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South African gold producer Harmony Gold Mining Company (HMY) recorded earnings of 4 cents per share in the second quarter of fiscal 2010, significantly down from last year’s earnings of $1.27. However, reported earnings matched the Zacks Consensus Estimate.

Revenues were down 6% year over year to $397 million driven by lower gold production, while it improved 8.2% sequentially on a 15% rise in average gold prices to $1,100 per ounce from $957 per ounce in the reported quarter. Gold production for the quarter was down 1.2% from the previous quarter to 376,956 ounces, mainly due to restructuring.

Cost of sales increased 11.4% year over year to $355 million, while product cost was up 7% to $290 million. This resulted in a more than 50% decline in gross profit to $42 million in the reported quarter. Net cash utilized in operations after all capital expenditures was $93.4 million. Cash and cash equivalents amounted to $108 million as of December 31, 2009. Harmony Gold's restructuring actions have reflected in a net debt of about $50 million.

Harmony Gold is not expecting the next quarter to be any better. Management is guiding for flat production in the upcoming quarter even in the face of Papua New Guinea production expanding, implying continued disappointing output from South Africa. The company confirmed that a shaft at its Evander pit has been closed (three months prior to expectations) and that lower production would continue at Virginia, following the restructuring of a shaft.

The company is expecting a 25% increase in power cost and a royalty payment from the fourth quarter of fiscal 2010. We expect Harmony Gold’s profitability to decline in the near term with lower production and higher unit costs. Given that Harmony Gold had rolled onto summer electricity tariffs (expected saving of approximately $10.7 million), we believe the decrease in total operation costs of $3 million is disappointing.

Harmony Gold is the world's fifth-largest gold mining company, and has operations in South Africa and Papua New Guinea. It produces about 1.5 million ounces of gold per annum (primarily from South Africa).

The company has now completed an internal re-structuring, which should deliver growth at increasing margins, going forward. Growth should be delivered from the development of five large-scale projects in South Africa and Papua New Guinea, which together will exploit 20 million life-of-mine ounces.

Author's Disclosure: none

Source: Discordant Quarter for Harmony