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On Aug 22, we downgraded our recommendation on gold miner Harmony Gold (HMY - Analyst Report) to Underperform. Our view reflects high operating costs, volatility in gold prices and labor issues.

Why Downgraded?

Harmony Gold, on Aug 14, recorded a wider loss of 20 cents per share for fourth-quarter fiscal 2013 (ended Jun 30, 2013) versus a loss of 2 cents a year ago and 5 cents in the sequentially prior quarter. The results were hurt by a hefty impairment charge and temporary closure of the company’s Kusasalethu mine. Lower gold prices contributed to a double-digit decline in sales. Harmony Gold is progressing with its cost reduction program in a weak gold price environment.

Following the release of the fourth quarter results, the Zacks Consensus Estimate for Harmony Gold for fiscal 2014 went down 42% to 33 cents per share. The company now retains a Zacks Rank #5 (Strong Sell).

Harmony Gold, which is among the prominent gold miners in South Africa along with AngloGold Ashanti Ltd. (AU - Snapshot Report), remains one of the highest cost major South African gold producers. Apart from electricity supply concerns, the company has labor issues, resulting in high operational costs. Cash operating costs rose on a sequential basis in the most recent quarter due to rise in electricity tariffs.

Moreover, Harmony Gold’s operations are likely to be impacted by a slower-than-expected ramp-up in production at mines and gold price volatility. Weak gold prices coupled with higher costs are significantly affecting the company’s profitability.

Harmony Gold also remains exposed to geopolitical risks associated with potential mine shut downs and labor strikes. Labor disruptions at Kusasalethu resulted in a decline in gold production in fiscal 2013 and cost the company roughly R1.2 billion ($116 million). Harmony Gold faces tough labor and wage negotiations (with demand for significant wage hike) and the labor relation environment remains volatile in the gold industry.

Mining Stocks That Warrant a Look

While we prefer to avoid Harmony Gold, other companies in the mining industry with favorable Zacks Rank are Avalon Rare Metals Inc. and Denison Mines Corp. (DNN - Snapshot Report). Both retain a Zacks Rank #2 (Buy).

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