Harmony and Newcrest teaming up in PNG

Two of the biggest gold miners not listed on the TSX are combining forces in Papua New Guinea (PNG) with the hopes of bringing a large scale gold and silver mine into production by early next year.

South-African-based Harmony Gold Mining (HAPS-J, HMY-N, HRM-L) and Melbourne, Australia-based Newcrest Mining (NCM-A), announced in mid-July that they would join forces at the Hidden Valley project in PNG.

And on August 8 Newcrest cemented the deal by paying Harmony US$230 million to take a 30.01% stake in the project.

Newcrest can move up to a 50% stake by funding all project expenditures until the production is reached at the project slated for the first half of next year — with a cap set at US$306 million.

The two companies will form the Morobe Mining Joint Ventures company, whose assets will include not only the Hidden Valley gold mine but also the prospective Wafi Golpu copper and gold deposit, as well as other exploration licences in the Morobe province.

But Hidden Valley itself is clearly the key to the deal. The project has an estimated life of mine of 10.3 years, over which time it is expected to mill 43 million tonnes of ore with an average head grade of 2.2 grams per tonne. Per year that works out to 285,000 oz of gold as well as 3.84 million oz. of silver

Harmony’s latest estimate puts capital costs for the mine at US$365 million — 23% higher than its previous estimate. The uptick is due to higher demand caused by resource development in the region it says.

As for the pace of development, Harmony says the project fell behind schedule by four months in 2007 because of problems with the building of the SAG mill in the Czech Republic. But, it says, excluding the SAG mill, all other suppliers are on schedule.

Harmony also reports that roads to the mine are finished and that while there have been delays in building the project’s permanent camp, construction is speeding up and won’t hold up production.

As for power, diesel-powered generators will be installed with enough power to cover the site’s electrical load, but, Harmony says, a cheaper source of power is crucial to the projects economics.

With that in mind it entered into a power supply agreement with PNG Power (a state-controlled power company) in April 2007 to provide hydro-generated power to the project. A new hydro-generator will have to be built at an existing power site and a transmission line will have to be built from the dam to Hidden Valley.

Harmony sits as the world’s seventh largest gold producer while Newcrest slots into the number nine position. As of 2007, Harmony had 53.6 million oz. of gold reserves while Newcrest had 33.2 million oz.