Harmony grabs piece of South Deep

Perennial shopper Harmony Gold Mining (HMY-N) has taken a 29.2% stake in fellow South African miner Western Areas (WARSF-O, WARA-J), co-owner of the South Deep underground gold mine, 45 km southwest of Johannesburg in the Witwatersrand basin.

Harmony acquired 37.4 million shares from privately owned South African investment house Allan Gray, with another 7.6 million shares picked up on the open market. The price tag rings in at just shy of 2 billion rand (US$320 million) — half in cash and the balance funded via a loan from Rand Merchant Bank.

South Africa’s third-largest gold producer says it paid a premium of 7.4% over Western Areas’ 30-day volume-weighted average price share price.

The deal sees Harmony pick up a 14.6% interest in South Deep, and a stake in Western Areas’ hedge book, which is currently in the red to the tune of just over 2 billion rand. Earlier this year, Barrick Gold (ABX-T, ABX-N) inherited a half-interest in the mine through its acquisition of half-owner and operator Placer Dome.

“We see this as a strategic exposure to one of the best orebodies in the world and we look forward to working with the board of Western Areas on realizing this assets’ full potential,” said Harmony chief executive Bernard Swanepoel in a statement.

Earlier this year, Western Areas and Placer halved South Deep’s reserves following a year-and-a-half review. Proven and probable reserves now total 147 million tonnes running 6.2 grams gold per tonne, for 29.3 million contained ounces.

The reduction in reserves is mostly attributed to a new geological model, an enlargement of regional pillars aimed at improving ground stability, and the inclusion of more low-grade material owing to a change in the mining method in certain parts of the mine.

Many of the trimmed ounces were shifted to the measured and indicated resource category, which now amounts to 109.9 million tonnes averaging 7.3 grams gold per tonne, for 25.9 million contained ounces. The estimates are based on a gold price of US$400 per oz.

In 2005, Placer’s share of production from South Deep was 230,560 oz. gold produced at a cash cost of US$387 per oz., up from 214,293 oz. at US$394 apiece a year earlier.

The South Deep twin-shaft expansion, which was commissioned in late 2004 after years of delay, is expected to boost total annual production to 750,000 oz. over 70 years.

Placer shares ceased trading on the Toronto and New York stock exchanges on March 8, after Barrick announced that it had taken up a total of more around 94% of Placer’s outstanding shares in early February. Barrick is compulsorily acquiring the remaining shares.

In other news, Western Areas said in a brief statement that Chris Lamprecht has resigned from the company’s board. The resignation is the latest in a series of departures since the company’s board requested the resignation of Brett Kebble last year. Kebble was found murdered soon thereafter. He had been at the centre of a multimillion-dollar share scandal.

Allan Gray is Harmony’s largest shareholder with more than 69 million shares or 17.6% of the company’s share capital.