Harmony Gold's Strategic Steps Show Promise Amid Challenges - Analyst Blog

On Aug 19, we issued an updated research report on gold miner Harmony Gold (HMY). While the company is progressing well with its growth projects, cost reduction program and other actions to boost profitability and cash flows, it remains exposed to volatility in gold prices and labor issues.

Harmony, on Aug 14, reported earnings of 3 cents per share for fourth-quarter fiscal 2014 (ended Jun 30, 2014), compared with a loss of 20 cents per share a year-ago. Both gold production and gold sales rose year over year in the quarter. The company expects gold production of 1.2 million ounces (oz) in fiscal 2015 and is focused on improving gold grades.

Harmony is making good progress in producing better quality gold ounces. It has several world-class mines in South Africa, which together with the Hidden Valley mine and the Wafi-Golpu project in Papua New Guinea (“PNG”), is expected to significantly contribute to its targeted production.

Harmony is also showing significant progress both in the growth of resources as well as diversity. The company is focused on meeting its long-term targets and maximizing shareholder value.

Harmony has made several strategic changes to ensure future growth and profitability, which are expected to lower its debt and allow it to have financial flexibility. The company's five-year strategy is to improve its margins by implementing its plans and increase free cash flow through higher grades and cost control. The company reduced its capital expenditure by 30% in fiscal 2014.

However, Harmony's operations could be impacted by a slower-than-expected ramp-up in production at mines and gold price volatility. The company is highly exposed to gold price volatility. Gold price received fell 19% year over year to $1,299 per oz in fiscal 2014, contributing to a double-digit decline in the company's sales for the year.

Harmony also remains one of the highest cost major South African gold producers. Weak gold pricing coupled with high costs are affecting the company's profitability.

Moreover, Harmony remains exposed to geopolitical risks associated with potential mine shut downs and labor strikes. It faces tough labor and wage negotiations (with demand for significant wage hike) and the labor relation environment remains volatile in the gold industry.

Other Stocks to Consider
 
Other companies in the mining industry with favorable Zacks Rank include Silver Standard Resources Inc. (SSRI), U.S. Silica Holdings, Inc. (SLCA) and Endeavour Silver Corp. (EXK). While Silver Standard Resources and U.S. Silica Holdings retain a Zacks Rank #1 (Strong Buy), Endeavour Silver holds a Zacks Rank #2 (Buy).