South African players consolidate Free State assets

Harmony Gold (HGMCY-Q), which has made a name for itself by acquiring marginal or unprofitable South African mines and turning them around, has submitted an undisclosed cash offer to acquire all of AngloGold‘s (AU-N) assets in the Free State.

The mines in question — Bambanani, Tshepong, Matjhabeng and Joel — produced a total of 1.3 million oz. in the 2000 calendar year at an average cost of US$270 per oz. For the first nine months of 2001, they poured 908,000 oz. at a cash cost of US$233 per oz. and a total production cost of US$274 per oz. During those three quarters, Bambanani and Tshepong turned in operating profits of US$6 million and US$18.3 million, respectively, whereas Matjhabeng operated at a loss of US$7 million and Joel, at a loss of US$7.8 million. Harmony’s bid was submitted jointly with African Rainbow Minerals.

“We have previously stated that the need for consolidation in the region is strong and has the potential to unlock value through the logical exploitation and optimization of all the Free State mining operations,” says Bernard Swanepoel, Harmony’s chief executive officer.

AngloGold has received a competing bid for its Free State assets from another player — a consortium led by black empowerment group Khumo Bathong Holding. The consortium includes JCI Gold, Mvelaphanda Holdings and New Mining Corp. In a peculiar twist, the Khumo consortium also announced that it had made an offer for Harmony’s Free State assets, and that the offer was flatly rejected.

“The Free State consolidation is not a strategy we dreamed up in the last two months,” says Swanepoel. “It is something we have been at for six years. This is where Harmony comes from, and this is where we plan to be.”

AngloGold is in the process of choosing. “The primary concern here must, of course, be the received price,” states Chairman Bobby Godsell in an open letter to shareholders for the quarter ended September 2001. “We are, however, aware of the need to be mindful of the character of the new entity after the sale. Here, considerations are the imperative to consolidate ownership and management in the region, the capacity and record of the purchaser in ventures of this kind, and a concern to promote sustainability and viable black economic empowerment in the mining sector.”

In March, Harmony purchased the Elandsrand and Deelkraal mines, collectively known as Elandskraal, from AngloGold for R1 billion (US$130 million).

Harmony’s South African operations include Freestate, Evander, Randfontein, Kalgold and Elandskraal, in addition to the newly acquired New Hampton gold mines in Australia. Before embarking on a trail of acquisitions, the company’s sole producer in 1995 was the Freestate operations, where output totals 580,000 oz. per year.

Production for fiscal year ended July 31, 2001, totalled just over 2.1 million oz. at cash costs of US$234 per oz., compared with 1.6 million oz. at US$246 per oz. in fiscal 2000. The Freestate operations contributed 686,000 oz. in fiscal 2001 and turned a cash operating profit of R46.7 million, down from R188.8 million in the previous year. The decrease in operating profit is attributed to a lower recovery grade of 4.04 grams, off 0.65 gram from the previous year. At the Freestate operations, three of the original shafts were closed over recent months.

For the first quarter ended Sept. 30, 2001, output from Freestate was 5.7% higher than in the previous quarter, when 156,477 oz. were poured. Cash costs between the two periods rose slightly to US$272 from US$267 per oz. Proven and probable reserves at the operations are estimated at 44.3 million tonnes grading 4.78 grams, equivalent to 6.8 million oz. Total resources stand at 570 million tonnes grading 3.55 grams, or 65 million oz., including 45 million inferred ounces.

“It is our belief that, in the short term, the South African gold mining industry, and more specifically the Freestate goldfields, has reached the stage whereby orebody consolidation remains the only alternative to create increased operational margins,” states Swanepoel in the company’s 2001 annual report.

In June, Harmony suspended mining at its lone Canadian operation, the Bissett gold mine in Manitoba. Harmony had been unable to turn a profit at Bissett since acquiring it in 1998. The mine produced 44,303 oz. at a recovered grade of 5.18 grams for fiscal 2001, resulting in an operating loss of R3 million.

The decision to shelve Bissett and close certain shafts at Randfontein, Evander and Freestate forced Harmony to take US$28.3 million in writedowns at year-end. This lowered net earnings to US$15.2 million (or 14.5 per share) on sales of US$591 million, compared with a profit of US$60 million (68 per share) on sales of US$472 million in the previous year.

In the first quarter of fiscal 2002, Harmony’s output rose 4% over the previous quarter to 616,038 oz. at marginally higher cash costs of US$233 per oz, compared with US$230 in the previous quarter (ended June 30). This puts the company on track for annualized production of 2.5 million oz.

Cash operating profits were up US$1 million over the previous 3-month period at US$25 million, and earnings in the September quarter more than doubled to US$11 million (8 per share), reflecting much reduced interest charges on the lower level of company debt.

‘Spectacular’

“Evander continues to do spectacularly well,” says Swanepoel, adding that Randfontein is realizing its potential now that the money-losing No. 4 shaft has been abandoned. Also, Elandskraal is generating more cash than what is required for its capital, and Kalgold is making money as well.

Meanwhile, Down Under, the company has announced it will invest A$50 million to acquire an initial 31.1 % interest in Australian junior Bendigo Mining, which is developing a high-grade underground gold mining project in Victoria. Swanepoel says the mineral resource of the project is in the order of 12 million oz. Harmony will hold some 360 million options priced at A30 apiece, which, if exercised, would increase its ownership of Bendigo to 50.1%.

Closer to home, Harmony continued prefeasibility studies on the Kaplats platinum-palladium discovery, near Stella in the Kalgold region of the North-West province. Six separate zones of near-surface mineralization have been identified over distances of 500-1,000 metres. The mineral resource has been estimated at 66.5 million tonnes grading 1.6 grams of combined platinum-palladium-gold, equivalent to 3.4 million oz. platinum group metals (PGMs), to a depth of 150 metres below surface. In some of the target areas, there is potential for higher-grade sections running 4.5 grams combined PGMs over 2-4 metres.

During the last quarter, the company spent R2.3 million on additional drilling to confirm the geometry of three reef zones and obtain representative samples for metallurgical tests. Initial tests confirmed an overall recovery of at least 65%. A further 130 overburden boreholes investigated new target areas. “There is no doubt we will be adding to the overall resource base,” says Swanepoel.

Gold Fields expands

The expansion drive of South Africa’s Gold Fields (GOLD-Q) to add offshore ounces to its yearly production base of 3.7 million oz. has been heightened by the possible sale of its underperforming Free State assets.

The Harmony and African Rainbow Minerals joint-venture has been granted an exclusive option to negotiate the purchase of the St. Helena and Oryx mines, setting the stage for a possible asset swap involving a 19.9% stake in Goldfields of Australia from Harmony, which currently owns 23%. The swap will also likely involve some 3.7 million Western Area shares held by Gold Fields.

During fiscal 2001, Australia’s Goldfields produced a record 614,769 oz. at a total cash cost of US$205 per oz. (A$417 per oz.). Goldfields is set to merge with fellow Aussie gold miner Delta Gold, which will catapult the new company above 1 million oz. per year. Harmony’s 19.9% stake in Goldfields would represent a 7-8% interest in the new company.

Together, the St. Helena and Oryx mines in the Free State contributed 285,000 oz. in the year ended June 30, 2001, at an average cash cost of US$318 per oz. Production at Oryx slipped to 149,000 from 183,000 oz., while cash costs rose 7% to US$329 per oz. St. Helena saw its production fall 23% to 136,000 oz., while cash costs jumped US$36 per oz. to US$307.

Unable to curtail the flow of red ink at the poorly performing Oryx mine and faced with an operating loss, for the year, of US$14 million, Gold Fields wrote down its carrying value to the tune of US$253 million. Operators decided to reduce the mine’s output and integrate the smaller entity into the neighbouring Beatrix mine. Oryx was then renamed the Beatrix 4 shaft, and reserves there were recalculated based on a new geological study and a gold price of US$270 per oz. at 2.9 million oz, compared with 6.9 million oz. previously.

St. Helena incurred losses for most of fiscal 2001, until April, when operators decided to phase out operations over the next 2-3 years. The No. 10 shaft was mothballed and St. Helena took an US$8.5-million hit in writedowns.

Significant gold resources remain at St. Helena (mostly at No. 10), but at current prices, they are not economic. Reserves stand at 2 million tonnes grading 5 grams gold, equivalent to 320,000 oz. Measured and indicated resources are pegged at 4.7 million tonnes grading 15.5 grams, or 2.3 million oz.

During the first quarter ended Sept. 30, 2001, St. Helena poured 31,900 oz. at a cash cost of US$306 per oz, versus 37,500 oz. at US$255 in the previous quarter.

The possible fire sale of St. Helena and Oryx comes on the heels of a recent US$232-million bid by Gold Fields to buy WMC‘s (WMC-N) St. Ives and Agnew mines in Western Australia. Gold Fields, along with Toronto-based Repadre Capital (RPD-T), has also proposed a A$63-million (US$32-million) cash-plus-shares deal to acquire Ranger Minerals‘ 90% stake in the Damang mine, next door to Tarkwa in Ghana. These operations are expected to add some 800,000 oz. to Gold Fields’ annual production profile, while, at the same time, lowering its cost base.

Gold Fields’ attributed production for fiscal 2001 was 3.7 million oz., compared with 3.9 million oz. in the previous year. Cash and total production costs improved to US$195 and US$214 per oz., respectively, against US$216 and US$240 per oz. in 2000.

The major reported a net loss of US$119 million for the year ended June 30, 2001, after taking US$223 million in after-tax writedowns during the fourth quarter, including US$8 million in the carrying value of its investments in Eldorado Gold (ELD-T), Aquest Minerals (AQU-V) and Brazilian International Gold Fields (BGZ-V).

Strong performance

The first quarter ended Sept. 30, 2002, was highlighted by a 4% increase in production to 886,000 oz., led by strong performances at Tarkwa in Ghana and Kloof in South Africa. Tarkwa achieved record production levels, increasing 28% over the previous quarter to 150,000 oz. at a slightly lower cash cost of US$163 per oz. Kloof produced 279,000 oz., up 6% over the June quarter, and cash costs improved by US$6 to US$210 per oz.

Despite a weakening Rand, overall cash costs rose to US$200 per oz. from US$195 per oz. as a result of annual wage increases, higher insurance premiums and higher seasonal power rates. The exchange rate in the June and September quarters averaged R8.03 and R8.37, respectively.

At Driefontein, production came in relatively unchanged at 324,000 oz., against 322,000 oz. in the June quarter. Cash costs increased to US$189 per oz., from the previous quarter’s US$178 per oz. In the Free State, production at Beatrix was marginally lower at 145,000 oz., while cash costs rose 9% to US$222 per oz. (Beatrix is excluded from the proposed Free State asset swap with Harmony.)

Gold Fields posted net earnings of US$24.3 million (5 per share) on US$274 million in revenue in the three months ended Sept. 30. The comparable profit for the June quarter, after adjusting for year-end writedowns, was US$25.1 million on revenue of US$269 million. Operating profit for the September quarter was up 5% in U.S. dollar terms over the previous quarter, at US$59 million.

Meanwhile, Gold Fields and Outokumpu continue to advance the Arctic Platinum joint venture in northern Finland. Recent drill results have more than doubled the previous resource estimate in two deposits to 6 million oz. combined palladium, platinum and gold, based on a cutoff grade of 0.5 gram per tonne.

The overall resource of the Konttijarva and Ahmavaara deposits, in the Konttijarva-Suhanko intrusion, is estimated at 117.5 million tonnes grading 1.19 grams palladium, 0.28 gram platinum and 0.11 gram gold, plus 0.19% copper and 0.08% nickel. This is equivalent to 4.5 million oz. palladium and 1.1 million oz. platinum.

Gold Fields says that scoping studies for a project in the order of 400,000 oz. per year suggest “sturdy economics” at prices below US$350 per oz. for platinum and palladium.

Metallurgical studies on representative samples from each deposit are in progress, and the Arctic partnership intends to incorporate these into a bankable feasibility study by September 2002.

Drilling has begun on a third resource target, the high-grade SK reef in the Portimo complex, 15 km from the proposed plant site of Ahmavaara and Konttijarva.

Gold Fields can earn a 51% interest in the project by spending US$13 million over six years. The South African major has already spent US$11 million and earned a 49% vested interest.

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