On Feb 18, we issued an updated research report on South African gold miner Harmony Gold (HMY). While the company is making a good progress with its growth projects, cost reduction initiatives and other actions to boost profitability and cash flows, it remains exposed to volatility in gold prices and geopolitical risks.

Harmony posted a loss in second-quarter fiscal 2015 (ended Dec 31, 2014), reported on Feb 9, on lower gold pricing and stoppage of operations at one of its key mines – Kusasalethu. The mine, which has been affected by illegal mining activities and a series of fires, has yet to return to profitability. Revenues fell by double-digits in the quarter, affected by lower gold volumes and pricing. Gold production declined in the quarter.

Harmony sees higher gold production in the third quarter after the Kusasalethu mine’s restructuring is finalized and the Hidden Valley mine starts full production. It expects gold production of between 1.1 million and 1.2 million ounces (oz) in fiscal 2015.

Harmony, a Zacks Rank #3 (Hold) stock, is progressing well in producing better quality gold ounces. It has several world-class mines in South Africa, which together with Hidden Valley and the Wafi-Golpu project in Papua New Guinea (“PNG”), is expected to significantly contribute to its targeted production.

Harmony is also showing significant progress both in the growth of resources as well as diversity. The company is focused on meeting its long-term targets and maximizing shareholder value.

Harmony is making a good progress with its Wafi-Golpu project which is believed to be a game changer for the company. The company’s board, in Dec 2014, approved the updated prefeasibility study (PFS) of the project and also agreed to move it to feasibility study stage. Wafi-Golpu is a promising orebody which contains mineral resources of 20 million oz of gold and 9.4 million tons of copper.

Harmony also remains focused on cost control in a volatile gold price environment. The company’s strategy is to improve its margins by implementing its plans and increase free cash flow through higher grades and cost control.

However, Harmony’s operations could be impacted by a slower-than-expected ramp-up in production at mines. The company is also highly exposed to gold price volatility. Gold price received (in dollar terms) slipped 6% both year over year and sequentially in the most recent quarter, affecting the company’s results.

Moreover, Harmony remains exposed to geopolitical risks associated with potential mine shut downs and labor strikes. It faces tough labor and wage negotiations (with demand for significant wage hike) and the labor relation environment remains volatile in the gold industry.

Other Stocks to Consider
 
Other companies in the gold mining industry with favorable Zacks Rank include Newmont Mining Corp. (NEM), Golden Star Resources, Ltd. (GSS) and Lake Shore Gold Corp. (LSG) with all holding a Zacks Rank #2 (Buy).