Harmony Gold Mining Company Limited

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Harmony Gold Mining Company Limited is a South African gold producer with operations also in Papua New Guinea, it focuses on underground and surface gold mining, along with associated exploration and development activities.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Harmony Gold Mining Company (HMY) is a mid-tier gold producer, with a complex operational structure. Their primary focus is on extracting gold through underground mining and surface operations. They also engage in exploration to identify new mineral deposits. HMY’s operations are spread across different regions, presenting a complex and varied business.

Revenue Distribution:

HMY primarily generates revenue from gold sales. They sell their products to the London Bullion Market Association (LBMA) gold and other precious metal markets.
HMY also has some by-product income from other metals, such as silver, but its contribution to revenue is minimal compared to gold.
The sales are done in US dollars and are affected by gold prices, exchange rates, and production volumes, the last two being influenced by its mining operations.

HMY’s business performance is almost wholly reliant on gold sales, so it’s essentially a bet on gold prices.

Industry Trends:

Gold prices are volatile and influenced by factors like inflation, interest rates, currency fluctuations, geopolitical risks, and investor sentiment.
Gold prices have seen significant fluctuation due to geopolitical and macroeconomic issues, making predictability quite difficult.
Mining is a capital intensive business, new projects have large upfront capex and therefore companies with good access to capital are much better suited.
In recent times, there has been a lot of environmental consciousness, therefore many mining companies are under regulatory scrutiny and they are spending to minimize their impact on the environment, as well as creating a sustainable operations model.

Margins:

HMY’s operating margins are dependent on the price of gold, mining costs, and currency fluctuations.
While HMY’s revenue is fully dependent on gold prices, their ability to keep operational costs down or raise sales helps increase margins.
The company is investing in some new technology to bring operational costs down, but its operational costs are very sensitive to energy prices and labor, both of which are experiencing pressures due to inflation.

HMY’s business model is sensitive to volatility in gold price and operational costs.

Competitive Landscape:

HMY operates in a competitive gold mining industry, with large multinational companies as well as mid-tier companies.
Key competitors include AngloGold Ashanti, Gold Fields, and Newmont Corporation, among other prominent companies.
Each company competes to have more reserves, better technology, cheaper methods of mining, and other factors to improve their profitability.
Competitors are constantly trying to innovate and gain a competitive edge through new methods of extraction, better cost controls or other advancements.

What makes the company different?

HMY’s assets are primarily in South Africa and Papua New Guinea, with operations mostly underground.
This concentration makes it unique compared to global players with diversified assets.
They have had significant experience in deep-level gold mining.
The company is focused on transforming themselves to be less reliant on deep-level underground mining by having diversified mining projects.

Geographical and operational concentration is a double edged sword: they have domain over the knowledge and methods that they have refined over the years, but it also puts the business into operational risk and dependency.

Financials Deep Dive:

Revenue Trends:

HMY’s revenue is mainly from gold sales and has followed the trajectory of gold prices.
In FY2023, they had a gold revenue of $1,990 million USD and for FY2022 it was $2,176 million USD, a decline of almost 10%.
Since they have some by-product revenue, they also gain a bit from other metals sales, for example their silver production saw a 55% growth in FY2023, but it has a small effect on overall numbers.

Profitability:

Their overall operating profit was $364 million in FY2023 and for FY2022 they had a profit of $511 million. A decline of around 30%.
With high inflation and costs their overall earnings and profits are under pressure.
Operating profit and returns on assets and invested capital have all had considerable drops.
Their free cash flows were at negative $70 million dollars for FY2023.
Their balance sheet is also under pressure because of losses, in FY23 they lost $366 million dollars in total.

Balance Sheet Health:

HMY’s net debt has increased from 1,366 million in June 2022 to 1,914 million dollars by June 2023. This has increased their debt-to-equity ratio which has an impact on their solvency.
They have total current assets of $1,725 million, which when compared to their current liabilities ($1,453), they have a relatively good liquid position.
However, they have also a large amount of long-term debt, which increases their risks.
HMY’s debt-to-equity ratio of 26.9%, which is quite low and represents low leverage, given the risks of gold mining, this is a favorable scenario for the business.

Their debt situation could improve in the near-future as their recent refinancing helped with the repayments schedule. But their debt situation is still something investors have to consider.

Moat Analysis

Rating: 2 / 5

Intangible Assets (Brand): While Harmony has some name recognition in the South African mining industry, its brand doesn’t command pricing power or create a significant competitive advantage globally.
Switching Costs: Switching costs are low, as the sale of gold isn’t dependent on which company mines it.
Network Economics: HMY’s profitability isn’t affected much by a network effect.
Cost Advantages: HMY enjoys some advantages due to their scale and also some lower cost operations but they are easily duplicable by other companies, and most of their costs are largely dependent on external forces which they can’t control. The company has a small lead in certain segments due to geographical factors, such as low energy costs in South Africa, but competitors are likely to catch up soon.

Legitimate Risks:

Commodity Price Volatility: The biggest risk is fluctuations in gold prices, as their revenue is directly tied to its prices. Since they are a gold mining company, they have virtually no diversification to weather commodity shocks.
Operational Challenges: HMY has had various operational issues (accidents, power disruptions etc) in the past, which could lead to reduced production and subsequently reduced sales. The mining business itself is inherently dangerous.
Geopolitical risks Due to having most operations in South Africa and Papua New Guinea, the company is exposed to the legal and socioeconomic factors of these regions. Instability in the region and changes in regulations could hurt their operations.
Rising Operational costs: HMY’s expenses are very sensitive to labor and energy costs, and increases in them can erode their profitability.
Debt levels: Although the company recently refinanced its debts, the amount is still quite high, and that introduces considerable risk to the company if it has an operations downturn.
Regulatory and Political Risks: Changing regulations or increased scrutiny from governments could increase their costs or impact operations.

Business Resilience:

They are likely to recover if their share prices drop, their assets are valued below the average multiples, and are likely to have high intrinsic values that they can rely on for the share value to recover.
With a large network and extensive experience in deep-level mining, they are well placed to continue in the industry.
However, all those benefits don’t offer a strong competitive advantage or moat over their peers.

HMY has survived for a long time, due to its operations, but it lacks a strong moat and therefore has low resilience.

Understandability Rating

Rating: 3/5

The mining industry and HMY’s business model can be generally understood by lay investors.
However, their operational structure can be quite complex to understand and fully evaluate.
Further understanding of their financial statements, how mining works, and the factors that affect their profitability can be too complicated for casual investors.
HMY’s sensitivity to external factors makes it hard to fully assess the future of the business.

It is easy to understand the overall premise of the company, but understanding the details is much more difficult.

Balance Sheet Health Rating

Rating: 3 / 5

Their debt levels have grown and are something to look out for.
HMY has an okay short-term solvency position with a positive ratio of current assets over current liabilities, at ~1.2.
However they have a large amount of long-term debts.
Their leverage ratio is quite low compared to peers, implying low leverage and low financial risks.
The increase in cash flows can help improve the liquidity position of the company.

Recent Issues and Management Outlook:

Safety Incidents: The most recent issues for the company are safety problems. HMY announced an incident that resulted in a fatality at its operations. The incident is a reminder of the inherent risks in the mining industry and has also shown an operational weakness in its safety procedures. They’ve committed to improvements in worker safety and have also put an emphasis on employee well-being.
Restructuring efforts HMY’s ongoing business strategy and transformation in recent earnings is about “unlocking value”. Part of this is the focus on re-opening old profitable mines, and also improving capital discipline and allocation for better cost management, improving cash flows, and overall company performance. They’ve had success in improving their operations and also their financial performance by cutting costs and improving their output.
Operational Improvement They are implementing digital tech at their mines to improve productivity and safety.
Refinancing debt: HMY has refinanced its debts to manage interest repayments better. However, they also have some plans for further debt reduction to improve their financials.
Investment in exploration: HMY is actively pursuing new mine explorations in its area of operations and the results and news about these projects are followed closely.
Inflation: Management mentioned the risks that inflation brings to their profits as operational costs are tied to energy and labor prices which are both undergoing pressures. They have mentioned strategies to try to offset these increases but also acknowledged there’s nothing they can ultimately do when those prices rise.

Recent earning calls and reports have mentioned some key risks to the business: volatility in gold prices, operational issues that include safety incidents, and inflation-related cost increases. While it may be difficult for the company to have high profitability, they are taking actions to safeguard their operations, but their moats have eroded and are likely not going to be as profitable as in previous years.