J Studios
Investment Thesis
Harmony is one of the highest-cost gold miners globally, with significant earnings leverage to the gold price.
Its production growth surprised the market in 2024, driven by improved recovered grades in its two young underground mines, which we view as sustainable.
FY24 performance exceeded its production target and cost guidance and full year adjusted EPS was up over 100% from a year ago.
Introduction
Harmony Gold Mining Company Limited (NYSE:HMY) is a mid-sized gold miner based in South Africa. Almost all of its gold mine assets are located in South Africa, accounting for 90% of its total gold output. Moab Khotsong and Mponeng are its two key assets, both high-grade ultra-deep underground mines with over 20 years of remaining life. Additionally, Harmony Gold also has a large surface operation in South Africa. The only major mine it operates outside of South Africa is Hidden Valley in Papua New Guinea.
Chart 1: Harmony Gold's main assets and production volume.
Note: Harmony Gold's fiscal year ends in June.
The total attributable reserve of Harmony Gold was 39.3 million ounces by the end of FY23, mostly located in South Africa, the home base of the company. The geographic concentration of mining assets leads to lower jurisdictional and operational risks for the company compared to its more diversified global peers.
Chart 2: Harmony Gold's reserve
A high-cost mining company
Harmony Gold has the third-highest All-in Sustainable Cost (AISC) among global gold miners, as many of its mines have either a short remaining life or are ultra-deep underground mines. Hence, they require high extraction costs. Harmony Gold's poor cost profile is negative for margins, particularly when gold prices are low. However, once the gold price began to rally since 4Q23, it staged a dramatic earnings recovery, with earnings more than doubled in full-year FY24, according to the latest operation update.
Chart 2: Cost comparison among top global gold mining companies
Chart 3: Harmony Gold's financials began to recover since 1HFY24. (SA Rand to USD = 1:17.8).
Note: As Harmony Gold's fiscal year ended in June, hence its H1FY24 has not incorporated the strong gold price rally since March 2024.
Production surprised on the upside in FY24
Harmony Gold's gold production has been stable in the past 3 years, with no new mines added to the portfolio. Early in FY24, management guided that in FY24, production would be flat from FY23. However, in 1HFY24, Harmony Gold's gold production was up 12% yoy to 832 thousand ounces, exceeding the guidance significantly. This was driven by an 11% growth in recovered grades from its two major underground gold mines (see Chart 4).
The strong production momentum continued in 3Q24, leading management to raise its full-year production target to 1.55 million ounces from the previous 1.38-1.47 million ounces. In the latest operation update issued on August 26th, management announced its full-year production volume reached 1.56 million up 6% yoy. The recovered grade was also up 6% yoy to 6.11 (g/t).
Chart 4: Harmony Gold's recovered grade in South Africa underground mines continues to improve
Outlook for gold price is still bright, despite over 20% rally YTD
In my previous report on leveraged gold mining ETF, I listed three reasons for a continuing gold rally after February's first rate cut. Firstly, institutional participation in gold is still limited, given the gold rally in 2Q was accompanied by a rising treasury yield which contradicts the conventional framework for valuing gold. But once the Fed began to cut, the fundamentals for gold will become stronger. Secondly, the long gold, short copper trade and long gold, short oil trade will gain more popularity, as weak global macro is negative on nearly all industrial metals and energy but positive on gold. Thirdly, the AI theme won't last forever and investors will be looking for alternative assets to diversify their investment.
What to do now with the stock?
Harmony Gold's share price delivered a stronger return than most of its peers YTD, thanks to its high operating leverage to the gold price. Additionally, the stronger-than-expected production growth from its two-core underground assets added fuel to the fire.
Chart 5: Harmony Gold rallied over 155% in the past year, while large-cap gold miners had returns ranging between 27-40%
I believe the stock will still have room to run for three reasons. The outlook for the gold price is still positive. Harmony Gold's FY24 results were better than expected, with a 1% beat in production volume and a 2% beat on AISC. Lastly, Harmony Gold's valuation is not stretched at 8.6x FY25 PE, despite its strong share price rally.
Chart 6: Harmony Gold's valuation is less stretched at 8.6x FY25 PE.
Risks
The primary risk for the stock is the potential pullback of gold prices following the Fed's anticipated first rate cut in September. While a 25bps cut is still the consensus, some investors hoping for a 50bps cut may be disappointed. This could lead to profit-taking pressures on rate-sensitive assets, such as gold.
Investors are waiting for Harmony Gold to issue FY25 volume and cost guidance from management. We expect flat to single-digit growth in production volume and a moderate increase in AISC. If the guidance is significantly lower than expected, it may result in a correction in the share price.
Conclusion
We believe that the price of gold will continue its upward trend even after the September cut is factored in. Harmony Gold is highly leveraged to the gold price due to its cost profile, and its fundamentals also improved due to sustainable recovered grade improvement at its two core mines. Harmony's FY24 results released on Aug. 26th were also better than expected.