GNAM Investment Competition Harmony Gold Mining Company Ltd 30 October 2016 Jomari Swarts – MBA 2016 Keitumetse Bolata – MBA 2016 Raymond Greig – MBA 2016
Company Overview Listed on JSE, NYSE & BSE in Mining sector Customers Operations Tech • China, India, USA • South Africa • Investment in; – 9 Operations Demand for – ice plants • Jewellery, – 1 open pit mine – rail-veyor for semi-automated • Technology, • Papua New Guinea • Investment and central banks – 1 open pit mine – Exploration sites Strategy Market Shareholders • 3rd Largest Minining Co& in SA • Competitive, value focused gold mining company • 13th largest in the world • New experienced CEO • Higher production goals for 2017 • • African Rainbow Minerals Ltd., Competitors; • Identifying acquisition targets • Allan Gray Proprietary Ltd, – AngloGold Ashanti and (outside South Africa) – JV with • Van Eck Associate Corporation and – Gold Fields Hidden Valley mine • Retail Investors (North America) • Currency hedge (90% of operations in SA) • 1st dividend pay-out in 4 years 2
Macroeconomic Analysis • Hillary Clinton most likely to be the next US president US elections Gold price for past 1Y (USD/oz): Open (30 Oct ‘16) 1 276 SA’s credit High 1 367 • Expect to be downgraded to non- investment grade rating decision Low 1 054 in Dec ’16 • Expect interest rate hike in the short- US Fed interest term Gold price forecast for 2017 rates (USD/oz): Average 1 420 • Over supply in the market • Demand down in 2016 Gold • Forecasted demand to increase in Asia • Increase in western investment interest 3
Macro-economy effects on Harmony Forecast (2017) Justification Effect on Harmony Gold demand for jewellery in revenue Gold Increase to $1,420 an Asian and investments in ounce the West Strengthen global confidence in US earnings US dollar economy Revenue earned in US dollars Weaken earnings SA rand SA downgrade to junk status SA mines’ costs are in SA rand Increase US Fed int. Attempt to boost US Dampen gold price rally rate economy Increase in rand gold price => Rally in Harmony share price 4
Group Performance vs Competitors Harmony AGA Sibanye Gold Fields Pan African 18,461,615,024 Billion Billion Billion Billion Market 18,461,615,024 75,308,871,871 34,674,059,662 45,915,462,994 6,762,358,808 Cap R42.20 Operating Operatin Operating Operating Margin Margin Margin Share R42.20 R184.49 R37.53 R55.89 R 3.48 Operating Margin price 328.86% Change 328.86% 56.71% 61.21% 52.04% 87.1% 19.1 in 2016 3.37% P/E 19.1 37.4 21.32 25.51 11.5 ROE 3.37% 4.57% 1.23% 7.97% 16.89% Despite low ROE’s the SA gold industry is on treading upwards 5 Data sourced from on 29/10/2016 http://www.moneyweb.co.za/tools-and-data/click-a-company/
Performance over the last year Share price against the SA rand gold price 700% 25,000.00 600% 20,000.00 500% 400% 15,000.00 300% 10,000.00 200% 100% 5,000.00 0% Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 -100% 0.00 Sibanye Harmony Gold AngloGold Ashanti DRD Gold Limited Gold Fields Limited Gold Price/oz Strong performance for South African gold companies due to strong Rand gold price 6
Company Analysis: Financials Profitability Efficiency • • Revenue ↑18.8% Collection period ↓4.62 days • • Gross margin ↑13.9% Settlement period ↑7.3 days • • Operating costs ↓17.1% Operating cycle ↓9.69 days • • ROE increased 20.33 % points Increased ability to generate profits using assets Liquidity and cash flow Leverage • • Current ratio at 1.71 Debt ratio ↓ to 23.9% • • Acid ratio at 1.13 Debt to Equity ↓ to 31.4% • • Increased cash from operations Interest cover ↑ at 5.81 times • • Sufficient liquidity to cover short- Lower financial risk in term borrowings macroeconomic environment 7
Market sentiment • PE at 19.19, below industry average of 31.8 • Dividend declared of R0.50 in 2016 • Share price trending upwards Reaction to the All Share index Share Price over the past year 120.0% 150.0% 7000 18 16 100.0% 6000 100.0% 14 80.0% 5000 12 60.0% 50.0% 4000 10 40.0% 8 3000 0.0% 20.0% 6 2000 0.0% -50.0% 4 -20.0% 1000 2 -40.0% -100.0% 0 0 % change in Harmony Gold share price % change in volume traded Harmony Gold Price Exchange rate % change in ALSI 8
Valuation BUY Warranted price from all valuation methods is below market price Current Share Price is R42.20 caused by Value per share HEPS at 500 R47.06 (upside of 4.5%) Incomplete/biased Conservatively valuation of PNG estimated growth Operations ROE 3.% R at 10% G at 1% (SA’s GDP growth 2017) BUT • Harmony has recognised the risks in Southern Africa and is diversifying operations by investing in emerging markets • company, appears to have a good business strategy and is not highly leveraged. Harmony should remain a good long term investment We recommend revaluing Harmony when the next interim financials are out to confirm whether we have undervalued Harmony’s growth and value of acquisition. 9
Thank You 10
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