Harmony’s First Dividend in 5 Years

Harmony Gold Mining (HMY - Analyst Report), the third largest producer of gold in Africa, recently declared its first dividend in the last five years. The company declared dividends of 6 cents per share for the year ended June 30 payable on Sept 21. With almost insignificant profits, Harmony had restrained dividends.

Harmony reported earnings of 29 cents per share for the fiscal fourth quarter, higher than 17 cents in the previous quarter, helped by sales of less-profitable assets, staff cuts and lower debt resulting in lower interest expenses. Revenues increased by $15.8 billion driven by a stronger gold price. Gold production increased sequentially, although by a modest 1.1% from 10,880 kg to 11,003 kg.

Harmony plans to increase production by more than 40% to about 2.2 million ounces a year by 2012, from the present 1.55 million. The company is also looking to acquire the assets of Pamodzi Gold Ltd. in Free State, South Africa for $3.4 billion.

However, Harmony is affected by the strength of the rand as its expenses are denominated in the local currency while sales are denominated in dollars. The company’s net profit fell 76% last quarter to R238 million as the South African currency rallied against the dollar.

More so, Harmony has been battling to restore credibility since the resignations of its Chief Executive Officer and Financial Director in 2007, which resulted in a quarterly cost of about $2.08 billion related to final compensation.

We believe Harmony needs to focus on cost reduction. The company has recently agreed on salary increases of between 9 and 10.5%. Harmony’s power supplier, Eskom Holdings Ltd. has also increased its tariff by 31%. These cost increases are expected to have an impact on Harmony’s earnings in the near term.