Tags: Harmony | Gold | leverage | HMY

Harmony Gold: Leverage on Rising Metal

By    |   Monday, 31 Oct 2011 12:37 PM

South African mining company Harmony Gold Mining (HMY) has a significantly higher cost structure than investors will see with the large U.S. gold miners. If the price of gold metal does rise dramatically, however, these higher costs actually provide a form of leverage for investors in Harmony Gold.

Harmony Gold develops and mines more than a dozen properties in South Africa plus extensive mining operations in Papua, New Guinea. About 92 percent of gold production currently comes from the South African mines, but the New Guinea facility holds 21 percent of the company's proven gold reserves.

Harmony Mining closes its fiscal year on June 30. For fiscal 2011, the company produced 1.3 million ounces of gold, down from 1.42 million in 2010. The average price received in 2011 was $1,370 per ounce compared to $1,090 a year earlier.

Cash costs to produce the gold increased to $1,009 from $801 per ounce. The result is what the earnings report calls headline earnings of $138 million or 32 cents per share in fiscal 2011, up from $1 million or zero cents in 2010.

Leveraging costs

Notice from the numbers above that a net $100 gain in the price of gold minus the production costs resulted in the Harmony bottom line going from break-even to a $140 million profit on lower production volume.

With gold recently trading above $1,900 per ounce and currently around $1,650, the profit margins going into the company's fiscal 2012 could increase dramatically. If Harmony Gold Mining is able to mix in a higher level of production, the result could be a very positive upside surprise for share owners.

The downside trade-off is a stock with a high degree of volatility and a current price to earnings ratio over 30. A potential investor should pick an entry price based on both the price of gold and where the share price is in relation to share-price cycles.

The company on Oct. 31 reported that earnings for the quarter rose to 95 cents per share from 30 cents in the previous quarter. The stock popped higher on the open and then settled back toward the previous close on the news.

Recently, the analysts at HSBC Securities upgraded their rating on HMY to overweight from neutral with a target price 60 percent above the current share value. Each U.S. ADR share represents one share of the South African stock.

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South African mining company Harmony Gold Mining (HMY) has a significantly higher cost structure than investors will see with the large U.S. gold miners. If the price of gold metal does rise dramatically, however, these higher costs actually provide a form of leverage for...
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Monday, 31 Oct 2011 12:37 PM
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