Harmony Gold: Headwinds Are Too Strong To Ignore

Concord Gold (HMY) just lately reported Q3 2019 outcomes that reveal Y/Y enchancment in each manufacturing and price metrics. The devaluation of the Rand in opposition to the US greenback was important in decreasing manufacturing prices. However, the AISC of the corporate is approach too excessive to allow worthwhile operations. The corporate has recorded adverse EPS, and the unfavourable mining setting in South Africa is one other crimson flag. Additional, HMY has been growing its debt and likewise its shareholder base. This might additionally hamper the corporate’s earnings profile going ahead. Let’s get into the small print.

Determine-1 (Supply: Prime500)

Throughout the quarter ended March 2019, HMY produced 331,603 ounces of gold, recording a 17% Y/Y enhance. AISC got here out at ~$1,286/oz. (Q3 2018: $1,456/oz.), witnessing a 12% Y/Y enchancment. Nevertheless, the typical quarterly gold costs realized in the course of the quarter have been ~$1,324/oz. and we are able to see that the corporate is working at very skinny margins per ounce of gold manufacturing. A technique this case might enhance is that if there may be important upside in gold costs from the present ranges. This could allow HMY to witness stronger margins which might ultimately drill down positively on its earnings. Though now we have but to see HMY’s earnings for the March quarter, as a result of its excessive prices (in relation to gold costs) I imagine that the earnings’ expectation isn’t very beneficial (Determine-2).

Determine-2 (Supply: Concord Gold)

Why do I think about HMY’s AISC as being too excessive? Let’s see what value metrics have been reported by peer gold miners. It’s price noting that in the course of the interval underneath evaluate, Kinross Gold (KGC), B2Gold (BTG), Alamos Gold (AGI), and IAMGOLD (IAG) reported per ounce AISC of $925, $848, $937, and $1,086, respectively. These numbers set up how HMY is uncompetitive in opposition to friends since its AISC was ~$1,286/oz (and the very best amongst friends).

As talked about earlier, HMY’s value metrics (as in, AISC) confirmed Y/Y enchancment. This was partially because of the weakening Rand in opposition to the USD. Since HMY’s native mining prices (corresponding to labour prices, and so forth.) are paid within the Rand, and the identical are reported in USD, Rand’s weak spot would imply decrease reported manufacturing prices (in USD). On that be aware, the typical change fee between the 2 currencies deteriorated from R11.95/$1 to R14/$1 (discuss with Determine-2), and at the least this was a constructive for the corporate. In my view, if the Rand reveals indicators of a restoration, then that might be one other adverse for HMY’s mining dynamics.

One other main issue at play right here is the unsure mining setting in SA (learn: South Africa). Regardless of having an alarmingly excessive unemployment fee (of ~28%), the SA mine employee unions usually wreak havoc with the manufacturing schedules of mining firms by way of strikers/stoppages, and so forth. On that be aware, the AMCU (learn: the Affiliation of Mineworkers and Building Union) has been on strike in Sibanye Gold’s (SBGL) gold mines since November 2018 and supposed to increase the strike to different SA miners, together with HMY. The union’s request for such motion was rejected by the court docket; in any other case, we might have seen disruption in HMY’s operations. For my part, the enemy has been held at bay however not eradicated altogether and HMY’s manufacturing remains to be threatened by the chance of union strikes.

These danger elements have been absorbed within the share worth of HMY and lead to a poor correlation between the costs of gold and HMY. Take a look at Desk-1 which reveals that HMY has a excessive correlation with a bearish gold market and a really low correlation with a gold market bull.

Desk-1 [Prepared by Aitezaz Khan for Seeking Alpha]

This suggests that any important upside in gold costs would solely enhance the corporate’s share worth barely. Gold costs have been depressed for some time and have just lately proven indicators of restoration (within the wake of rising US-China commerce tensions). However they haven’t been in a position to forged any noticeable impression on HMY’s share worth (Determine-Three).

Determine-Three (Supply: Searching for Alpha)

From a monetary perspective, HMY’s excessive debt and increasing shareholder base are the warning indicators. HMY has been growing its long-term debt through the years with unmatched money property. On the finish of December 2018, whole debt stood at ~$415 MM whereas the corporate solely had ~$100 MM in money and ~$322 MM in present property. The corporate has an alarming D/E ratio of 1.61x, and the ever-increasing shareholder base (Determine-Four) creates extra pressures on future earnings. For the half-year ended December 2018, HMY’s EPS stood at $zero.01/share and had declined from $zero.15/share final yr.

Determine-Four (Supply: SENS-Interim Outcomes)

The technicals look enticing at this level, although. The 52-week worth vary lies between $1.42 and $2.20. On the time of writing, HMY final traded at $1.60 and that worth was approach beneath the median worth of the 52-week vary (at $1.81/share) and the potential upside can also be indicated by the corporate’s technical worth chart (Determine-5).

Determine-5 (Supply: Finviz)

Additional, HMY is optimistic in regards to the near-term commissioning (Determine-6) of its Wafi-Golpu copper and gold undertaking that might act as a progress catalyst within the medium to long run.

Determine-6 (Supply: Presentation)

However, the corporate’s near-to-medium time period outlook would proceed to be haunted by excessive prices, weak correlation with gold costs, excessive debt and increasing shareholder base. For my part, aside from the correlation with gold costs, the remaining three elements would impression the corporate’s earnings going ahead and can restrict any important upside in its share worth.

Disclosure: I/now we have no positions in any shares talked about, and no plans to provoke any positions throughout the subsequent 72 hours. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Searching for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.

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