Economic sustainability

Economic context

Harmony is a significant role-player in global gold markets, in the South African economy and in the economies of the provinces in which it operates. Harmony is one of the world’s largest producers of gold, and South Africa’s third-largest gold producer.

Although gold production in South Africa has been declining in recent years, Harmony is an important contributor to economic activity and employment in the provinces in which it operates namely: Gauteng, North West, Mpumalanga and the Free State, as well as neighbouring labour-sending areas.

The direct and indirect employment created by the group is another indication of the company’s economic contribution. In FY10, Harmony employed 42 597 people – a substantial portion of the individuals employed in the South African and PNG gold mining industry as a whole.

Producing safe profitable ounces

Operating and financial performance in FY10

Harmony delivered a satisfactory financial performance for the year in spite of effects of the global economic downturn. Detailsof this performance on a quarterly basis and for the financial year may be found in the quarterly reports and the Annual Report.

Key features of this financial performance in FY10 are:

• Total gold production of 1.428 million ounces (44 433 kilograms)
• Average gold price received of R266 009/kg ($1 092/oz)
• Revenue generated of R11 284 million ($1 489 million)
• Capital expenditure of R3 353 million ($442 million)
• Net loss for the year of R192 million ($24 million)
• Operating margin of 26%

At the end of June 2010, Harmony’s market capitalisation was R34.9 billion ($4.5 billion).

Harmony’s revenue stream has increased year-on-year over the past five years as the company has restructured to focus on safe, profitable ounces. The decrease in production is also as a result of this restructuring.

Adding value

Harmony’s value added statement for FY09 and FY10 is presented below, as well as a breakdown of payments made to government. No significant assistance was received from government, in South Africa or PNG.

Harmony Gold Mining Company Limited and its subsidiaries

Value-added statement for the year ended 30 June 2010

	FY10		FY09
	Rm	%	Rm	%
Sales of gold Less: cost of material and services	11 284 (4 491)		11 496 (3 341)
Value added from trading operations Profit on disposal of assets Income from investment Value added by discontinued operations – net	6 793 104 218 (32)	96 1 3 –	8 155 947 443 1 022	77 9 4 10
Total value added Distributed as follows: Employees (including directors and management) Salaries, retirement and other benefits (excluding employees tax)	7 083 4 193	100 59	10 567 4 568	100 43
Providers of capital Dividends to shareholders Interest on borrowings	213 246	5 3	- 212	- 2
Government and community Taxation Employees’ tax	84 719	1 10	335 693	3 7
Royalties	33	-	-	-
Social Investment	81	1	33	-
Total distributions Retained for reinvestment: Depreciation and amortisation Impairment of assets Profit/(loss) accumulated in the business Total re-invested	5 569 1 375 331 (192) 1 514	79 19 5 (3) 21	5 841 1 253 546 2 927 4 726	55 12 5 28 45
Total distribution including re-investment	7 083	100	10 567	100

*All other amounts in this statement exclude the effect of the discontinued operations.

The gold market and exchange rate

Harmony’s average R/US$ exchange rate used for FY10 was 7.58 while the average gold price was R266 009/kg (US$1 092/oz).

Harmony believes that gold remains a profitable product and expects the gold price, in dollar terms, to be sustained and possibly even increase in the medium to long term. This is despite the international financial markets not having fully stabilised following the global economic crisis.

Harmony is highly exposed to the rand dollar exchange rate given that the bulk of the company’s current operations are based in South Africa. Therefore, while Harmony’s earnings are in dollars, its costs are largely incurred in rands.

The rand/dollar exchange rate has over the past year showed remarkable resilience. The strengthening of the rand against the US dollar throughout FY10 placed continued pressure on Harmony’s profit margins.

Harmony’s strategic plans for FY11 have been based on a gold price of R250 000/kg of ($950/oz) and an exchange rate of R8.19/US$, with financial modelling done at R275 000/kg.

Investing in the future

As part of Harmony’s growth strategy, the company aims to acquire long-life assets that offer higher grades through the regular assessment of assets in Africa and South East Asia which could potentially fit the Harmony portfolio. This is in addition to the substantial asset base currently under the Harmony group’s management and the group’s highly competent team of employees.

A key feature of FY10 was the restructuring of Harmony’s asset base in line with the strategy to deliver 2 million safe, profitable and sustainable ounces by 2013. The following significant steps were taken in FY10 to improve Harmony’s portfolio quality:

• Brand 3, Merriespruit 3, Harmony 2, Evander 2, 5 and 7 shafts were closed as their orebodies reached the end of their economic lives;
• continued investment in exploration and development took place at the company’s Phakisa, Kusasalethu, Doornkop and Hidden Valley growth projects, reaffirming their robust life-of-mine plans and reserve positions;
• Pamodzi Gold Mining Limited’s Free State assets were acquired. They are currently in liquidation and include President Steyn 1 and 2 shafts, Lorraine 3, Freddies 7 and 9, the Steyn plant and surface stockpiles;
• an international exploration programme was conducted which resulted in the discovery of a new zone of mineralisation adjacent to the main Wafi-Golpu copper-gold project in PNG. This Wafi-Golpu resource expanded to 16Moz Au, 4.8 Mt Cu & 55 Kt Mo (38.5Moz equivalent) of which Harmony’s share is 50%;
• the Evander operations and projects were reassessed. Following a review of the economic viability of the Evander South project under various scenarios, it has been excluded from Harmony’s reserves. The Libra project (retreating the Evander tailings) has been included in the reserve statement;
• Mount Magnet in Western Australia was sold post year-end to allow the company to focus on growing, developing and operating its portfolio of quality assets in PNG.

Harmony spent some R3.4 billion on capital expenditure in FY10, largely on the group’s five growth projects in South Africa and the development of the Hidden Valley Mine in PNG. In total, the company has spent R15.4 billion on capital projects over the past five years.

The group’s growth projects are: Doornkop South Reef Project, Kusasalethu New Mine Project, Phakisa Project and Tshepong Sub 71 Declines in South Africa; and the Wafi-Golpu Project in PNG for which feasibility and concept studies have begun.

Project update

Phase	Milestones achieved in FY10	Full production	Capital expenditure to date	Outstanding expenditure
Doornkop South Reef Project
Ramping up – production of 46 422 ounces in FY10	Equipping of the man winder compartments Equipping of the rock winder compartments Completion of the main pump station 207 level	FY15/16 Annual full production of 250 000 ounces at a LOM grade of 4.96g/t	R1.47 billion	R294 million
Kusasalethu New Mine Project
Ramping up – production of 95 836 ounces in FY10	More than half of production now sourced from the new mine No 3 backfill shaft sunk to 109 level 115 level pump station commissioned	FY13/14 Annual full production of 286 000 ounces at a LOM grade of 6.37g/t	R1 034 million	R77 million
Phakisa Project (Sub 71)
Ramping up – production of 44 079 ounces in FY10	Rail-veyor infrastructure completed with commissioning of third rail-veyor train Phase 1 (ice plants, surface buildings and change houses) implemented Installation of permanent water handling system	FY13/14 Annual full production of 245 000 ounces at a LOM grade of 7.70g/t	R1.5 billion	R228 million
Tshepong Sub–decline Project
Development still in progress – first gold production scheduled for July 2012	New raise lines developed from the decline shaft	July 2019 Annual full production of 73 000 ounces at a LOM grade of 5.73g/t	R133 million	R114 million

For more detail on Harmony growth projects, see the Annual Report.

Harmony committed to extensive exploration in FY10 in South Africa, with some R219 million having been spent. The company is intensifying its exploration programme and has committed R377 million to exploration in FY11.

Economic transformation and empowerment

Harmony’s commitment to economic transformation and empowerment both in South Africa and PNG is evidenced by:

• Equity ownership in the company by historically disadvantaged South African (HDSA) interests. Harmony has achieved compliance with the Mining Charter through partnerships and the sale to HDSA companies of interests in the company and the underlying operations. At the end of June 2010, Harmony estimates that around 36% of its production was attributable to HDSA interests. Harmony’s HDSA ownership comprises shareholding by African Rainbow Minerals (ARM) as a result of a series of transactions including Freegold - a Harmony/ARM merger, the ARM Empowerment Trust; and other transactions, measured in terms of the “continuing consequences” provision of the Mining Charter in which previous transactions are included in calculating HDSA ownership credits in terms of market share as measured by attributable units of production. These include the Khuma Bathong transaction, the Simane transaction, the African Vanguard Resources (AVR) transaction and the sale of Orkney assets to Pamodzi Gold.
• Empowerment and transformation of the procurement base in South Africa, through the development of small, medium and micro enterprises (SMMEs) that are broad-based black economically empowered (BBBEE), and based in the provinces of operation as well as through doing business with large BBBEE companies. Harmony’s procurement processes and expenditure are governed by a group strategy and policy. BBBEE companies, and particularly local BBBEE companies, receive preference in the awarding of contracts. (The discussion below gives further details).
• Contracts awarded by Morobe Mining Joint Ventures (MMJV) to the landowner company (NKW Holdings Limited) owned by three landowner groups - Nauti, Kwembu and Winima - for catering, fuel haulage, general freight, plant hire, security, labour hire and bus services. MMJV is complying with the Memorandum of Agreement (MOA) on the Hidden Valley Project and will continue to offer business development opportunities to landowners as the mine enters its production stage, and more opportunities become available.

Implementing affirmative procurement in South Africa

Harmony is committed to the transformation of its procurement practices and performance. Harmony’s procurement policy promotes expenditure with companies recognised as BBBEE entities and local suppliers. The calculation for Harmony’s BBBEE/HDSA spend has been done using the Department of Trade and Industry (DTI) code as a guideline and the targets in Harmony’s Social and Labour Plans (SLPs) have been set in accordance with the company’s expenditure recognition as described in the DTI code. This practice will be amended in future to adhere to the requirement of the new Mining Charter that requires BEE figures determined by ownership alone, based on the definition as stipulated in the Mining Charter of September 2010 that reads as follows: “BEE entity” means an entity of which a minimum of 25% + 1 vote of share capital is directly owned by HDSA as measured in accordance with flow through principle”.

Harmony’s BBBEE procurement expenditure in FY10 amounted to R2 036 million (38% of total expenditure). This is 2% lower than its SLP target of 40% for the year. Harmony’s BBBEE spend by category for FY10 was as follows:

• capital, at R1 498 million (27%);
• services, at R307 million (5%); and
• consumables, at R231 million (4%).

Harmony faced various challenges during the year in achieving its affirmative procurement targets owing to limited skills within the BBBEE supplier base. This had an impact on the BBBEE product and skill offerings, decreasing their business opportunities. Challenges have also been experienced in dealing with companies that are not familiar with tax law, and health and safety requirements, among others. Harmony aims to address these shortcomings through its enterprise development programmes, including its Enterprise Development Centres (EDCs).

Harmony’s EDCs, now operational in Welkom and Soweto, were structured in support of affirmative procurement with the objective of making it easier for HDSA suppliers to do business with Harmony. The development of the EDCs is being implemented in two phases:

• Phase 1 has been completed and has involved the development of a database of local emerging BBBEE suppliers and the documentation of their competencies. It also alerts these suppliers of new opportunities available from Harmony and assists them with the tender and vendor processes, including arranging financing if required. Phase 1 of the EDC project also supports the emerging BBBEE suppliers in the execution of their orders to ensure efficiency, and facilitates joint ventures with traditional suppliers.
• Phase 2 will incorporate skills assessments, business development, provision of business facilities and administrative support to the local BBBEE suppliers.