In a note to clients on Johannesburg-based Harmony Gold, RBC Capital Markets argues that the stock could be takeover target, given its demonstrable market undervaluation, combined with the likelihood that it will start delivering on promises "within a couple of months". In Johannesburg, the stock price jumped nearly 10% on Thursday.

Analysts at RBCCM argue that one of the main reasons Harmony is undervalued can be traced to its 50% stake in Papua New Guinea's Morobe project, which includes the new-operating Hidden Valley mine, and the prolific Wafi Golpu property. "On our numbers" say the analysts, "even on the most conservative basis, Wafi could add in the order of USD 1.5bn to USD 2bn to the value of Harmony. This is some 40% of the current market capitalisation [value] of the company".

Harmony, in RBCCM's view, "has been a disappointing story since the rand started strengthening in 2002, due to a strategy that banked on a weakening [rand] currency to keep marginal assets alive".

In 2007 the strategy and CEO changed from Bernard Swanepoel to Graham Briggs. From then, the main lines of attack were simple, according to RBCCM: "close loss makers, bolster the balance sheet, joint venture high risk ventures and, invest capital aggressively to re-establish a better quality asset base. The one thing it needed, was time - time, and a bit of luck".

Time has passed, say the analysts, "and the new strategy is now set to deliver a new, less marginal, lower cost, more diversified Harmony. But that is not the end of the story. The ‘lucky' part of the equation is really reflected in the outstanding exploration results seen at the Wafi Golpu deposit in Papua New Guinea. We believe this exploration play is fast becoming a central play in the valuation of Harmony".

Given the potentially significant value attributable to Harmony's stake in Wafi, RBCCM's analysts argued that "another gold major could be looking at a strategy of making a bid for Harmony with the aim of stripping out the Papua New Guinea assets and re-listing the rump as a separate vehicle".

RBCCM says "the rump could be re-listed following the example set by Barrick Gold with African Barrick recently". The analysts believe that "in essence, this ‘lost value' in Harmony must be unlocked. Harmony could do this very easily by simply deciding to list a separate international vehicle. Such a move would likely cause an immediate and sharp increase in the Harmony share price but, in our view, this would inevitably leave the new international vehicle very vulnerable to a takeout and would undoubtedly lead to a discounted valuation on the remainder of Harmony".

The analysts believe that "far more value than the simple sum of the parts could be created by allowing the needs of AngloGold Ashanti or Gold Fields and Harmony to be met simultaneously through a merger of the two companies and a subsequent or simultaneous re-listing of separate vehicles that hold the good SA plays (now with nice growth), the marginal plays (marginal, but strong enough in terms of cash generation that it attracts the attention of companies like Village Main, desperately looking for a cash-generative marginal base) and even maybe a uranium arm on account of Harmony owning 40% of Rand Uranium, and AngloGold itself being the largest producer of uranium in South Africa at present".

AngloGold Ashanti and Gold Fields are also Johannesburg-based, but already conduct substantial transnational operations. In Wafi Golpu, the analysts conclude, Harmony is sitting on a ‘get out of jail free' card, "and we believe this will be played - one way or another".

Tier I gold diggers

Stock From From Value
price high* low* USD bn
Agnico-Eagle USD 67.63 -23.3% 25.1% 11.421
Goldcorp USD 48.18 -5.2% 32.5% 38.466
Polyus USD 32.15 -17.0% 43.1% 12.257
Harmony ZAR 85.99 -2.9% 26.2% 5.342
Lihir Now at Newcrest
AngloGold Ashanti USD 45.23 -14.4% 25.5% 17.242
Zijin CNY 7.87 -27.5% 109.3% 12.641
Barrick USD 50.22 -9.9% 36.9% 50.147
Newcrest AUD 37.07 -15.2% 24.7% 28.662
Gold Fields ZAR 114.40 -11.2% 28.8% 11.922
Kinross USD 15.87 -20.3% 11.2% 17.993
Newmont USD 53.17 -18.8% 10.3% 25.871
Buenaventura USD 43.36 -24.2% 47.1% 11.919
Freeport-McMoRan USD 52.28 -14.8% 86.0% 49.483
[[SPDR Gold Shares ETF]] USD 139.05 -1.1% 30.9% 55.676
Tier I averages/total -14.6% 36.2% 293.365
Weighted averages -14.8% 37.1%
* 12-month / Source: market data; table crunched by Barry Sergeant


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