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Interview with the President: Harmony Gold

By James West
MidasLetter.com
Monday, April 13, 2009

During 2008, Harmony Gold Mining Company Limited (NYSE:HMY), one of the world’s top ten gold producers, saw its gold production fall to 1.55 million ounces from 1.75 million ounces in 2007. Graham Briggs, who became CEO in August 2007, was determined to put the company on a more profitable track, and decided to ease up on the acquisition of mature mines, pay down debt, and put the company’s focus on increasing production while driving cash costs down.

I sat down with Graham Briggs in Toronto last month and posed a few of the questions that our subscribers had been asking about the company and its future.

James West: What is going to drive shareholder value growth in the immediate and medium term?

Graham Briggs: We’ve been spending a lot of money on growth projects which will see our production grow from the current level of 1.6 million ounces up to 2.2 million ounces in 2012. Now that’s without any new acquisitions or new projects. That’s entirely from our existing project portfolio.

The first one of these will be the Hidden Valley gold mine where we have entered into a partnership with Newcrest Mining Limited and our share of that is 130,000 ounces per year. Then we’ve got three projects in South Africa of which the infrastructure is virtually completed, and the shaft sinking and the shaft infrastructure are just about done.

We’ve worked hard to reduce our debt in the last year and a half and we will have zero net debt by June 2009. Once we have achieved that goal we will look at possibly paying a dividend in the next financial year.

We’re looking at a lot of internal growth through a pipeline of projects but we are also looking further afield.

James West: What are your plans for improving cash costs? Are you comfortable with the current cost structure?

Graham Briggs: We’ve traditionally been a high cost producer. With these new projects the underground grades actually increase, so we’re producing more ounces per tonne, and thus our cash costs are coming down in the future.

Although the cost of capital has become expensive recently, the strong R/kg gold price enables us to put a good deal of money in the bank after all the bills are paid.Our cash costs have been high but that is improving as we move forward.

James West: What about electricity in South Africa?

Graham Briggs: A year ago or so that was a major, major issue. Obviously there has been a lot of attention focused on the electricity issue by the government of South Africa. We’ve been negotiating and getting our baseline requirements signed off. But because of the commodity prices a lot of the smelters and high consumption industrial users have been shut down, which has provided us with a bit of a reprieve.

Eskom is building power stations, and there may be potential for problems going forward until these new stations come on stream, but the problem is being dealt with and will diminish in the future.

James West: I’ve seen statements indicating your plans to grow through acquisitions going forward. Will Harmony look at projects far from the southern hemisphere where it has traditionally operated, or do you envision staying closer to home?

Graham Briggs: We’re a gold mining company, so we have to look for gold where gold is found. South Africa is a great place to be, but there are not a great deal of acquisition opportunities here. We do want to upgrade our portfolio and we’re in a unique situation in that we are finally well positioned to do that thanks to our reduced debt. So we’re looking in gold countries, greenstone belts throughout West Africa. All over the place really…we really don’t have a great deal of experience with copper gold porphyry systems though we do have some of those in Papua New Guinea no, so that’s going to be a great learning curve for us.

We’re an international gold company so we have to look at all regions in the world where there’s gold.

James West: So do you see partnerships with junior companies as a source of new projects? Do you maintain good relationships with juniors?

Graham Briggs: Well typically in the past we really haven’t but we’ve for the last 8 months or so been looking around, We have a new business team in an office in Brisbane as well as an office in South Africa and we’ve got a few people who have been conducting some due diligences, chatting to some of the junior companies and so we’re spreading our net wide and far at this point.

James West: What is the minimum size deposit you’d be looking to acquire through joint ventures or partnerships with juniors?

Graham Briggs: Well if it was in a country where we haven’t operated or we don’t operate right now, we’d be looking for something sizable – you know sort of 150,000 ounces per annum- that’s what we would want to see added to our cash flow, so obviously we’re being a bit selective, but as you know, there are not a lot of quality deposits for sale, so we’re looking but I also think there are some good projects in the world and our financial situation is healthy enough that if we can find a situation where we can invest some of our money in a deposit and help the existing owners develop it and work up to a nice stake in that deposit, then that’s the kind of farm-in situation we would be interested in looking into.

James West: How are your shareholders distributed?

Graham Briggs: We have a dual listing in the United States on New York and NASDAQ which provide our North American shareholders access to Harmony’s shares. For FY08 approximately forty percent of our shareholders were in North American, forty percent in South Africa, and twenty percent in London and throughout Europe.