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Harmony Gold A Buy With Increase In Gold Price

Harmony Gold A Buy With Increase In Gold Price

Tue June 06 2017





GLD has appreciated 6.98% while Harmony has fallen 6.62% over the last three months.


The PE is 4.25 and dividend yield almost 4%.


Harmony Gold Mining (NYSE:HMY) is a South African based gold miner that has suffered with the death of 25 miners back in March. The stock has lagged the price of gold because of this tragic loss but the stock has appears to be rebounding off its bottom. In the last three months, the price of GLD (NYSEARCA:GLD) has appreciated by 6.98% while Harmony has fallen 6.62%. GDX (NYSEARCA:GDX) is down 8.48% over the last year while Harmony is down 44.93%.




HMY data by YCharts


The company has 437.3 million shares, the stock trades for $2.05, and the market cap is $896 million. The dividend is 8¢ and the dividend yield is 3.9%. Earnings per share are 48¢ and the price to earnings ratio is 4.25. Wow! The stock is cheap.


Harmony produced 1.08 million ounces last year and is on track to do over one million ounces this year. 92% of production came from South Africa and 8% Papua New Guinea. Its reserves are reported as 37.8Moz of gold and attributable gold mineral resources of 107.6Moz. Guidance is 5.13 grams per ton of gold in FY2017. In FY2015 it was 4.75 so that's quite an improvement. Its cash cost estimates are $1,100 per ounce. Harmony has hedged a little less than one third of its production. I'd prefer management not to hedge. If I don't like gold, I'll hedge by selling the stock. By the way, the stock is listed on the NYSE so it's easy to buy.


Management has given estimates of producing between 1.1 million and 1.5 million ounces by 2019. It added 180,000 ounces through the development of its Hidden Valley mine in Papua New Guinea. Much of the company's capex is going into Papua New Guinea. Golpu, a 50/50 venture in PNG, holds 379 million tons at 0.9 grams per ton of gold. Obviously Golpu is a strip mine.


For the first nine months, Harmony has produced 812.9 thousand ounces at a cash cost of $996 an ounce. Its average ore grade is 5.03 gram per ton and the company produced a profit of $239 million.


Mining far underground is not cheap. Air conditioning must be pushed many kilometers underground as virgin rock can reach 60° Celsius. Another risk is that there has been talk of nationalizing mines. The ruling party, the African National Congress, rejected calls to go through with nationalization. Back in 2014, the state owned utility Eskom was not able to deliver power and there were many blackouts.


Mining in South Africa is not easy. There are electrical issues, labor problems, the rand is very volatile, and it is extremely dangerous. The May explosion was at its Phakisa mine. Dozens of illegal workers were killed in the mine. I couldn't find a mention on the company's web site of the accident, though it may be there. Mining is done at almost 2,500 meters beneath the surface. There was also a fatality at its Bambanani mine in February.


Other South African miners like Lonmin have had problems too. Last year, 73 miners died which is an all-time low. Still, that's a lot of people! Can you imagine if that many people died in mining in the U.S.?


As you can see, Harmony is a risky stock. Having stated this, it's probably a good time to own the stock. Last June when gold was at this price, Harmony's stock value was almost double where it is today. Gold is going up, the risk has already been factored in, and the stock is cheap based on its PE multiple, dividend yield, and its gold reserves. There is plenty of growth ahead; assuming the price of gold cooperates.


Source: https://seekingalpha.com