Harmony Gold had good news for shareholders this week. They doubled the dividend. Investors responded by dumping the stock.
Shares of the South African miner fell on the New York Stock Exchange after the company released its first-half results on Wednesday. The numbers told two very different stories at once.
On one hand, operating profit surged 61%. The interim dividend hit a record ZAR 3.4 billion, roughly $204 million. On the other hand, the company missed its production target and costs blew out in almost every direction.
Wall Street looked at both stories and chose to focus on the bad one.
Why Harmony Gold investors are punishing the stock
Harmony was supposed to produce around 800,000 ounces of gold in the first half of the year. It produced 724,099 ounces instead. That is a 9% drop from the same period a year ago.
Part of the blame falls on a sodium cyanide shortage that hit the entire South African gold industry. The disruption affected recoveries particularly in surface operations, which consume more sodium cyanide than underground mines, the company said in its official announcement.
Underground grades also disappointed. Recovered grade fell 11% to 5.72 grams per tonne, down from 6.44 grams per tonne a year ago. Lower metallurgical recoveries and unplanned grade dilution made things worse.
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Then came the cost shock. All-in sustaining costs jumped 21% to $2,115 per ounce. Cash operating costs rose 25%. Labor inflation, Eskom load shedding, and lower production volumes all piled on at the same time, the company disclosed in its SEC filing.
First-half production results at a glance:
- Gold output: 724,099 oz, down 9% from a year ago
- Underground recovered grade: 5.72 g/t, down from 6.44 g/t
- South Africa high-grade underground output: down 14%
- Hidden Valley in Papua New Guinea: up 4%, a rare bright spot
- All-in sustaining cost: $2,115 per oz, up 21%
The dividend double the market ignored
In the middle of all this, Harmony made a bold move on shareholder returns.
The company announced a new dividend policy that pays out up to 50% of net free cash flow. The interim payout jumped to ZAR 5.30 per share, more than double what shareholders received a year ago and 58% above analyst consensus.
The balance sheet is in strong shape to support it. Harmony ended the period with R8 billion in net cash, zero debt, and total liquidity of about R14.8 billion. Free cash flow covered both capital spending and the dividend with room left over.
CEO Beyers Nel was direct about the tough quarter. Speaking on the earnings call, he said operational fundamentals remain firmly intact despite short-term headwinds, and that plant recoveries have since normalized. He confirmed the company is still on track to meet its full-year targets.
Harmony Gold’s second-half recovery plan, explained
Management is not backing down from its full-year guidance of 1.4 to 1.5 million ounces. To get there, the second half needs to deliver roughly 420,000 more ounces than the first half. That is a big number to make up.
The cyanide supply issue is being resolved by shifting stock between operations and commissioning a new dissolution plant. Eskom power risk is being partially offset through renewables contracts covering about 20% of energy needs.
HASSAN / AFP via Getty Images)
Underground grade is expected to recover above 5.8 grams per tonne by year end. The company is counting on tighter blast control and better mine sequencing at Moab Khotsong and Mponeng to get there.
Key second-half recovery targets:
- Gold output: approximately 420,000 more oz still needed in the second half
- Underground recovered grade: back above 5.8 g/t
- All-in sustaining cost guidance: R1.15 million to R1.22 million per kilogram
- Eva Copper project: contractor now mobilizing to site
- CSA copper mine in Australia: maiden production already underway
Gold at $3,400 is not saving gold stocks right now
Gold has been one of the best performing assets of the year, trading near $3,400 per ounce. That should have been a major gift for Harmony.
And in some ways it was. The company’s average realized price for the period was $3,421 per ounce, up 36% from a year ago. That figure, confirmed in Harmony’s SEC filing, pushed revenue up 20% to $2.56 billion and drove operating profit up 61%.
But a high gold price only helps if you are actually pulling gold out of the ground efficiently. Harmony was not doing that in the first half of the year. When output falls and costs spike at the same time, even $3,400 gold cannot paper over the cracks.
Gold miners broadly have lagged the spot price by about 15% this year. Harmony’s selloff fits right into that frustrating pattern for the sector.
The stock now sits at roughly 14 times forward earnings and about six times enterprise value to earnings before interest, taxes, depreciation, and amortization (EBITDA). That is a clear discount to bigger peers like Newmont (NEM) and Barrick Gold (GOLD). The question is whether management can close that gap with a stronger second half. The third-quarter operational report will be the first real test of that promise.
Related: Analysts have a message for investors on the gold price drop
