

As part and parcel of the Moab Khotsong acquisitions, Harmony has successfully raised new capital via an initial share placement and a subsequent share subscription. When all is concluded, R1 262 million or around $100 million will have been collected. This is a net positive for the stock as Harmony is raising less than I had modelled and indicated in previous notes. The placement and subscription will be less dilutionary to EPS therefore and the dilution will be temporary. The announcement of the successful capital raise also brings clarity and puts the acquisition of Moab Khotsong behind Harmony.

The placing was not an offer to the public. Furthermore, African Rainbow Minerals Limited (“ARM”) agreed to subscribe for as many shares as necessary to keep its shareholding at 14,29%. ARM's participation is subject to Harmony shareholder approval. 

Existing and new institutional investors participated in the placing. 55 million new shares were placed, raising R1,0 billion or $82 million at an anticipated R19,12 per share.

In addition to these shares, ARM is subscribing for 11 million shares at the same placing price of R19,12.

Taking the placement and subscription together means a total of 66 million shares or 15% of the shares in issue prior to the equity raise. Therefore, post the placement and subscription there will be 511,3 million issued shares.

Absent the Moab earnings, this raise would have meant a 13% dilution at EPS level if there were no extra earnings. However, as Moab will contribute to earnings I calculate that the dilution in a full year is limited to 7% and is then in the base. My earlier assumptions had EPS dilution of between 13% and 17% so this is a small positive for those shareholders who have not been part of the capital raise.    

In earlier notes I had assumed Harmony would raise equity at around R21 per share but with up to 135 million new shares issued, double what they have actually issued. The company therefore probably feel comfortable with the cash flow and gearing situation going forward but there could have been pushback too from shareholders to go easy on a share issue, with dilutionary consequences.

The institutional accelerated bookbuild was filled quickly with ARM further subscribing for as many shares as necessary to keep its shareholding in Harmony at 14,29%.

Hidden Valley Harmony Gold

In total, Harmony raises R R1 262 million or around $100 million. The cash will pay down some of the $150 million bridge loan raised for buying Moab Khotsong, effective March 2018. $50 million of the $200 million drawn was repaid.

In October 2017, AngloGold Ashanti entered into a sale and purchase agreement to dispose of assets to Harmony for $300 million cash, with the key asset being Moab Khotsong mine, which has included the Great Noligwa mine.

Moab is a relatively new deep-level shaft, and having a potentially long-life. There are three vertical shafts and the orebody has three separate blocks. Mining is 1 800 meters to 3 000 meters below ground. The mine produced 280,000 oz of gold in the year to 31 December 2016 at an all-in-sustaining-cost of $884/oz. The ore reserve is 5 million oz and the mineral resource 17,5 million oz, including Project Zaaiplaats with 3,3 million oz of the ore reserve and 6,8 million oz of the mineral resource.

Moab Khotsong has a positive cash flow benefit for Harmony, boots underground recovered grade, and increases the South African underground mineral resource by 38% (i.e. 17,5 million oz). The deal adds a quarter of a million new ounces of gold in a full year at all-in sustaining cost below Harmony's target of US$950/oz. The average underground recovered grade rises to 5,7g/ton from 5,07g/ton in F2017.

Moab generated EBITDA of R2,1 billion and attributable profit of R852 million in 2016. Net asset value if R3,0 billion (less than the purchase price). On a free cash flow basis, Moab has generated over R3 billion in the last four years.

In F2019, Moab would contribute about 28% of Harmony EBITDA of R7 billion on a pro forma basis.   

For the year to June, Harmony is on track with gold hedging underpinning profitability. Production will be 1.1 million oz or 1,18 million oz with Moab.

Cash costs were up 5% for the nine months at R467,090/kg or $1 215/oz. F2018 all-in sustaining costs target is R520,000/kg. 

Harmony has a lower overhead compared with AngloGold and expects a 20% reduction of the overhead costs with Moab.

F2019 result will benefit from Moab Khotsong and the ramping up of Hidden Valley.

On a blended DCF and sum-of-the-parts basis I value Harmony, with the new share capital in issue, at R22.

Trading Buy at R19,84.

Trade Now!

Wishing you profitable investing, until next time.

Mark N Ingham     

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