Harmony Gold Mining Company Limited is the largest gold producer in South Africa, accounting for about one-third of all gold produced in the country; the company is among the largest gold producers in the world. Harmony specializes in transforming mature gold mines of marginal profitability by applying low-cost methods of extraction and refining for low-grade gold ore. The company's properties in South Africa are located in the Free State, Evander, Randfontein, and West Rand region of the Witwatersrand basin and the Kraaipan Greenstone Belt in the North West Province. Foreign operations included the Bisset mine in Manitoba, Canada, and the Hill 50 and New Hampton mines in Western Australia. The company has investment interests also, in Abelle Limited in Papua New Guinea and Highland Gold Ltd. in Russia. At the gold mines where Harmony is involved in operations, the company owns 22.2 million ounces of proven gold reserves at a grade rate of 0.12 ounces per ton and 39.8 million of probable reserves at a grade of 0.17 ounces per ton. Harmony sells its gold within South Africa and on international markets and prefers to remain unhedged, believing that hedging results in lower gold prices. Harmony is the only major gold producer to market its own brand of gold bars. The company uses the name Pure Gold, representing 999.9 percent purity. Other gold products include gold medallions and jewelry designed at a jewelry school established by the company to develop a national style.

Becoming a Specialist in Low-Grade Gold in the Mid-1990s

Named for its first gold mine in the Free State province of South Africa, Harmony operated as a subsidiary of Randgold & Exploration until it became an independent company in 1997. Discontented shareholders initiated changes at Randgold in 1994, after a sludge dam burst, damaging the town of Merricspruit and killing 17 people. That year a consortium of British banks took control of Randgold and hired a new management team, including Peter Flack as chairman of Randgold and Bernard Swanepoel as managing director of Harmony.

A marginally profitable, mature mine, in which the premium grade ore had been extracted over several years of underground mining, the Harmony mine was on the edge of closure in 1995. The new management implemented methods to make the property productive and profitable through low-grade ore mining and refining techniques. One dimension of this plan involved a series of acquisitions in 1996 that increased gold production and achieved economies of scale through integration into existing operations. The acquisitions included mineral rights to Farm Vermeulenskraal Noord (FVN), an adjacent, undeveloped property with an estimated 12 million ounces of recoverable gold, and Unisel properties adjacent to FVN, which extracted gold from the same mineral reef. The acquisitions raised Harmony's annual production to 580,000 ounces of gold.

In late 1996 Harmony initiated a pilot project to test a new solvent-extraction method of gold refining that sharply reduced operating costs. Designed for small-scale smelting and refining projects, the technique processed gold to 99.9 percent purity. After successfully completing the test, Harmony began construction of a commercial scale plant with a refining capacity of two tons per month. Operations began in the fall of 1997, only the second such refinery in South Africa. The savings generated by the refining process exceeded the cost of construction within the first year.

High-quality refined gold from low-cost low-grade ore opened new marketing opportunities for Harmony. The company decided to expand its revenue base by selling gold to jewelry manufacturers and by offering branded gold bars on the international market. In January 1997 South Africa's Reserve Bank granted Harmony permission to sell one-third of its gold production in international markets and the following year Harmony became the first gold producer to sell its own brand of gold bars, under the name Pure Gold. LG International, a South Korean conglomerate, purchased the first consignment.

Harmony became an independent company in September 1997 when Randgold separated four mature mines and placed them under two independent companies, Durban Roodepoort Deep and Harmony Gold Mining Company. To Harmony's operations Randgold added East Rand Properties, which included the Grootvlei and Consolidated Modderfontein mines, and Saaiplaas No. 3 shaft near the Harmony mine, the last purchased by Randgold in early 1997.

Harmony's debut as an independent company occurred at a turbulent time. During its first quarter as an independent company, the grade of gold ore declined, reducing gold output; coupled with weak gold prices, low output reduced revenues. An operating profit at the Free State properties was offset by an operating loss at East Rand Properties (despite government subsidies) and at Saaiplass. Other problems included sporadic illegal strikes, leading to the dismissal of 4,600 mine workers. As economic difficulties continued due to weak gold prices, Harmony laid off an additional 770 mine workers, plus supervisory personnel, reducing overall employment from 18,600 workers in September to 11,700 in December.

Late 1990s Acquisitions Leading to Profitability

Despite low gold prices, Harmony continued to acquire new properties or mineral rights in order to expand production. The company focused on marginal, mature properties that it could transform into highly productive and profitable operations by implementing its low-grade ore mining and refining methods. In addition to expanding ore reserves, acquisitions provided harmony with flexibility in operations, to produce gold from the highest-grade ore available within the context of low-grade ore mining. In April 1998 Harmony acquired the mineral rights, equipment, and infrastructure of the Steyn Shafts #5, 6, 7, and 8 from Free State Consolidated Gold Mines, adding 237,000 ounces to annual production. The company acquired Bisset Gold Mining Company in Manitoba, Canada, including infrastructure, equipment, a 16-year mineral lease, and environmental permits. The small mine produced 60,000 ounces of gold per year, and held reserves of 670,000 ounces. In South Africa Harmony acquired the Maasimong Mine at Freegold 3 and Free State 3 Gold Plant at Saaiplaas.

In August Harmony acquired an 86 percent interest in Evander Gold Mines, a consolidation of four mines. Harmony paid ZAR 250 million cash plus nine million new shares of stock for the properties. With production at 400,000 ounces of gold per year, the Evander properties increased Harmony's total production to more than one million ounces per year. Within nine months Harmony improved cash operating costs, from $340 per ounce, to $196 per ounce, well below the $250 per ounce industry standard for profitability. The improvement increased the ore reserve that could be mined profitably from 10.4 million ounces to 15.1 million ounces.

Harmony surpassed its goal to produce one million ounces of gold during the fiscal year ended June 30, 1999. The company met its goal in April, and produced a total of 1.2 million ounces of gold, representing a 66 percent increase over 1998. The February 1999 sale of the troublesome East Rand Properties supported profitability, but gold prices continued to be rather weak in 1999, particularly after May 7, when the British Treasury announced its intention to sell more than half of its gold reserves during the next few years. Although Harmony did not maintain hedges, believing that hedging lowered gold prices, the company expected to remain profitable as long as gold prices did not drop to less than $250 per ounce. That year the average price received was $288 per ounce, a decline from $316 per ounce. After a loss in 1998, the company earned a net profit of $28 million (ZAR 171 million) in 1999.

Harmony continued to expand its mining operations, seeking diverse opportunities, primarily in South Africa. On July 1, 1999, Harmony completed a merger with West Rand Consolidated Mine (WRCM) and Kalahari Goldridge Mining Company (Kalgold). WRCM owned mining operations at the Kraaipan Greenstone Belt, while Kalgold was involved in open pit mining, a low-cost method of extracting gold from low-grade ore. The merger provided Harmony with an opportunity to diversify into exploration and open pit mining and brought experienced management in both areas. In practice, Harmony acquired the companies for ZAR 300 million, adding 100,000 ounces of gold to annual production.

In January 2000 Harmony made a $128 million (ZAR 780 million) cash and stock offer for Randfontein Estates. Completed the following April, the acquisition increased the company's production by 560,000 ounces of gold per year and Harmony became the third largest gold producer in South Africa, and the sixth largest worldwide. Harmony planned to transform the mature gold mining properties from a high-cost operation, to a profitable, low-cost operation.

In January 2001 Harmony completed a ZAR 1 billion ($131 million) acquisition of Elandsrand and Deelkraal mining operations in the Free State from AngloGold. With ore grades declining, yet still of higher grade than other Harmony properties, the mines were prime prospects for Harmony's skills in transforming mature mines into productively profitable mines.

Harmony funded expansion by offering stocks and corporate bonds. In June 2001 the company issued 27 million new shares of stock plus nine million warrants, listed on the Johannesburg Securities Exchange (JSE) and the New York Stock Exchange (NYSE). Harmony raised ZAR 1.2 billion from the offering and an additional ZAR 1.2 billion through the company's first issue of corporate bonds. The sale of stocks and bonds allowed the company to continue to expand despite weak gold prices in the U.S. market. With gold prices at a 16-month low, Harmony hedged one million ounces of gold put in options, at $260 per ounce, in order to assure financers of the AngloGold mines acquisition. During fiscal 2000-01 Harmony produced 1.6 million ounces of gold at a cost of $234 per ounce. The company generated a cash operating profit of $88 million (ZAR 673 million).

Early 2000s Expansion Involving Domestic and International Acquisitions

After investigating mining opportunities in Australia, Harmony began to make investments in gold properties there in 2000. The company started with a 23 percent interest in Goldfields Ltd., involving gold mines located near Kalgoorlie and in Tasmania, as well as in Papua New Guinea, then turned around and sold the stake to bid on New Hampton Goldfields. In December the company made a cash offer for New Hampton Goldfields Ltd., which operated the Big Bell and Jubilee gold mines in Western Australia. By April 2001 Harmony increased its holding to 90 percent. The company sold its interest in Goldfields in order to purchase Hill 50 Ltd. in December 2001. The acquisition provided Harmony an opportunity to combine operations of the New Hampton properties with Hill 50's nearby Murchison Belt property. Hill 50 included New Celebration mine south of Kalgoorlie and the Maud Creek property in the Northern Territory, then in an advanced stage of exploration. The company obtained higher quality ore reserves as well. Harmony invested AUD 50 million for a 31.3 percent interest in Bendigo Mining in Victoria, to fund a renewal of mining in the prospect area.

In November 2001 Harmony entered into a joint venture agreement with African Rainbow Minerals Pty Ltd. (ARM Gold) to acquire the mature Joel, Tshepong, Matjhabeng, and Bambanani mines in the Free State from AngloGold. The ZAR 2.7 billion acquisition included infrastructure and mineral rights. With combined production of the four mines at more than one million ounces of gold per year, Harmony's share, at 500,000 ounces of year, increased the company's total output to three million ounces per year.

Actions in the international marketplace involved a stock offering and investment acquisitions. Harmony made an international public offering of 8.5 million shares of stock, which sold on the JSE at $13.20 per share in April 2002. Of the $112 million in net proceeds, Harmony applied $95 million to offshore debt. Investments during 2002 included a minor share in Placer Dome located in Manitoba, Canada, and a 32 percent interest in Highland Gold, with assets in Russia. In November Harmony purchased a 21 percent interest in High River Gold Mines Ltd. from Jipangu, Inc. for $14.5 million. High River owned and operated gold mining properties in Russia, Canada, and West Africa.

Harmony introduced new Pure Gold brand gold bars and coins to the South Africa and international markets in April. Gold products included the Elephant Ten Tola, a 116.7 gram bar designed especially for sale in India (the elephant being a significant emblem in both South Africa and India). Wrought gold bars and medallions for sale in South Africa were produced in 28-gram, 15-gram, and 8-gram weights.

Harmony benefited from increased interest in gold as an investment alternative to volatile investments. Average price received per ounce of gold increased 15 percent, to $329 per ounce. A stronger rand value offset the stronger U.S. dollar price in gold in real terms, however. During fiscal 2002-03 Harmony's gold production increased to 2.9 million ounces, compared to 2.6 million ounces the previous year. Operating costs declined from $192 per ounce to $242 per ounce due to high-cost acquisitions, specifically St. Helena in South Africa and Hill 50 in Australia. Operating profit increased slightly, however, from $254 million in 2002 to $260 million (ZAR 2.4 billion) in fiscal 2003. The September 2003 spot price of gold at $392 per ounce promised to maintain a significant level of profitability.

Investment and divestment activities during late 2003 included an offer for a 20 percent interest in Abelle Limited, with properties in Australia and Papua New Guinea. In October Harmony sold its High River Gold and the following month the company sold Kalgold operations for ZAR 275 million, but retained an interest in mineral rights in a platinum discovery on the property.

2003: Fulfillment of National Black Empowerment Requirements

Durng 2003 Harmony took steps to meet the South African Mining Charter, which requires the country's mining companies to expand black ownership of assets in South Africa to 26 percent. The intent of the Mining Charter is to correct the historical injustices of apartheid. Toward that end, Harmony formed a joint venture with Africa Vanguard Resources (AVR), a new black empowerment company, to manage the Doornkop South Reef Project at Randfontein. AVR acquired a 26 percent share in the mineral rights for $29 million and would share in 16 percent of the profits.

In January 2003 Harmony announced its decision to expand the project by deepening existing mine shafts. With an estimated gold content of 6.6 million ounces of gold, Harmony expected the project to have a 20-year lifespan and to optimize production in six years, producing 330,000 ounces per year. To raise funds for development, Harmony sold its Placer Dome interest for $87 million, obtaining a substantial profit. In addition, the company sold eight million shares of common stock for $15.50 per share in January 2003.

A merger agreement between Harmony and ARM Gold, announced in May, met the South African Mining Charter as well. Renamed Harmony, the new company combined Harmony's 319.9 million ounce resource base and ARM Gold's 90.2 million ounce resource base, creating the world's largest resource base at 410 million ounces. In conjunction with the merger agreement, Harmony and ARM Gold acquired a 35 percent interest in Anglovaal Mining Ltd. (Avmin) from Anglo American, specifically to obtain the Target mine in Free State province, with annual production of 350,000 ounces of gold. The Target North project, then in development, was estimated to contain 59.6 million ounces.

The company's Social Plan Framework Agreement, signed by the National Union of Mineworkers in July 2003, corrected the last vestiges of historically discriminatory practices as it applied to mine employees. Changes involved re-grading employee categories with appropriate pay increases, providing retirement benefits, and improving employee housing.

Upon completion of the merger in September, Harmony increased its ownership interest in Avmin to 53.7 percent through the purchase of a 42.4 percent interest in Avgold, a subsidiary of Avmin. In conjunction with the stock exchange, Avmin changed its name to African Rainbow Minerals. With the additional resources of the ARM Gold merger and the Anglovaal acquisitions, Harmony expected production to exceed four million ounces of gold in 2004.

Principal Subsidiaries: Abelle Limited (Australia; 20%); Bendingo Mining; Bisset Gold Mining Company; Evander Gold Mines Ltd.; Highland Gold Ltd. (Russia; 32%); New Hampton Goldfields Ltd. (Australia); Hill 50 Ltd. (Australia); Randfontein Estates (74%).

Principal Competitors: AngloGold Limited; Barrick Gold Corporation; Newmont Mining Corporation.
 

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