Since gaining independence in 1994, Harmony Gold Mining Company Limited (JSE: HAR; NYSE: HMY) has gone from the brink of closure to being one of the world’s leading gold companies. Last year it produced 1.17 million ounces of gold – the third largest amount mined in South Africa and the eleventh most worldwide. As the company enters 2015, however, Harmony’s focus rests not only on its existing mines but also on an exciting project that’s yet to reach feasibility.
The Golpu project in the Morobe Province of Papua New Guinea is owned by a 50/50 joint venture between Harmony and Newcrest Mining Limited (ASX: NCM). In terms of both copper and gold grades it is comparable with Grasberg, the world’s greatest gold mine, while in size the ore body is five times the height of the Empire State Building. Harmony CEO Graham Briggs calls it a “spectacular asset,” against which Harmony’s other projects pale into insignificance.
“It is a huge, high-grade resource that even at this early stage we see supporting a very long mine life of probably 70 years or more,” he says. “In fact, Golpu is probably the only high-grade, large copper deposit in the world that is undeveloped. There are other large deposits of course, but none with this type of grade.”
Drill results from the Golpu deposit recorded grades as high as 428 metres at 2.2g/t Au and 2.9% Cu. The 1,073 million-tonne deposit is estimated to contain a stunning 20.2 million ounces of gold, 9,450 kilotonnes of copper and 72 million ounces of gold equivalent overall.
“In these times of uncertainty about commodity prices – in our case copper particularly, as well as gold – the viability of this asset remains certain,” Graham adds. “Starting off with a relatively smaller mine that focuses on the highest-grade ore, with low capital expenditure, will ensure that Golpu survives future market fluctuations, even when copper and gold prices sink lower than they are currently. If those prices rise, however, the mine could be massively profitable.”
In addition to boasting world-leading size and grade, Golpu has a highly advantageous location. Papua New Guinea lacks the long mining history of countries such as Australia but it has quickly emerged as an exceptional copper-gold province. The islands contain five operating mines already – Grasberg, Ok Tedi, Porgera, Hidden Valley and Lihir – in addition to several development projects.
Golpu in particular lies in an area of relatively flat topography, reducing the bulk earthworks required, and in close proximity to important regional infrastructure. “One big advantage of Golpu is that it’s only about 62 kilometres away from Lae – the biggest port city in Papua New Guinea,” says Graham. “It’s also close to Nadzab airport, an important regional access point, and there are several regional power supply options. So it definitely has an advantage in being able to utilise existing infrastructure in the region, compared with other projects in the country which may be very far from infrastructure like this.
“But in the immediate mining area it’s really just an exploration project, in that it has nothing but minor local roads. We need to get going with that kind of infrastructure – in particular, commencing early underground access so that we can really go down there, have a look at this ore body and be able to create the infrastructure with which to mine in the future.”
This work will make up a significant part of the feasibility study, which Harmony aims to complete by the end of 2015. The company will then be able to apply for the mining lease, with a view to beginning production in 2020 and reaching full Stage 1 production capacity by 2025. “Early production in 2020 is critical, because that will help pay the bills for putting the full production infrastructure in place,” Graham explains.
Stage 1 of the Golpu project will target the upper, higher-grade portions of the ore body and mine 30% of the tonnes and 40% of the metal content. The current plan places this mine in the lowest cost quartile for copper, with an attractive Internal Rate of Return (IRR) of 17%. This initial stage of the mine is projected to last 27 years, over which annual production will peak at 320,000 ounces of gold and 150,000 tonnes of copper. Stage 2 will go deeper to optimise resource extraction, mining 70% of the tonnes and 60% of the metal content. The ore body remains open at depth, leaving the potential for yet more development.
Working in the background of Harmony’s work on Golpu are its nine existing underground mines, single open-pit operation and several surface sources in South Africa. Their combined production of 1.17 million ounces of gold in Financial Year 2014 made Harmony the 11th largest gold producer in the world last year. The company reached its current prominence primarily through buying old mines – from Anglogold Ashanti, Goldfields and others – and managing to eke more life out of the assets than anyone else thought possible.
“It’s been an exciting journey, but never an easy one; our margins have always been fairly skinny,” says Graham. “But we’ve succeeded on account of our attention to detail and continual focus on operations. We can squeeze a little bit more out of assets than other companies can, particularly in South Africa, and this has forced us to focus heavily on the costs and the grams per tonne.”
The tendency of Harmony’s margins to be tight means that its operations have traditionally been very sensitive to changes in the gold price. Graham admits that the low gold price of last year affected Harmony “a great deal,” requiring it to do some restructuring to improve on profitability. As 90% of Harmony’s gold is produced in South Africa, what really affects its balance sheet is the rand gold price. This has been flat for the last three years due to the weakening of the rand against the US dollar, but the climbing upwards of other prices has squeezed Harmony’s margins nonetheless. On the plus side, Harmony has little debt and Graham believes that things are looking up for gold in 2015. “Although the gold price will continue to be a challenge, people are now talking about gold being a safe haven; the gold bulls are starting to talk a bit more than the bears,” he comments.
Harmony was also challenged in 2014 by South Africa’s rolling power shortages. The company is looking to address power issues over the coming months, but expects labour to continue to be a challenge. “The coming year will bring with it another wage negotiation, which tends to create a lot of press coverage and attention from labour unions,” he says. “It’s a challenge, but one we believe we can manage fully.”
A stronger future
Despite the challenges of 2014, Harmony had many successes too. The company managed to improve safety on its mines and improve its margins, but Graham says the biggest achievement was reworking Golpu’s prefeasibility study. “Thanks to our work this year, people can now see that Golpu is a great project with a viable plan,” he remarks.
In 2015, Harmony aims to build on these successes to improve safety, margins and productivity further while also keeping to the timetable for developing Golpu. The long-term plan is all about improving returns to shareholders and maintaining the company’s success.
“We have to continue to look at the strategy and focus on the sustainability of the company,” says Graham. “The mining business, particularly the gold mining business, is a long-term business; it’s not just quarter-to-quarter. You have to look at projects that are going to keep the company profitable way into the future – and that’s where Golpu comes in. Once that’s built, we can look forward to many years of mining with good returns.”