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)--Thirteen-hundred dollar

gold prices

don't mean that much for South African gold miners.

The rand, the local currency, is rising at breakneck speed as investors rotate into higher-yielding currencies and the U.S. dollar continues to weaken. That means that gold miners like

Harmony Gold

(HMY) - Get Free Report

, which operates in South Africa, are not able to take advantage of high gold prices. "Thirteen hundred dollar gold is not converting into high South African rand per kilogram," says CEO Graham Briggs.

Gold's 26% rally in 2009 in U.S. dollar terms translated into just a 6% rally in rand terms, and 2010 is shaping to be no different. "There's been quite a squeeze on inflation vs. the gold price in South Africa," says Briggs.

South African miners also have to combat low-grade gold and high electricity costs, both of which make it more expensive to produce an ounce of gold.

In the second quarter, despite rising profits, Harmony reported a net loss of 6 cents a share due to the high rand, cash costs of $831 an ounce and ballooning electricity expenses.

Despite all these problems, however, Briggs told me at the Denver Gold Conference that the biggest problem for South African miners is actually bad press. He believes the media loves to pick on South African mining issues, and one small negative headline means a big loss of investor confidence.

Briggs is trying to convince investors that gold mining is tough everywhere and that Harmony is conditioned to dealing with these problems. "If you're in South Africa, you manage a lot of those risks as part of an ongoing process."

For his part, Briggs is hoping to lower the company's cash cost to $630 an ounce in four years as Harmony shuts down low grade deposits and invests time and money into higher grade gold.

In terms of electricity costs, Briggs faces a deeper issue. Harmony has cut 28% of its power since 2008 but is still a big consumer of electricity because it has deep underground mines that require water, air flow and transport for workers.

Briggs estimates that Harmony's electrical expenses equal 13% per gold ounce and will keep rising. Briggs hopes to just stay on top of costs and get creative like recirculating water throughout their mines.

Harmony has been fighting these problems for a while. Although the company has been independent for only 15 years, it has been in operation since 1950 under the management wing of

Randgold Resources

(GOLD) - Get Free Report

, a West African gold miner. Nevertheless, Briggs is trying to diversify the company's operations before bad press can truly hurt Harmony.

Currently, 96% of its production comes from South Africa, but Harmony does have a project in Papua New Guinea jointly owned with


as well as exploration properties in South East Asia and Australia. "We've had a lot of eggs in our South African basket and we're trying to get out of that and have a few more in other areas."

In five years, Briggs expects Harmony to produce 2 million ounces of gold as compared to 1.46 million ounces in 2009.

Although gold mining in South Africa has a negative reputation and is undoubtedly difficult, Briggs doesn't believe it's bad, just different.


Written by Alix Steel in New York.

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