Diversification Into Copper Aims To Mitigate Gold Dependency Despite Market Risks

Key Takeaways

• Expansion into high-margin assets and copper production aims to diversify revenue and stabilize earnings, reducing dependency on gold prices.
  
• Operational efficiencies and strategic capital allocation are expected to enhance free cash flow and improve long-term profitability.
  
• Strong revenue and net profit growth, strategic investments, and diversification efforts bolster Harmony Gold Mining's market position and could enhance long-term shareholder value.

Catalysts

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

• Harmony's focus on expanding its South African high-grade underground assets and surface operations may lead investors to anticipate sustained improvement in revenue due to increased gold production and better recovered grades.
  
• The entry into copper production through international projects like Eva Copper is expected to diversify revenue sources and stabilize earnings by reducing dependency on gold price fluctuations.
  
• Ongoing investments in operational efficiencies and safety improvements are expected to preserve or enhance net margins, as these initiatives aim to control costs while maintaining or increasing production output.
  
• The strategic focus on developing high-margin, low-risk assets in South Africa and internationally is anticipated to expand operating free cash flow margins and improve profitability over the long term.
  
• The disciplined capital allocation towards growth projects like Moab Khotsong and Mponeng, alongside potential M&A activity, is expected to contribute to higher quality reserve conversions, positively impacting free cash flow generation and overall earnings.

Harmony Gold Mining Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Harmony Gold Mining's revenue will grow by 7.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.7% today to 33.4% in 3 years time.
• Analysts expect earnings to reach ZAR 27.6 billion (and earnings per share of ZAR 30.71) by about March 2028, up from ZAR 10.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.5x on those 2028 earnings, down from 13.4x today. This future PE is lower than the current PE for the US Metals and Mining industry at 8.5x.
• Analysts expect the number of shares outstanding to grow by 0.69% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 18.62%, as per the Simply Wall St company report.

Harmony Gold Mining Future Earnings Per Share Growth

Risks

• Harmony Gold Mining has demonstrated a strong financial performance with a significant increase in revenue and net profit, supported by high operating margins and effective cost management. This positive financial result could stabilize or increase share prices, contrary to a belief in their decrease. [Revenue, Net Margins]
  
• The company's strategic capital investment in high-grade and high-margin projects, such as Mponeng, Moab Khotsong, and Eva Copper, alongside a disciplined approach to capital allocation, supports long-term revenue growth and improved margins, potentially boosting market confidence and share prices. [Earnings, Revenue]
  
• Harmony's expansion into copper and ongoing investments in their gold-copper portfolio aim at enhancing diversification and reducing risk. The synergy between gold and copper positions Harmony to benefit from countercyclical advantages and demand in these markets, which could positively influence earnings trajectory. [Earnings, Revenue]
  
• Amid the current high gold market prices, Harmony's strategically managed hedging program ensures protected margins, which can maintain or improve profitability even if gold prices fluctuate, supporting stable or increasing share prices over time. [Net Margins, Earnings]
  
• The company's strong balance sheet, now in a net cash position, combined with positive free cash flow generation, enables Harmony to execute growth projects without incurring substantial debt. This financial strength can support sustained profitability and attract investor confidence, potentially increasing share prices. [Earnings, Net Margins]

Valuation

• The analysts have a consensus price target of ZAR195.0 for Harmony Gold Mining based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ZAR240.0, and the most bearish reporting a price target of just ZAR135.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ZAR82.7 billion, earnings will come to ZAR27.6 billion, and it would be trading on a PE ratio of 7.5x, assuming you use a discount rate of 18.6%.
• Given the current share price of ZAR226.33, the analyst price target of ZAR195.0 is 16.1% 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.