Harmony Gold yesterday defended its hedging strategy despite a hefty R1.7billion derivatives loss in the year to the end of June compared with a R484million gain a year earlier. Photo: Supplied
Harmony Gold yesterday defended its hedging strategy despite a hefty R1.7billion derivatives loss in the year to the end of June compared with a R484million gain a year earlier. Photo: Supplied

Harmony defends strategy in spite of loss

By Dineo Faku Time of article published Sep 16, 2020

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JOHANNESBURG - Harmony Gold yesterday defended its hedging strategy despite a hefty R1.7billion derivatives loss in the year to the end of June compared with a R484million gain a year earlier.

The 70-year-old gold-mining company blamed the stronger rand gold price for the loss. It told investors that the derivatives had realised net gains of R2.16bn since their inception in 2016.

Financial director Boipeolo Lekubo said the programmes were conservative, given that the group maintained a hedging limit of 20percent of gold production for two years, locking in the current high price for the future.

“People are quick to forget that the hedging strategy helped to fund the acquisition of Moab Khotsong, fund Hidden Valley, as well as return cash to shareholders,” said Lekubo, adding that Harmony had restructured some of the hedges due to the Covid-19 pandemic.

“For 80percent of our production, we benefit from the full spot price. We believe that our strategy on hedges is the right thing to do.”

Gold has climbed almost 30percent since the beginning of the year and reached the record level of $2000 (R33345) an ounce on the global economic fall out due to the Covid-19 pandemic.

Harmony received an average gold price of $1461 an ounce during the year under review - 14percent higher than in the prior year.

However, it said the increase in the gold price, both in dollar terms and in rand terms, negatively affected the valuation of the derivatives.

Harmony recorded a net realised negative cash flow of R1.77bn in its derivatives, principally due to R1.49bn in negative cash flow on rand gold derivatives.

The group, which finalised the acquisition of the $300m Mponeng mine and Mine Waste Solutions from AngloGold Ashanti on Monday, did not declare a dividend, saying its priority would be debt repayments.

“Given the current gold price, our priority will be to repay debt, following which the intention is to have a look at a dividend. What the dividend policy will look like, we will come back to the market once the decision is made,” said Lekubo.

In June, Harmony raised $200m through a rights issue to in part fund the acquisition of the Mponeng mine and Mine Waste Solutions.

Harmony’s financial highlights included a 9percent increase in production profit and revenue to R7.1bn and R29.2bn, respectively.

The group’s shares have accelerated 316percent since January 2016 on the record gold price. The company is set to be included in the FTSE/JSE Africa Top 40 Index.

However, due to the impact of electricity constraints during the third quarter, the national lockdown and the phased recovery in South Africa in the fourth quarter, year-on-year total annual gold production fell 15percent to 1.2million ounces.

The group said 29 of its employees succumbed to Covid-19 after 4.1percent of its workforce tested positive; while 94 percent had recovered and there were 61 active cases.

Harmony rose 3.69percent on the JSE yesterday to close at R106.86.

BUSINESS REPORT

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