On Nov 14, we reaffirmed our Underperform recommendation on Harmony Gold ( HMY) factoring in high operating costs, volatility in gold prices and labor issues.
Harmony Gold saw its profit decline year over year in first-quarter fiscal 2014 (ended Sep 30, 2013) on lower sales. The South African gold miner, on Nov 8, logged a profit from continuing operations of $1 million for the quarter as against a profit of $51 million recorded a year ago. Lower gold prices and gold sales contributed to a roughly 22% year over year decline in revenues to $403 million.
Harmony Gold, a Zacks Rank #4 (Sell) stock, remains one of the highest cost major South African gold producers. Apart from electricity supply concerns, the company has labor issues, resulting in high operational costs. Cash operating costs rose on a sequential basis in the first quarter due to rise in wages and electricity tariffs.
Moreover, Harmony Gold’s operations are likely to be impacted by a slower-than-expected ramp-up in production at mines and gold price volatility. Weak gold prices coupled with higher costs are significantly affecting the company’s profitability.
Harmony Gold also remains exposed to geopolitical risks associated with potential mine shut downs and labor strikes. Labor disruptions at the company’s Kusasalethu mine resulted in a decline in gold production in fiscal 2013. Harmony Gold faces tough labor and wage negotiations (with demand for significant wage hike) and the labor relation environment remains volatile in the gold industry.
Mining Stocks That Warrant a Look
While we prefer to avoid Harmony Gold, other companies in the gold mining industry with favorable Zacks Rank are Pretium Resources Inc. ( PVG), Golden Star Resources, Ltd. ( GSS) and Lake Shore Gold Corp. ( LSG). While Pretium Resources holds a Zacks Rank #1 (Strong Buy), both Golden Star Resources and Lake Shore Gold retain a Zacks Rank #2 (Buy).