Aging South African Mines Will Struggle Amid Rising Costs

Key Takeaways

• Rising costs, aging mines, and regulatory burdens are set to erode operating margins and challenge long-term profitability.
  
• Delays in key projects and weakening gold demand pose significant risks to future production and revenue stability.
  
• Strategic asset transformation, financial strength, and diversified production position the company for resilient margins, growth, and shareholder returns despite industry volatility.

Catalysts

Engages in the exploration, extraction, and processing of mineral properties in South Africa, Papua New Guinea, and Australasia.

• Rapid acceleration of the global transition toward decarbonization and renewable energy threatens gold's fundamental role as a store of value, reducing long-term demand and weakening Harmony's pricing power and revenue outlook over the coming decade.
  
• Heightened environmental, social, and governance scrutiny-along with more stringent regulatory requirements-are likely to raise capital costs, slow permitting, and increase compliance-related expenditures, putting sustained pressure on Harmony's operating margins and future earnings.
  
• An aging portfolio of South African underground operations continues to face declining ore grades and rising labor and electricity costs, which, despite recent optimization, are poised to drive structurally higher operating costs, leading to margin compression and eroding net profitability.
  
• Ongoing delays and political risks around the permitting and approval for major projects like Wafi-Golpu and Eva Copper expose Harmony to the risk of a significant production gap in future years, potentially resulting in declining group production and lower revenue.
  
• The increasing exhaustion of easily accessible reserves and greater reliance on deep, capital-intensive extraction-combined with advancements in gold recycling and growth of substitute investment vehicles-will undermine Harmony's long-term volume prospects and price realization, threatening both top-line growth and free cash flow sustainability.

Harmony Gold Mining Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Harmony Gold Mining compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Harmony Gold Mining's revenue will grow by 11.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 15.7% today to 60.2% in 3 years time.
• The bearish analysts expect earnings to reach ZAR 55.2 billion (and earnings per share of ZAR 48.31) by about July 2028, up from ZAR 10.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 4.2x on those 2028 earnings, down from 15.7x today. This future PE is lower than the current PE for the US Metals and Mining industry at 7.9x.
• Analysts expect the number of shares outstanding to grow by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.67%, as per the Simply Wall St company report.

Harmony Gold Mining Future Earnings Per Share Growth

Risks

• Harmony Gold Mining's disciplined capital allocation, robust cost controls, and the transformation of its asset portfolio have resulted in a consistently higher margin business, indicating that net margins and free cash flow could remain resilient even if short-term headwinds emerge.
  
• The strategic shift towards high-grade, long-life South African assets and large copper-gold projects like Eva Copper and Wafi-Golpu positions the company to benefit from long-term demand trends for both gold and copper, which could sustain or increase revenue and overall earnings in the future.
  
• The company's strong balance sheet, now in a significant net cash position, provides financial flexibility to fund growth projects and continue paying increasing dividends, supporting shareholder returns and potentially buoying share price.
  
• A well-hedged production strategy alongside ongoing byproduct credits from uranium and silver contribute to margin stability, suggesting that revenue and profitability can be maintained or improved even in the face of gold price fluctuations.
  
• Expansion and replacement projects at Moab Khotsong and Mponeng, along with new low-cost production from assets like Eva Copper, are set to increase production quality and margins over time, which could drive further improvements in operating free cash flow and shareholder value.

Valuation

• The assumed bearish price target for Harmony Gold Mining is ZAR225.19, which represents two standard deviations below the consensus price target of ZAR281.43. This valuation is based on what can be assumed as the expectations of Harmony Gold Mining's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ZAR320.0, and the most bearish reporting a price target of just ZAR220.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ZAR91.7 billion, earnings will come to ZAR55.2 billion, and it would be trading on a PE ratio of 4.2x, assuming you use a discount rate of 17.7%.
• Given the current share price of ZAR264.85, the bearish analyst price target of ZAR225.19 is 17.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.