JOHANNESBURG (miningweekly.com) – Gold mining company Harmony said on Monday that its current expectation was that it would not require any external funding to build the Golpu copper/gold mine with its 50% joint venture partner Newcrest and buy-in from the government of Papua New Guinea (PNG).
The JSE-listed company estimated the first-stage project capital on a 100% basis at $2.6-billion, with an internal rate of return (IRR) of 16%.
Announcing the results of the initial feasibility study and the second-stage prefeasibility study to analysts and journalists, new Harmony CEO Peter Steenkamp said that both studies confirmed a robust investment case that supported proceeding with the project.
The first-stage feasibility study justifies the development of twin exploration access declines, with two proposed block caves designed to extract half of the contained copper and gold of the Golpu reserve.
Planned was for the 50% remaining reserve to be extracted by a deeper block cave below the second-stage block cave, Harmony South East Asia CEO Johannes van Heerden reported.
The outcome of the options once pursued points to the total resource having a net present value of $2-billion with a 17.5% IRR.
“The other benefit that comes through out of this is you’re actually able to fund this ongoing development as part of your mine development. So you are able to progress this without going cash flow negative,” Van Heerden told the meeting attended by Creamer Media’s Mining Weekly Online. (Also watch attached video).
Harmony’s half share of the ore reserve is 5.5-million ounces of gold and 2.4-million tonnes of copper.
The mine has a 28-year life-of-mine with low operating costs.
The targeting of the highest-grade sweet spot for first-stage production allows for very strong initial cash flows.
Once out of the porphyry, the grade profile decreases as does the cash-flow profile.
The project is currently considerably more valuable than it was two years ago and on the basis of Harmony’s latest quarterly financial results, would produce double the free cash flow of Harmony’s best performing South African gold mine, at some $32-million, from output of 70 860/oz.
However, given Harmony’s poor returns from its joint venture Hidden Valley gold mine, with Newcrest, in PNG, mining analysts peppered Harmony management with penetrating questions.
Citibank analyst Johann Steyn recalled that in 2002, Harmony also guided 300 000 oz/y from Hidden Valley by 2008, but that Hidden Valley had not ever managed to produce above 100 000 oz/y since development.
“The key trouble with something like Golpu is that it looks exceptionally exciting but execution risk on something so complex can really be the swing factor between this becoming very profitable and being massively value destroying,” Steyn said, adding that Harmony’s share of capital of $2.6-billion for Golpu was bigger than its current market capitalisation.
Harmony CFO Frank Abbott pointed out that the capital outlay would be spread over a long period and it was not as if Harmony would be required to come up with $875-million in year one.
“We believe the amounts required are very affordable and repayable and our current cash flow is substantially more,” Abbott said, adding that if the PNG government decided to exercise its right to buy a shareholding, the capital would be an even easier ask.
The plan is for the processing infrastructure of the first phase to be used to support the development of the second stage.
Engagement with key stakeholders, including the PNG national government, the Morobe provincial government, landowners and community representatives was continuing to “ensure clear alignment on the project objectives".
The Harmony share price fell 8.3% before 11 am on Monday to R40.35 a share.