Financial director's review

Production
Gold produced reduced by 9%, or 3 898kg, to 40 535kg (621kg capitalised) in 2011. This was mainly due to several operations at Evander and Virginia being placed on care and maintenance in FY10 and Merriespruit 1 in September 2010, which accounted for 4 092kg of the decrease year on year. Offsetting this was increased production from Target 3 in 2011, and increased production from our growth operations at Doornkop, Kusasalethu, Phakisa and Hidden Valley as these operations ramp up to full production capacity. The average grade produced at underground operations rose from 4.5g/t to 4.6g/t in FY11 despite lower grades at Joel (22%) and Masimong (8%).

Revenue
Gold sales increased by 10% in FY11 to R12 445 million, on a 16% rise in the rand gold price received. This was offset by the 7% decrease in gold sold. In US dollar terms, gold revenue increased by 20% to US$1 781 million.

• Production costs rose by R812 million (US$210 million) to R9 170 million (US$1 313 million). This equates to an increase in cash costs of R31 505/kg, or 16%. In US dollar terms, owing to the appreciation of the rand against the US dollar, cash costs rose by 26%, or US$208/oz.
  This reflected the escalating cost of labour, electricity and stores costs, which accounted for R1 183 million (US$169 million) of the increase for the year. Also contributing to the increase is the inclusion of costs for Hidden Valley for the full year, up R581 million (US$83 million) year on year. There was a decrease of R1 101 million (US$158 million) related to closed shafts at the Evander and Virginia operations.
• Amortisation and depreciation rose R401 million (US$73 million) in FY11 to R1 776 million (US$254 million). This reflects the increase in tonnes mined for the year, as production ramps up at our growth operations and Target 3.
• The charge for impairment of assets decreased from R331 million (US$43 million) in FY10 to R264 million (US$39 million) in FY11. Impairments for FY11 relate to Steyn 1 and 2 shafts as well as St Helena as carrying values for the operations exceed the recoverable amounts. Management decided not to continue mining in some areas of Steyn 2, which resulted in a shorter life-of-mine and therefore a lower recoverable amount. A decision was made not to mine at Steyn 1 and St Helena triggering an impairment on these assets.
• Employment termination and restructuring costs decreased from R205 million (US$27 million) in FY10 to R158 million (US$23 million). FY11 costs relate primarily to the closure of operations at Virginia and Evander operations, and the voluntary retrenchment programme after closing Merriespruit 1 shaft.
• A net insurance credit of R174 million (US$25 million) was recorded in FY11 on the unwinding of the previous self-insurance scheme.
• The change in estimates for rehabilitation obligations resulted in an increase of R45 million (US$7 million) year on year to R74 million (US$11 million).
• Care and maintenance costs for FY11 increased from R57 million (US$8 million) to R124 million (US$18 million) after including the Evander and Virginia operations in FY10 and FY11.
• Write-offs relating to the gold inventory value for Steyn plant (R41 million (US$6 million)) and certain stockpiles (R30 million (US$4 million)), together with an adjustment of R21 million (US$3 million) to gold in lock-up, resulted in a R92 million (US$13 million) inventory loss being recorded in the income statement.

Operating profit
The group reported an operating profit of R44 million (US$4 million) in FY11, compared with R164 million (US$22 million) in FY10. This decrease, despite the higher revenue total, reflects higher production cost, depreciation and exploration expenditure (up R134 million (US$22 million) year on year).

• (Loss)/profit from associates consists of Harmony’s 40% share in the (losses)/profits of Rand Uranium. We ceased equity accounting the investment when shareholders of Rand Uranium agreed to sell the company.
• Impairment of investment in associates in FY11 relates to the impairment of the carrying value of the investment in Rand Uranium when it was classified as held-for-sale and written down to its recoverable amount.
• The gain of R141 million (US$20 million) (FY10: R38 million (US$5 million)) recognised in net gain on financial instruments for FY11 resulted primarily from fair value movements in equity linked deposits (ELDs) held by environmental trusts.
• The gain on the farm-in option relates to recognition of a gain of R273 million (US$38 million) on the cancellation and subsequent disposal of an option held by the group, which related to a future mine to be developed by Witwatersrand Consolidated Gold Resources Limited.
• Investment income decreased from R187 million (US$25 million) in FY10 to R140 million (US$20 million) in FY11, reflecting lower cash balances and lower interest rates. Interest received from investments held by environmental trusts decreased by 80% as further changes were made to the profile of these investment portfolios from cash to ELDs. Offsetting these decreases was an increase in interest received and interest refunds from the South African Revenue Service (SARS) of R50 million (US$7 million) in FY11.
• Finance costs rose from R246 million (US$32 million) to R288 million (US$41 million) in FY11, mainly due to higher borrowing balances for the year.

Taxation
The deferred taxation credit for FY11 was R492 million (US$70 million) of which around R367 million (US$53 million) relates to the inclusion of the Freegold unredeemed capital allowance. The South African Revenue Service (SARS) previously disallowed Freegold’s “post 1973 gold mine” additional capital allowance claim. During March 2011, SARS conceded that the Freegold operations are entitled to claim this capital allowance. The inclusion of the capital allowance increased the deferred tax asset on the balance sheet and the resulting credit was recognised in the income statement.

In addition, a deferred tax credit was recorded for Evander, where the deferred tax rate decreased from 22.9% to 11.5%. This was due to the annual review of the life-of-mine.

Headline earnings
Headline earnings per share from continuing operations increased from SAc1 (USc0) in 2010 to SAc223 (USc31) in 2011. Total headline earnings per share including discontinued operations was SAc223 (USc31) per share in 2011, compared to a loss of SAc7 (USc1) per share in 2010.

Operating activities
Net cash generated from operating activities was R2 379 million (US$340 million) in FY11, compared to R1 583 million (US$210 million) in FY10. This relates primarily to the increase of R807 million (US$132 million) in cash generated by operations, mainly as a result of higher revenue from a higher rand gold price received and changes in operating working capital. Also contributing to the year-on-year increase was the reduction in taxation paid by R80 million (US$10 million) and the insurance refund from unwinding the self-insurance scheme. This was offset by the rise in production costs due to inflationary pressures on labour, materials and electricity as well as the increase in exploration expenditure of R179 million (US$28 million) from R219 million (US$29 million) to R398 million (US$57 million) in FY11. In addition, lower interest received of R46 million (US$5 million) for the year contributed to a decrease in cash generated by operating activity.

Investing activities
Cash utilised by investing activities was R2 654 million (US$381 million), compared with R3 416 million (US$453 million) in FY10. Total capital expenditure for FY11 was R3 144 million (US$450 million), a decrease of R489 million (US$31 million) from FY10. This reflects the nearing of completion of development at the growth mines in FY11. Proceeds from the disposal of assets, including the disposal of Mount Magnet, were R247 million (US$33 million) in 2011, compared with R146 million (US$19 million) in 2010. R100 million (US$15 million) was received in April 2011 as a deposit for the sale of Evander 6 and Twistdraai to Taung Gold Limited.

Financing activities
Financing activities generated R209 million (US$29 million) in FY11, compared with R650 million (US$85 million) in FY10. In FY10, the company entered into a loan facility with Nedbank and drew down R1.2 billion (US$160 million) during that year. In FY11, a further R900 million (US$130 million) was drawn down from Nedbank. Total loan repayments in FY11 amounted to R546 million (US$81 million) (FY10: R391 million (US$57 million)).

The net result of Harmony’s operating, investing and financing activities was an outflow of R66 million (US$10 million) which, combined with the opening balance of R770 million (US$101 million) and a negative foreign exchange translation of R11 million (positive foreign exchange translation of US$13 million), resulted in a closing cash and cash equivalents balance of R693 million (US$102 million).

Signed

Hannes Meyer
Financial director
24 October 2011