NEW YORK ( TheStreet) -- Harmony Gold ( HMY) has a lot of gold with one big problem: location. On paper, Harmony has a lot of positives. In its fiscal fourth quarter ended in June, the company's cash operating profit grew 49% while selling 345,266 ounces of gold at cash costs of $831 an ounce. The company is on track to produce 1.7 million ounces of gold in its next fiscal year and has 48.1 million ounces of reserves. Harmony also pays an annual dividend of 14 cents a share. Despite its cash flow, however, the company reported a headline loss of a penny per share because of a strong local currency, restructuring issues and rising electricity and labor costs. The company mines 96% of its gold in South Africa and is currently expanding in Papua New Guinea and Australia. Harmony recently entered into a preliminary agreement to buy Scorpio Gold's Caribou Gold Property in Nova Scotia as the company rushes to diversify into other locations. Its biggest problem, according to CEO Graham Briggs, speaking recently at the Denver Gold Forum, remains the stigma attached to South African miners. TheStreet: What's your biggest headache mining in South Africa? Briggs: In South Africa, a lot has been written about the mining charter and black empowerment. Harmony is in a good position on all these issues. Those aren't our risk areas but when you look at investors come overseas to Denver or New York and speak to investors they raise this as quite a big issue but it's really not a big issue for our company .... really the big issue is around the press and what happens there. So why aren't they factors for you? Briggs: If you look at black empowerment, Harmony's 33% black empowered. If you look at previously disadvantaged people who need to get into positions of management, Harmony is at 40% now
and the charter says 40%, so we've managed a lot of those issues in the past and going forward we'll continue to manage them. There are things we do when we operate so they aren't major issues but when you see a press report that says "South African mining hasn't transformed because they haven't got 40% previously disadvantaged or they haven't got black empowerment" ... that's probably true for the country as a whole but it's not true for us as a company. So for an investor looking at companies say that mine in West Africa vs. South Africa, say Randgold (GOLD) vs. Harmony, what would you tell investors as to why they should be looking at your mines in South Africa as a positive? Briggs: There are different South African mining companies; Harmony is more South African than the others. We've got about 96% of our production coming from South Africa and therefore we're exposed a lot to South African issues.
You keep saying that your finances are actually really healthy. Do you feel that investors don't know that? Briggs: Some of the financials often to the uninformed are very difficult to
understand , especially with the noncash items ... You have to look forward and you have to look at all your tax rates going forward ... and that sort of higher tax rate indicates much more profits but ... these things are not always easy to see. Your cash costs in the second quarter were $831 per ounce ; that's high. Why and what are you doing to change it? Briggs: The reason for that is typically we've had lower grades in South Africa .... our intent going forward is to get it to $630. We're really been focusing on higher grade areas, we've taken out those lower grade areas; those have been the areas that have been closed down and so we are focusing on those areas which are going to be much more profitable. When do you think you'll get to $600? Briggs: Probably in about four years time we'll be at about $630 an ounce. We have record high gold prices but it doesn't seem like Harmony can really take advantage of those prices yet. Is that true? Well, it's true for various reasons. Its true in that we have a very strong exchange rate as well in South Africa. When you look at gold last year, it went up 26% in dollars per ounce but in rand terms, it went up 6%. There's been quite a squeeze on inflation vs. the gold price in South African terms ... but going forward focusing on more output from new operations and higher grades ... that will bring back a lot of those advantages of capitalizing on the gold price. Are your finding and development costs rising as well? Briggs: Our capital expenditures are actually coming down ... now we are into the flat development and opening up of the ore bodies. Hidden Valley in Papua New Guinea is now commissioned so capital is basically spent there so our capex costs are coming down. In terms of an exit strategy: your Papua New Guinea asset is a 50% joint venture with Newcrest. Are you hoping they will buy you? Briggs: No, not at all. I think our 50% is very valuable and therefore we think there is a lot more potential there. We are not seeing the full value for that. We'll only see that when it goes through these various studies. Would you try to make yourself attractive to other bigger companies? Briggs: I think most companies again have this South Africa issue and therefore we're a bitter pill from a foreign company point of view. What is your gold price target? Briggs: The company's view is relatively conservative. I mean we're all gold bulls but relatively conservative. We do our planning around $1,050...but if you were going to ask me personally gold is going to go up there is no doubt about it with what you see around the world. I think last year was the first year for a long time when gold production in the world has actually gone up. There haven't been huge discoveries, and of course the capital bill to bring some of these mines into production has been significant. And then you know gold has shown over and over again that it really is a store of wealth. You can go into a shop in Boston and sell some of your gold jewelry, it's a store of wealth and its currency so it's good to have gold in your investment portfolio. What does $1,300 gold mean to Harmony? Briggs: Because again since our South African production is high it's really around the exchange rate so $1,300 is not converting into high South African rand per kilogram. The rand is very strong because people invest in these emerging markets in South Africa because you can get good returns from investments in South Africa. You can go to South Africa and invest money and get 5% returns; you can't do that in other currencies. You can't do that in the (U.S.) and get a guaranteed 5% return because interest rates are very low. We have very high interest rates so you can get that return and therefore there is this flow of cash into countries like South Africa which keep the South African rand strong. What are some trends you are noticing at the Denver Gold Forum? Briggs: You have seen that there is a lot of .... re-looking at older properties, relooking at the geology. This is where the gold price has changed for a lot of North American companies especially because that sort of gold price has translated into growth. Suddenly a project which was closed down maybe 10 years at maybe $400 an ounce is now really worthwhile to look at ... and there's some good potential for the gold mining industry. Edited for length and clarity.
-- Written by Alix Steel in New York. >To contact the writer of this article, click here: Alix Steel. >To follow the writer on Twitter, go to http://twitter.com/adsteel. >To submit a news tip, send an email to: email@example.com.
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