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Harmony Remains Neutral

Zacks Equity Research

We maintain our Neutral recommendation on Randfontein, South Africa based Harmony Gold Mining Company Limited (NYSE:HMY - News). The company conducts underground and surface gold mining. It is also engaged in related activities such as exploration, processing, smelting and refining.

Harmony recorded a net profit of 16 cents per share in the first quarter of 2012 versus last quarter’s loss of 1 cent per share and year-ago quarters profit of 3 cents. Results were a penny ahead of the Zacks Consensus Estimate of 15 cents.

Revenues were up 30.3% to $550 million versus $422 million in the prior-year quarter and up 8.9% sequentially from $505 million. The increase in revenue was driven by a rise in the gold price received, offset by a decrease in gold sold.

With high quality assets and a large reserve base, Harmony has strong long-term prospects. The company has significantly improved the quality of its production, which it will continue to do with better cash costs and free cash flow in future.

Harmony also has several world-class mines in South Africa, which are currently in the build-up phase, and together with Hidden Valley, will be significant contributors to Harmony’s set production targets.

As of September 30 2011, Harmony’s mineral reserves amounted to 40Moz of gold, spread across Harmony’s assets in South Africa and PNG. The reserves of Kusasalethu, Doornkop, Tshepong and Phakisa in South Africa and Hidden Valley in PNG now constitute 45% of Harmony’s total mineral reserves. Once the pre-feasibility study of Wafi-Golpu is completed, more ounces from PNG will be added to Harmony’s reserves.

However, Harmony’s operations are likely to be impacted in the near term by lower-than-expected rand−gold price, slower-than-expected ramp-up in production at mines and higher-than-expected input cost inflation.

Harmony Gold remains the highest cost South African major producer. Currently, the company is struggling to make money (due to a strong rand and sharp unit cost increases), which may lead to further restructuring. We remain concerned about Harmony’s low output as it strives to reduce the cash cost of production.

The company competes with Newmont Mining Corp. (NYSE:NEM - News) and AngloGold Ashanti Ltd. (NYSE:AU - News).

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