Harmony has produced good results in a year characterised by the outstanding exploration successes in Papua New Guinea and continuation of our strategy to restructure and lower costs at our South African operations.
During the past year, the price of gold has hovered around all-time highs and has convincingly answered those who questioned the safe-haven status of gold. It remains, in my view, a solid hedge against the uncertainty and instability prevailing in certain parts of the world.
The management team at Harmony is creating a company that will not only benefit from a rising South African rand price of gold, but that is also fulfilling our objective of geographic and currency diversification. The older, non-core assets in South Africa have been closed or sold, unnecessary costs are being removed and what will emerge is a collection of world-class assets designed to build significant long-term shareholder wealth.
Importantly, it is not only our shareholders who will benefit from the restructuring and repositioning taking place. Close to 40 000 employees who in turn support around 200 000 people, our suppliers and their dependants and all our other stakeholders will also benefit from our success and growth. We are conscious of our broader obligations to ensure that our growth benefits our employees, the communities that live near our mines and all our other stakeholders.
In terms of our growth initiatives, we remain excited about our Papua New Guinea operations. In the review period, we hosted the official opening of our first offshore greenfields project, Hidden Valley, which is steadily improving production levels. Extremely positive exploration results during the year at Wafi-Golpu were confirmed in our latest reserves and resources statement; resources of gold and copper at this project have risen 57% to over one billion tonnes. The Golpu deposit now benchmarks as one of the highest-grade gold-copper deposits in south-east Asia, with potential to improve further. Both Hidden Valley and Wafi-Golpu are held by the Morobe Mining Joint Ventures, in which our partner is Newcrest Mining Limited.
The declared resource satisfies our exploration target of 30Moz of gold and 8Mt of copper at this world-class discovery. Our objective in Papua New Guinea is to continue expanding and leveraging off this solid platform in one of the world’s premier new gold regions. To achieve this, we increased our exploration budget significantly in the review period to R377 million (US$49 million).
The company has turned the corner. Unprofitable operations were closed during the year and our longer-life, lower-cost operations are profitable and sustainable. While we produced 1.3Moz of gold in the last year, slightly less than the prior year, management’s focus on costs and a rising gold price delivered an improved cash operating profit of R3.3 billion (US$468 million), at an operating margin of 26%. Growth projects are clearly starting to deliver results with higher production, lower costs, and continued progress from numerous management initiatives at Doornkop, Phakisa, Kusasalethu and Hidden Valley.
Integrated reporting
Harmony has long been known for its comprehensive disclosure. Moving from our old level of disclosure to integrated reporting, as required by King III, is therefore not a step change for our company. It did require more in-depth, but succinct, disclosure of the risks our company faces. This was a beneficial exercise for Harmony in that we have a greater and more detailed understanding of these issues and have been able to initiate strategies to ensure that all stakeholders’ interests are protected.
Gold mining has several risks, some of which are political, social, or of a business/commercial nature. To minimise these risks we have sought to build trust and strong, mutually beneficial relationships with the government of South Africa, the government of Papua New Guinea and of Morobe Province, communities living near our mines, our joint-venture partner Newcrest, and all our other stakeholders. Our exploration criteria are stringent and our exploration teams are acknowledged as some of the finest in the world. Drill-hole results at Wafi-Golpu during the year have confirmed the exciting value of this asset. The drilling programme, feasibility studies and early works are well funded and multiple additional funding options are being considered.
The decision to diversify our asset base from South Africa was essential for our global competitiveness and profitability and the results, albeit early from a long-term perspective, resoundingly support this strategy.
Mining in South Africa
It is true to say that, as South Africa’s secondary (manufacturing) and tertiary (finance) industries have grown, the relative contribution of mining to the country’s gross domestic product (GDP) has declined. Equally, however, as the mining industry continues to adapt to changing local and international conditions, it remains a cornerstone of the South African economy, contributing significantly to economic activity, job creation and foreign exchange earnings.
The government’s New Growth Path identifies mining as a key economic driver in creating jobs in different value chains across South Africa’s industrial landscape. Specifically, the government’s plan urges “…accelerating exploitation of mineral reserves by ensuring an effective review of the minerals rights regime, and lowering the cost of critical inputs including logistics and skills to stimulate private investment in the mining sector.”
In the same vein, the 2011 – 2014 strategic plan of the Department of Mineral Resources highlights the importance of unlocking this value and enabling the industry to lead the country’s New Growth Path, recognising that “the mining industry has the potential to induce prosperous industrial clusters to support its development. These can significantly broaden economic growth, increase benefits and create decent jobs.”
The cyclical nature of mining presents a wide range of risks, most recently evident in the economic and financial realities of the global and South African mining sector in 2009 and into 2010. In 2009, total mining income dropped in South Africa precipitously while expenditure rose unabated. As a result, the industry faced a R67 billion deficit which had to be covered by using retained earnings.
Nevertheless, the critical and strategic importance of the South African mining industry cannot be overstated. The sector accounts for roughly 43% of the market capitalisation of the JSE and, according to the Chamber of Mines’ 2010 statistics of South Africa, contributes:
- Approximately 8.6% directly, and another 10% indirectly, to the country’s GDP. In Harmony’s case, the bulk of our mines are in the Free State, where mining accounts for almost 90% of the province’s GDP
- Over 50% of merchandise exports (including secondary beneficiated mineral exports)
- About one million jobs (some 500 000 directly)
- About 20% of gross investment (12% directly)
- Approximately 30% of capital inflows into the economy via the financial account of the balance of payments
- Over 94% of the country’s electricity-generating capacity
- About 30% of South Africa’s liquid fuel supply
- About 20% of direct corporate tax receipts (worth over R16 billion).
Against this background, the call for nationalisation of mines within certain quarters of the ruling party (the ANC) deserves comment. The track record of nationalisation is extremely poor, to say the least, and countries that have nationalised mines and other industries have subsequently had to privatise as the adverse and far-reaching consequences of nationalisation became evident. It is in the interest of the South African economy and all its people, particularly the poor, unemployed and the youth that the mining industry remains globally competitive and attractive to domestic and international investment.
We are engaged in discussions with the proponents of nationalisation to expose and make them aware of the fundamental beneficial role that the private sector plays in mining and other sectors of the South African economy – in terms of job creation, poverty alleviation, education, health and the overall improvement in living conditions and standards of living of all our people.
I am of the view that privately owned and managed mines will in future co-exist and compete with state-owned and operated mines. It is important, however, that the playing fields are levelled and that state-owned mines are treated for legislative and regulatory purposes in the same manner as privately owned companies. I remain confident that, based on my discussions with government and various other stakeholders, there is a commitment to ensure the South African mining industry remains globally competitive and attractive to domestic and foreign investment. In today’s global economy, that is the only route to a prosperous and successful future for all our people.
We welcome the confirmation by President Zuma and other political leaders, including the Minister of Mineral Resources, that nationalisation is not a government policy objective.
For the past three years, the mining industry (via the Chamber of Mines) has partnered with government and labour to develop a long-term strategy to reposition mining as a valuable contributor to the country’s growth and socio-economic development. This task team (under the Mining Industry Growth, Development and Employment Task Team (MIGDETT) or mining industry growth, development and employment task team) also aimed to identify impediments to the growth of the sector since it was becoming clear to all stakeholders that the industry’s reputation as a good investment sector was deteriorating.
Participants agreed that higher levels of global competitiveness were needed in the sector and the task team has developed a strategy for sustainable growth and meaningful transformation and inclusivity in the mining industry. This culminated in a joint mining declaration by government, labour and business in June 2010, with specific commitments that range from promoting investment, to increasing innovation and exploration, to developing skills and boosting the benefits to the communities living near the mines.
The significance of this declaration is that it is a joint government, labour and business initiative. All stakeholders agree that growth and transformation are interdependent and achieving these two vital objectives will ensure that South Africa is well positioned for the next global commodities boom. |
