HMY - Harmony Gold: I Find The Stock Attractive

2023-09-18 12:26:57 ET

Summary

• Harmony Gold Mining Company announced its FY23 results on August 23, 2023.
• The company's solid balance sheet, low net debt, and potential for future growth make it an attractive long-term investment.
• I recommend buying HMY between $4.25 and $4.10 with possible lower support at $3.90.

Introduction

Harmony Gold Mining Company Limited ( HMY ) is one of the South African gold miners I regularly cover on Seeking Alpha. This article updates my article published on July 10, 2023.

Note: I have followed Harmony Gold regularly on Seeking Alpha since September 2019.

The company published a presentation on August 30, 2023, called " Mining with Purpose ," which will be used in this article.

The company operates nine underground mining operations, one open-pit mine, and four South Africa surface operations, representing 90.2% of the total yearly output.

Harmony Gold is active in Papua New Guinea, where it owns the Hidden Valley mine, an open-pit gold and silver mine representing 9.6% of the total yearly gold production, as shown below:

Finally, On August 23, 2022, Harmony Gold released the FY23 results ending June 30, 2023.

Note: Gold miners in South Africa are not easy to cover because of the recurring complexity of their financial releases. Complete results are released every 6 months , but the companies also release quarterly updates , which could be confusing and difficult to present here.

Also, another hurdle is the change between the Rand and the , which is fluctuating quickly. Below are the FY23 Key highlights from the press release:

Investment Thesis

As I said in my prior article, the most distinctive investing feature of Harmony Gold is that the company concentrates on South Africa, which represents 90.2% of the total gold production, increasing the risk premium.

South Africa is known to experience numerous technical recurring issues, such as electrical shortages, labor unrest, and political. Furthermore, The Hidden Valley gold and silver mine is located in Papua New Guinea, which is risky for business.

However, despite those unavoidable weaknesses, I still consider HMY attractive in the long term based on its solid balance sheet with low net debt, potential for future growth with improved margins, and an attractive stock valuation with a gold price trading over $1,900 per ounce. The company has significant mineral reserves of 39.3 Moz, including Silver and Copper.

Gold's near-to-medium outlook is turning on the bullish side, with the Fed expected to hold the interest rate this month and turning increasingly neutral, with potentially a final 25-point raise before pausing.

The gold price is now up ~17% YoY.

Thus, one great strategy I often recommend in this sector, especially for HMY, is trading LIFO for about 60% of your total position and keeping a core long-term position for a much higher payday that I believe could happen in 2024. Doing so allows you to take advantage of the short-term volatility while positioning for a possible future uptrend.

Stock Performance

HMY is up 105% on a one-year basis. The stock price has dropped since May-June 2023. However, HMY is outperforming its peers.

Harmony Gold Mining - Balance Sheet Ending June 2023 with Gold Production - The Raw Numbers

Note: All numbers are indicated in US$ . I have used a ratio Rand/ of 18.0.

Data Source: Company document .

1 - Balance Sheet Analysis

1.1 - Revenue for H1 2023 (ending June 30, 2023) and other financial indicators.

Harmony Gold posted revenue of $1,388 million in H1 2023, as indicated in the graph above. The FY23 revenue was $2,734 million, compared to $2,744 million in FY22. While the company indicates an increase of 14% (in Rand currency), a slight decrease of 0.4% translated in . Again, I used a ratio R/ of 18.0.

The company said in the press release:

This increase was due to higher underground recovered grades which increased by 8% to 5.78g/t in FY23 from 5.37g/t in FY22. This was further supported by the higher average gold price received which increased by 15% to R1,032,646/kg (US$1,808/oz) in FY23 from R894,218/kg (US$1,829/oz) in the previous reporting period.

1.2 - Free Cash Flow was $154.12 million in H1 2023. FY23 Free Cash Flow is $120.5 million

The 6-month Free Cash Flow was $154 million, and the Yearly Free cash flow was $120.5 million, compared with $45 million in FY22. A good improvement here is due to higher gold production in the last 6 months, as shown in the chart above.

The dividend is $4.03 per share for FY23.

1.3 - Debt

Net debt was $298 million at the end of June of 2023. The total cash was $153 million . Net debt to EBITDA is below 1x After the Eva Copper Project Acquisition. Liquidity is about $400 million (7.2 billion Rand).

Harmony concluded the Eva Copper transaction on 16 December 2022 for $170 million, paid using available debt facilities. HMY is updating the feasibility study and will provide a comprehensive update once it is complete.

In the press release:

Maintaining a robust and flexible balance sheet with strong liquidity is prudent as we expand internationally. With the acquisition of Eva Copper on 16 December 2022, net debt/EBITDA increased from 0.1 to 0.6 times. Due to the strong cash flows generated throughout the financial year, we have repaid debt of R2 045 million (US$115 million) since December 2022, resulting in net debt/EBITDA of 0.2 times at the end of the financial year.

2 - Production Analysis - Historical Data and Commentary. H1 2023 and FY23 Ending June 2023.

Total gold production for H1 2023 was 727,060 Au Oz compared to 707,638 Au Oz in H1 2022.

Also, production for FY23 ending June 30, 2023, was 1,467,715 Au Oz, down 1.3% from 1,486,517 Au Oz in FY22.

Production 6-month History:

Note: HMY produces gold from three segments: Surface and underground in South Africa and Hidden Valley in PNG. The Underground production in South Africa is the most prolific.

FY23 production was a little lower. Below is shown the production comparison FY23 versus FY22 per mine:

Note: Bambanani was also closed at the end of FY22, as this mine had reached the end of its commercial life.

• Production Underground for FY23 decreased by 1.6% to 1,085,345oz compared to 1,103,605oz in FY22. Excluding Bambanani, production increased by 2.6%.
• FY23 production from surface sources decreased by 8% to 7,523kg ( 241,872oz ) from 8,203kg (263,730z) in FY22.
• Gold production in FY23 at Hidden Valley increased by 18% to 4,370kg ( 140,498oz ) from 119,182oz in FY22. Silver production increased 41% to 2,520,163oz from 1,790,378oz in FY22. The improved reliability of the overland conveyor belt contributed towards the increase as volumes normalized compared to FY22. However, a slower-than-planned mining rate in the first three quarters negatively impacted gold and silver production.

Note: As I have said, the financial results for South African miners like HMY, Sibanye Stillwater ( SBSW ), Impala Platinum ( IMPUY ), and others are extremely difficult to report due to how they convey their results. It would be extremely beneficial for international shareholders to get simpler quarterly results.

2024 Production Guidance

FY24 production guidance for the group is between 1.38M ounces and 1.48M ounces at an AISC of less than R975 000/kg.

Underground recovered grade for FY24 is between 5.60g/t and 5.75g/t.

Capital expenditure in FY24 is expected to increase to $535 million, mainly due to investment in major projects, necessary fleet replacement at Hidden Valley due to the life of mine extension project, and an increase in ongoing development capital.

The company is currently updating the Eva Copper feasibility study . HMY will provide updated guidance on the project development costs and funding structure upon completion.

Technical Analysis and Commentary

Note: The chart is adjusted for the dividend.

HMY forms an ascending channel pattern, with resistance at $4.50 and support at $4.20.

Ascending channel patterns or rising channels are short-term bullish in that a stock moves higher within an ascending channel, but these patterns often form within longer-term downtrends as continuation patterns. The ascending channel pattern is often followed by lower prices, but only after a downside penetration of the lower trend line.

The trading strategy is to take profits between $4.40 and $4.60 with possible higher resistance at $4.70 and accumulate between $4.25 and $4.10 with possible lower support at $3.90.

I recommend trading LIFO for about 60% of your total position and keeping a core long-term holding for a much higher target.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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