Harmony Gold: A High-Cost Miner Significantly Leveraged To Gold Prices

Investment Thesis - Harmony Gold is one of the highest-cost gold miners globally, with significant earnings leverage to gold prices [2] - The company's production growth in 2024 surprised the market, driven by improved recovered grades in its two young underground mines, which are viewed as sustainable [2] - FY24 performance exceeded production targets and cost guidance, with full-year adjusted EPS up over 100% from the previous year [2] Company Overview - Harmony Gold Mining Company Limited is a mid-sized gold miner based in South Africa, with nearly all its gold mine assets located in South Africa, accounting for 90% of total output [3][5] - Key assets include Moab Khotsong and Mponeng, both high-grade ultra-deep underground mines with over 20 years of remaining life [3] - The company also operates a large surface operation in South Africa and one major mine in Papua New Guinea, Hidden Valley [3] Production and Guidance - FY23 production was 1,467,715 ounces, with FY24 guidance set between 1.38 to 1.48 million ounces [4] - In 1HFY24, gold production increased by 12% year-over-year to 832,000 ounces, exceeding initial guidance [10] - Management raised the full-year production target to 1.55 million ounces, with actual production reaching 1.56 million ounces, a 6% year-over-year increase [10] Cost Profile - Harmony Gold has the third-highest All-in Sustainable Cost (AISC) among global gold miners, negatively impacting margins, especially when gold prices are low [7] - The company’s AISC was reported at $1,588 per ounce in Q1 2023, with a 4.1% increase from Q4 2022 [8] Financial Performance - The total attributable reserve was 39.3 million ounces at the end of FY23, primarily located in South Africa [5] - Financials began to recover in 1HFY24, with earnings more than doubling in FY24 due to a rally in gold prices [9][15] Market Outlook - The outlook for gold prices remains positive, with expectations of continued upward trends even after anticipated rate cuts by the Fed [12][15] - Harmony Gold's share price has outperformed many peers, rallying over 155% in the past year, attributed to high operating leverage to gold prices and strong production growth [13] Valuation - Harmony Gold's valuation is considered not stretched at 8.6x FY25 PE, despite the strong share price rally [13]