Harmony Gold - A New Strategy for Growth and Diversification

• Harmony Gold Mining Company Limited is South Africa's largest gold producer by volume. They have a diversified portfolio of assets and projects across South Africa, Papua New Guinea, and Australia.
• Harmony has restructured its operations into four business areas or strategic pillars: optimized South African underground portfolio, higher-grade South African underground assets, high-margin South African surface operations, and a growing international portfolio.
• The company is redirecting capital towards higher grade and higher margin assets and projects. They have introduced a dividend policy to return 20% of net free cash to shareholders, given certain conditions.
• Harmony is in a high capex growth phase, investing in both organic growth and new acquisitions, like the Eva copper project in Australia.

Harmony Gold Mining Company Limited (HMY) is undergoing a strategic transformation to become a globally diversified mining company focused on gold and copper production. I argue that Harmony's new strategy positions it for significant growth and diversification, making it an attractive investment opportunity, especially given current high commodity prices.

Strategic Pillars for Growth and Margin Improvement

• Optimizing South African underground mines - Harmony is optimizing its mature underground mines in South Africa to focus on cash generation in the short term. This allows reinvestment into higher-grade assets.
• Developing high-grade South African underground assets - Through acquisitions of Mponeng and Moab Khotsong from AngloGold Ashanti in 2018, Harmony added higher-grade underground assets (7-9 g/t recovered grades) to boost margins. Further investment is being directed to extend the life of these mines.
• Expanding high-margin surface operations - Harmony's surface and surface retreatment operations in South Africa provide higher margins than its underground operations.
• Growing international portfolio - Harmony's presence in Papua New Guinea (Hidden Valley) and the recent acquisition of the Eva Copper Project in Australia mark the beginning of increased international exposure. The Eva Copper Project adds a high margin 15+ year copper mine to start production in 2024.

Strong Financial Position to Fund Growth

Despite significant capital investments in the past few years, Harmony maintains a robust balance sheet with manageable debt levels. Net debt/EBITDA was 0.6x after acquiring the Eva Copper Project for $230 million. Harmony has $300 million in available liquidity and credit facilities. The company can fund the $600 million development of Eva Copper through a combination of operating cash flows and additional project financing, avoiding significant equity dilution.

Harmony recently instituted a dividend policy targeting 20% of net free cash flow to be returned to shareholders. The dividend provides an additional return as the growth projects advance.

Margin Expansion from High-Grade Ore Bodies

Harmony's focus on higher-grade ore bodies is expected to expand margins. It's South African underground operations generate margins of approximately $200/oz at current gold prices, despite inflationary pressures on input costs like labour and electricity. However, Mponeng and Moab Khotsong produce recovered grades above 7 g/t, significantly higher than Harmony's other South African underground mines. As production increases from Mponeng and Moab Khotsong, Harmony's overall margins are expected to rise.

The addition of the Eva Copper Project diversifies Harmony's production profile and provides exposure to high copper prices. Eva Copper is projected to produce 35,000 tonnes of copper per year, along with gold as a by-product. With copper prices around $4.50/lb, Eva Copper will be a high-margin operation.

Exploration Upside in Australia and Papua New Guinea

In addition to the defined reserves and resources at Eva Copper and Hidden Valley, Harmony has significant exploration potential on its properties in Australia and Papua New Guinea. Success in exploration could further extend the mine lives, adding substantial value. Harmony allocates over $200 million annually to exploration activities across its portfolio.

Proven Operator in Challenging Jurisdictions

Harmony has demonstrated its social license and ability to successfully operate in South Africa, Papua New Guinea and Australia. This provides confidence in its ability to develop and operate its newest growth projects. Harmony has fostered positive relationships with regional governments and local stakeholders. The company places a strong emphasis on shared value creation and environmental, social and governance (ESG) programs.

Experienced Management Team to Lead Growth

Harmony's management team is focused on the company's strategic growth and diversification. CEO Peter Steenkamp joined in 2016 and led the strategic transformation. The company added depth in project development through senior appointments in Australia to oversee the newest acquisitions. Harmony's team has extensive experience in South African mining and has managed the company through multiple commodity cycles.

Valuation Upside as Investments Bear Fruit

I believe Harmony Gold represents an attractive investment opportunity, given the execution risk appears manageable and current valuations do not fully reflect the company's growth potential. The ramp-up of Mponeng and Moab Khotsong and the development of Eva Copper can significantly boost Harmony's production, margins and cash flows over the next 2-3 years. Additionally, the company has a solid pipeline of organic growth projects and exploration upside that provide additional long-term optionality not captured in the current share price. For investors with a 3-5 year time horizon, Harmony Gold offers appealing risk-reward characteristics.

The Investment Thesis for Harmony Gold

Leverage to higher gold and copper prices

• As a gold and copper miner, Harmony provides leverage to any increases in these commodity prices. Current prices are already strong, providing good margins. Further upside in prices would disproportionately benefit earnings and cash flows.

Value not fully reflected in share price

• Harmony is currently trading at around a 10x P/E multiple, below many of its mid-tier and major gold mining peers. As the company executes its growth strategy and increases production, its valuation multiple could expand in-line with peers.

Strong free cash flow generation

• Harmony's portfolio of mines generates strong operating cash flows, even after funding expansion projects. Initiating a dividend signals confidence in continued free cash flow generation.

Jurisdictional diversification

• Expanding outside South Africa reduces concentration risk and provides access to mining-friendly jurisdictions in Australia and Papua New Guinea.

Organic growth and exploration potential

• Harmony has a pipeline of low-risk organic growth projects to expand existing mines. Plus extensive exploration programs can uncover new resources to further grow production profiles.

Weakness in the South African Rand

• With costs denominated in Rand, a weaker Rand effectively decreases US dollar cost bases and increases profitability and cash flows.

Proven operator with a social license

• Harmony has an extensive track record operating safely in South Africa and manages community relations well. This provides confidence in successful new projects.

These factors make Harmony Gold an appealing investment at current valuations for investors bullish on gold and copper prices and willing to look past short-term execution risks for significant long-term growth potential. Harmony Gold's strategic evolution positions it well to generate growing returns from higher-grade ore bodies in South Africa and a new copper business in Australia. Its transformation into a globally diversified mining company exposes investors to higher margins and increased copper and gold production. Harmony's experienced leadership team gives confidence it can successfully execute this new strategic direction. For these reasons, I view Harmony shares as an attractive investment at current prices.