Key features

Total gold production of 1.3Moz (40 535kg) for revenue of R12 445 million (US$1 781 million) and operating margin of 26%

Capital expenditure of R3 143 million (US$450 million)

Training and development investment of R223 million in South Africa and PNG

BBBEE procurement expenditure of R2 267 million (42% of total expenditure)

Material indicators

Economic context and relevance

Producing safe, profitable ounces

The gold market

Investing in the future

Economic transformation and empowerment

The section on Harmony’s approach to sustainability details how we identified our material issues.

Harmony is a significant role player in global gold markets, in the South African economy and in the economies of the provinces in which it operates. Harmony is one of the world’s leading producers of gold, and South Africa’s third-largest gold producer. Regionally, Harmony has an even bigger impact, for example in South Africa’s Free State where mining accounts for over 90% of provincial GDP.

South African gold production has declined in recent years, but Harmony remains an important contributor to economic activity and employment in the provinces where it operates: Gauteng, North West, Mpumalanga and Free State, as well as neighbouring labour-sending areas. At present, Harmony is the only gold producer with a solid growth pipeline and rising grade profile, underpinning management’s expectations for an increasing contribution to gold production in South Africa.

The direct and indirect employment we create is another indicator of Harmony’s economic contribution. In FY11, the company employed 41 656 people – a substantial portion of the workforces in the South African and PNG gold mining industries as a whole.

Harmony delivered a satisfactory performance for the year, characterised by several important milestones and developments detailed in the quarterly reports and the annual report.

• Total gold production of 1.3Moz (40 535 kilograms)
• Average gold price received of R307 875/kg (US$1 370/oz)
• Revenue generated of R12 445 million (US$1 781 million)
• Capital expenditure of R3.1 billion (US$450 million)
• Net profit for the year of R617 million (US$87 million)
• Operating margin of 26%.

At 30 June 2011, Harmony’s market capitalisation was R38.7 billion (US$5.7 billion).

The trend of Harmony’s revenue stream over the past five years reflects the restructuring undertaken to focus on safe, profitable ounces. While this had a temporary effect on production, the benefits are evident in our financial and safety performances for the year.

Harmony’s value-added statement for FY11 is presented below, as well as a breakdown of payments made to government. No significant assistance was received from government in South Africa or PNG.

Harmony’s average R/US$ exchange rate used for FY11 was 6.99 while the average gold price received was R307 875/kg (US$1 370/oz).

Gold remains a desirable product and we expect the price received in dollar terms to be around US$1 850/oz an ounce in our next financial year, especially with continued global uncertainty and a weaker dollar. Harmony remains highly exposed to the R/US$ exchange rate, as most of our operations are in South Africa. While our earnings are in dollars the exchange rate impacts our revenue in rands. The rand strengthened against the dollar throughout FY11, keeping profit margins flat.

Harmony’s strategic plans for FY12 are based on a gold price of R280 000/kg (US$950/oz) and an exchange rate of R7.53/US$.

Integral to Harmony’s growth strategy is acquiring long-life assets that offer higher grades and we regularly assess opportunities in Africa and south-east Asia that could fit the Harmony portfolio. Stringent criteria govern any possible acquisition, including the requirement that any acquisition should complement the substantial asset base currently under management and add value to the group’s highly competent team of employees.

• Ongoing investment in development at Phakisa, Kusasalethu, Doornkop, Tshepong and Hidden Valley mines, confirming their robust life-of-mine plans and reserves
• The official opening of Hidden Valley mine in PNG in September 2010, our first offshore greenfields project and an important step in our strategy of geographical and asset diversification
• Ongoing exploration in PNG, including 7 700km² of wholly owned exploration tenements
• Excellent drilling results at Wafi-Golpu, justifying our confidence that this world-class asset will be the next mine in the area
• The closure of older or loss-making shafts, including Merriespruit 1 in Virginia. Over 80% of affected staff were transferred to Harmony’s growth operations
• Agreements to sell non-core assets such as Mount Magnet in Western Australia, the prospecting right over Merriespruit South area, and Evander 6 shaft as well as cancellation of the Freegold option with Witsgold, for a total of R790 million
• The successful integration of the Pamodzi assets, acquired in the prior year, into our existing Free State operations in South Africa.

Harmony’s capital expenditure totalled R3.1 billion in FY11, largely on growth projects in South Africa and the development of Hidden Valley mine in PNG. In total, Harmony has invested R8.31 billion on capital projects in the past five years.

• Equity ownership by historically disadvantaged South African (HDSA) interests in the company
  Harmony complies with the Mining Charter through partnerships and the sale to HDSA companies of interests in the company and its underlying operations. At the end of June 2011, we maintain that 36% of production was attributable to HDSA interests. Harmony’s HDSA ownership comprises shareholding by African Rainbow Minerals (ARM) following a series of transactions including Freegold (a Harmony/ARM merger), ARM empowerment trust, and other transactions, measured in terms of the “continuing consequences” provision of the Mining Charter where prior transactions are included in calculating HDSA ownership credits in terms of market share measured by attributable units of production.
• Empowerment and transformation of the procurement base in South Africa, by developing small, medium and micro enterprises (SMMEs) that are broad-based black economically empowered (BBBEE), and based in the provinces of operation as well as by doing business with large BBBEE companies. Harmony’s procurement processes and expenditure are governed by a group strategy and policy. BBBEE companies, particularly local companies, receive preference in awarding contracts (see section below). To view the policy refer to www.harmony.co.za.
• Contracts awarded by Morobe Mining Joint Ventures (MMJV) to the company owned by three landowner groups – Nauti, Kwembu and Winima – for catering, fuel haulage, general freight, plant hire, security, labour hire and bus services. MMJV continues to comply with the memorandum of agreement on the Hidden Valley project by offering business development opportunities to landowners. These opportunities will increase as the mine moves towards full production.

Implementing affirmative procurement in South Africa

Material issues

Small base of qualifying suppliers with the requisite skills

Conflicting standards, definitions and regulations between government departments.

Harmony is committed to progressively transforming its procurement practices and performance.

Our procurement policy promotes expenditure with companies recognised as BEE entities under the revised Mining Charter (September 2010). Targets set in the charter’s scorecard will also be adopted for each operation in Harmony. This will result in Harmony only claiming procurement spend for suppliers complying with the ownership requirement described in the charter as follows: “BEE entity means an entity of which a minimum of 25% + one vote of share capital is directly owned by HDSA as measured in accordance with flow-through principle”.

Harmony’s BEE entity procurement expenditure in FY11 was R2 267 million (42% of total discretionary spend). This is not comparable to the prior year, given the change in definition.

Harmony’s BEE spend by category for 2011 as defined by the new Mining Charter is shown below.

The changeover from the DTI code definition of BBBEE (which has seven measurement criteria) to the new Mining Charter definition, which only focuses on ownership, had a major impact on reported results. This makes it very difficult to compare FY10 with FY11, as the benchmark has changed.

* Based on DMR reporting period Jan 2011 to date

* Variances reflect changeover to new Mining Charter definition.

Harmony faced various challenges during the year in achieving its affirmative procurement targets owing to limited skills in the supplier base. This had an impact on the BEE product and skill offerings, decreasing their business opportunities. We have also faced challenges in dealing with BEE companies that are not familiar with tax law, and health and safety requirements, among others. We are addressing these shortcomings through our enterprise development programmes and enterprise development centres (EDCs).

• Phase 1, now complete, involved developing a database of local BBBEE suppliers and documenting their competencies. The system alerts these suppliers to new opportunities from Harmony and assists them with tender and vendor processes, including arranging financing if required. Suppliers are also assisted in executing their orders to ensure efficiency, and in forming joint ventures with traditional suppliers
• Phase 2 incorporates skills assessments, business development, provision of business facilities and administrative support to local BBBEE suppliers.