Unable to turn a profit at the Bissett underground gold mine in Manitoba, South African-based
“We will probably put Bissett on care-and-maintenance,” says Bernard Swanepoel, Harmony’s chief executive officer, who points out that the mine needs a gold price above US$300 per oz. in order to be economic.
Bissett operated at a loss of US$800,000 in the third quarter ended March 31, 2001, versus a loss of US$654,000 in the second quarter. Production was 9,484 oz. gold in the third quarter, 10,578 oz. in the second, and 11,349 oz. in the first. Cash operating costs were substantially higher in the recent quarter, at US$384 per oz., compared with US$344 in the second quarter and US$307 in the first.
The operation was affected by the freezing-up of the ventilation shaft, which resulted in sharply reduced production in January. Although the production shortfall was made up in February and March, there was a negative impact on the overall grade at 4.61 grams, compared with 5.31 grams in the previous quarter. Milled tonnage in the latest period, at 64,000 tonnes, was up 2% over the December quarter.
Harmony bought the Bissett mine in mid-1998 for $14.3 million from the receivers handling the bankruptcy of Rea Gold. Although it accounts for just a minor fraction of Harmony’s total production, Bissett was seen as a testing ground for the the company’s ability to operate a gold mine outside of South Africa.
The company’s strategy for turning around unprofitable mines is referred to as “the Harmony way,” a key component of which is the shifting of responsibility and accountability from the managerial to the operational level. With an eye toward increasing productivity, a multi-disciplinary management team is placed at each shaft, non-core activities are outsourced, a no-frills policy is adopted, and non-essential staff are reduced.
“We take assets and we restructure them,” says Swanepoel. “We position them for optimal profitability.” But he adds: “The biggest issue at Bissett is that the US$315-per-oz. gold price at the time of the acquisition is not there any more.”
Despite struggling with throughput and grade since acquiring the project, Bissett has proved that “we can and have successfully implemented the Harmony Way outside the boundaries of South Africa,” Swanepoel says. “We do run Bissett at costs significantly different from what it cost to run it previously.”
Over the next 12 months, Harmony intends to shave off around 300,000 unprofitable ounces of gold per year from the operation. “Our focus in the next quarter will be to analyze all our production units and restructure them with the intention of optimizing profitability,” states Swanepoel. This will require cutbacks, as well as closures of some shafts and metallurgical plants.
For the three months ended March 31, Harmony reported a net profit of US$9 million (or 9 per share), down 35.6% from US$14 million (14 per share) in the December quarter. Production totalled 493,351 oz. at a cash cost of US$234 per oz., versus 520,809 oz. at US$227 per oz. in the prior three months. The company’s cash operating profit of US$18 million was off 23.6% from the previous quarter.
The slip in performance during the third quarter is attributed to the loss of several production shifts over the Christmas holidays, a decrease in underground tonnage at Randfontein, and weaker operational performances from the Lindum and Kalgold open-pit mines. All three mines are in South Africa.
On a positive note, the Free State operations and the Evander mine maintained their production levels and improved operating profits.
In the first nine months of fiscal 2001, Harmony produced close to 1.6 million oz. In April, Harmony completed the purchase of the Elandsrand and Deelkraal mines, collectively known as Elandskraal, from
In order for the deal to be approved by various South African government agencies, such as the Competition Tribunal, a black empowerment partner had to come on board. Harmony has struck a deal with the South African group Khumo Bathong Holdings, granting the company a 10% share of Elandskraal’s cash operating profits after capex. Harmony has made loan financing, for 10% of the value of the asset, available to the group. The loan will be repayable out of profits from these operations.
In a separate, unrelated transaction, another empowerment group, Komanani Mining, will acquire a 9.6% stake in Harmony at a cost of R400 million by subscribing to 11 million Harmony shares priced of R36 per share. The price represents a 6% discount to the 30-day average trading price of the shares prior to the announcement. In addition, Komanani will buy 11 million convertible preference shares at a par value of 50. These shares will be convertible within five years at R41.50 per share.
Harmony took over management of Elandskraal in February, and in the following 2-month period, the operations produced 80,119 oz. at a cash cost of US$278 per oz. Operating losses of US$1.4 million for the two months will be treated as pre-acquisition costs and capitalized. Elandskraal will be fully accounted into operating results from the March quarter onward.
Harmony expects the Elandskraal operations will produce in excess of 400,000 oz. per year, adding to the just over 2 million oz. that the company will produce this year.
New Hampton shareholders had agreed to tender 92.6% of the outstanding shares to Harmony’s A27.5 cash bid prior to the offer’s closing in mid-April. Following an extensive review of New Hampton’s mining operations, Harmony anticipates it will slash production by 70,000 oz. During calendar 2000, New Hampton produced 259,000 oz. from its Jubilee and Big Bell mine operations.
On the exploration front, Harmony continues to drill-test the Stella platinum-palladium discovery in the Kalgold region of the North-West province. A near-surface resource has been estimated at 53 million tonnes grading 1.5 grams per tonne combined platinum-palladium-gold, equivalent to 2.5 million oz. of platinum group metals (PGMs). The mineralization remains open along strike and to depth.
Preliminary metallurgical tests using standard mill flotation procedures yielded PGM recoveries for fresh mineralization at 60-65%, with concentrate grades of 150-200 grams per tonne. Near-surface weathered material returned recoveries below 50%.
Harmony is looking for a partner to take this project forward and, so far, has heard from more than 25 interested parties.
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