Our opinion on the current state of HAR

Harmony Gold Mining Company Limited (HAR) stands as a notable example of a marginal gold mine within South Africa's mining landscape. The nature of marginal mines—where the cost of extraction is closely aligned with the prevailing gold price—renders Harmony particularly sensitive to fluctuations in the rand price of gold. This sensitivity often results in a volatile share price, reflecting the inherent uncertainties and the narrow operational margins that limit the company's flexibility in managing cost increases or declines in gold prices.

Looking ahead, Harmony's strategic focus shifts towards the development of the Wafi-Golpu mine in Papua New Guinea, a venture shared equally with Newcrest Mining. This project, backed by a memorandum of understanding with the Papua New Guinean government, sets a definitive timeline for the mine's development, which is poised to significantly impact Harmony's financial and operational dynamics. The estimated cost of developing Wafi-Golpu and its associated processing plant stands at around US$2.8 billion, a substantial investment that poses a considerable financial challenge for Harmony, given its requirement to fund approximately R20 billion of the total cost.

In addition to its international ventures, Harmony has made significant local investments, including the acquisition of the Mponeng gold mine in 2021 for R4.2 billion. Mponeng, recognized as the world's deepest mine, introduces complex challenges associated with ultra-deep level mining. Moreover, Harmony's commitment to sustainability and cost efficiency is evident in its investment in renewable energy, notably the construction of a 30mw solar park in the Free State, with plans to expand its green power capacity by an additional 80mw.

Recent operational developments have underscored the risks and challenges inherent in Harmony's operations. Notably, the tragic loss of four employees at the Kusasalethu mine in May 2022 and the acquisition of the Eva copper project in Australia in October 2022 highlight the company's ongoing efforts to diversify its portfolio. The Eva project, which marks a significant shift towards copper, is expected to commence production in three years, contributing significantly to Harmony's gold and copper reserves.

Harmony's performance in the six months to 31st December 2023 has shown positive signs, with a 14% increase in gold production and an 18% increase in the average price received, attributable to an 8% decline in the rand. This led to a substantial 226% increase in HEPS and the declaration of a 147c per share dividend. The approval of the Mponeng extension project, which extends the mine's life and enhances profitability, alongside the strong performance of the Hidden Valley mine, underscores Harmony's potential for generating significant operating free cash flow.

Despite these developments, Harmony remains a high-risk investment, largely due to its exposure to the volatile gold market and the substantial financial commitments required for its expansion projects. However, the company's strategic diversification and recent operational successes suggest potential for significant transformation and growth, making it a noteworthy contender for investors closely monitoring the precious metals and mining sectors.