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City analysts examine Harmony Gold’s rising costs; earnings forecasts cut


City analysts have mixed views on South African miner Harmony Gold (JSE:HARJ) as its fourth quarter results missed the market’s consensus estimates.

Yesterday Harmony told investors that it production decreased by 9 per cent in the full year, mainly as a result of shaft closures, meanwhile year-on-year cash costs increased by 8 per cent.

With a bearish view Morgan Stanley analyst Simon Kendal, who rates the stock as ‘underweight’, cut his earnings per share forecasts for 2012 and 2013 by 24 and 20 percent respectively because of the ‘ratcheting up’ of Harmony’s costs.

“Harmony had guided unit costs would be up, but we find the magnitude disappointing,” Kendal said. He added: “We have been expecting evidence of operating inflection (volume, grade, unit cash cost) since mid-2010, but have so far only seen isolated evidence.” 

Meanwhile Kane Slutzkin, analyst at UBS, still sees Harmony as a ‘buy’ although he too had to cut his forecasts for the future.

“Harmony reported fourth quarter earnings below both UBS estimates and market consensus,” Slutzkin highlighted in a note to clients. “Production was in line with our estimates and prior guidance while costs, were higher than we had forecasted. We cut FY12 earnings by 4.3 per cent on the back of higher costs.” 

However unlike Morgan Stanley’s Kendal, the UBS analyst stressed that Harmony’s growth mines are now gathering momentum. Slutzkin also emphasised that a future improvement in gold grades would be a key catalyst for the shares. 

Importantly the UBS analyst is looking forward to an upcoming Investor Day on the August 24, which according to Slutzkin, could be another potential catalyst. 

Quick facts: Harmony Gold

Price: 4.24 USD

Market: NYSE
Market Cap: $2.53 billion

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