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Why Harmony’s Cost Profile Makes It Highly Leveraged to Gold Prices


Mar. 31 2016, Published 1:13 p.m. ET

Highest-cost South African miner

Among the South African gold miners, Harmony Gold (HMY) is the highest-cost producer. Its all-in sustaining costs (or AISC) for the December 2015 quarter were $950 per ounce, which is higher than the $929 per ounce for Gold Fields (GFI), $882 per ounce for Sibanye Gold (SBGL), and $860 per ounce for AngloGold Ashanti (AU).

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Cost improvement

Among these miners, AngloGold is most favorably placed on the cost curve while Harmony has the most disadvantageous position. But, given that most of Harmony’s production comes from South Africa, where rand weakness has been a nice tailwind, the company’s margins have expanded considerably versus the other miners. For the quarter ended December 2015, Harmony’s production profit rose 84% quarter-over-quarter, driven by a 7% increase in gold prices and a 2% increase in gold production.

High leverage to gold prices

Its high cost makes Harmony much more leveraged to gold prices than its peers. The stock had fallen 52% in 2015—the biggest fall among its closest peers—owing to its unfavourable cost and production profile.

Management has started to hone in on costs with a focus on grades and production improvement. This focus should help the company meet its cost and grade targets. Its all-in sustaining costs improved 7% quarter-over-quarter in rand terms. In US dollar (USDU)(UUP) terms, the improvement was even better, at 15% to $950 per ounce, thanks to the rand’s weakness. Harmony has done an admirable job reducing costs over the last few quarters.

However, in the face of falling gold prices and the strengthening rand, Harmony’s outperformance should mostly disappear. Investors wary of this kind of scenario could consider miners with high-quality assets, sound geographic exposure, and a low cost profile. Goldcorp (GG), Agnico-Eagle (AEM), and Barrick Gold (ABX) are some of the miners that meet these criteria.


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