Harmony Gold has entered into an agreement to acquire the entity which owns 100% of the Eva copper project and a package of regional exploration tenements from Copper Mountain Mining Corporation for an upfront cash consideration of R3 billion plus a contingent payment of up to a maximum of R1.1 billion.
Eva Copper and the acquired tenements comprise 2 295 square kilometres of tenure within the world-class North West Minerals Province in Queensland, Australia. Eva Copper is an Iron Oxide Copper gold deposit. Eva Copper is envisioned to be a conventional open pit.
This acquisition fits well into Harmony’s plan to diversify into metals critical to the clean energy transition. The acquisition of Eva Copper will add 1.718 billion pounds of copper and 260 000 ounces of gold to Harmony’s mineral reserves and extend the Company’s diversification into copper, a future-facing metal critical to the energy transition.
The Eva project has an Off-take agreement with Glencore Mount Isa smelter for 100% of the first 5 years of production at market rates.
Copper as a future-facing metal is critical in support of the global energy transition.
Research by Wood Mackenzie shows the following:
- Total copper consumption is expected to grow c.2.1% per annum across all five broad industry sectors to 2040
- Electric Vehicles forecast to become c.70% of total annual auto sales by 2040 and represent an incremental 4.8Mt of copper consumption over 2020
- Copper intensity of EVs up to 3.6x greater than traditional internal combustion engine vehicles
- Solar and wind power generation has doubled the copper intensity, on a per MW basis, when compared to traditional sources
- Electrical network to overtake construction as the largest industry sector representing 27% of total copper consumption by 2040.
The construction period for the Eva project is two to three years, which is quick by mining standards. This is an open pit mine with a simple process plant and low overall execution risks. The estimated requirement for development capital is $597 million. The expected life of mine is 15 years.
How will Harmony finance the transaction?
Harmony will pay the upfront purchase price (R3bn) using cash and available revolving credit facilities
Harmony’s liquidity headroom as at 30 June 2022 was R8.202bn in cash and available undrawn facilities. This is intended to be used to help Harmony achieve its strategic and growth objectives. Operating free cash stood at R2.905bn.
As at 30 June 2022, Harmony’s Net debt to EBITDA was at 0.1x and is expected to remain well below 1 times post transaction close.
For the 2022 financial year, the group’s interest cover ratio was 43.4 times vs 42.8x in 2021.
As at 30 June 2022, net debt increased by R215 million to R757 million. This was mainly attributable to a lower cash position due to the increased capital expenditure and lower production.
Harmony previously stated that long-term value creation is contingent on effective capital allocation and that as it continues to grow and diversify production, capital expenditure must remain disciplined, focussed and affordable.
Harmony’s capital expenditure for FY22 increased by 21% to R6.192bn from R5.103bn in FY21, but was R1.837bn below what had been planned. The underspend in FY22 was mainly as a result of the late start of the Zaaiplaats and Kareerand projects. The Zaaiplaats delay was mainly due to the pending finalisation of the detailed study outcome. The Kareerand project capital spend was postponed due to regulatory approvals that were delayed.
During the last quarter of FY22, Harmony refinanced its funding facilities which now include new sustainability-linked and green loan facilities through a syndicate of banks. The facility comprises of the following components:
- $300 million sustainability-linked Revolving Credit Facility (RCF)
- $100 million sustainability-linked term loan
- R2.5 billion sustainability-linked RCF
- R1.5 billion green loan.
The Rand Revolving Credit Facility, US$ Revolving Credit Facility and US$ term loan are linked to certain sustainability-linked key performances indicators (ESG KPIs), which will be measured annually for the next three financial years and will result in changes to interest rate margins. The ESG KPIs against which we will be measured are greenhouse gas emissions, renewable energy as a percentage of total energy consumed at our South African operations and potable water consumed.
The new debt covenant tests for both the Rand and the US$ facilities are as follows:
- The group’s interest cover ratio shall be more than five times (EBITD1/Total Interest paid);
- Leverage (s total net debt to EBITDA ) shall not be more than 2.5 times.
Harmony Gold expects this deal to lower Harmony’s overall risk profile and strengthen its cash flow in the medium to long term through;
- Introducing copper exposure while diversifying internationally
- Low execution risk:
- acquisition de-risks Harmony through a more diversified commodity mix, lower costs, good grades, and capital affordability
- Strong and highly experienced team close to the acquired assets
- Ability to finance acquisition in cash and secure capital to build the mine
- Favourable ESG (environmental, social and governance) credentials
Harmony’s dividend policy is to pay a return of 20% of net free cash generated to shareholders, at the discretion of the board of directors.
Some market particpants have suggested that miners, who are cash flushed after the commodity superclycle, should rather pay huge dividends on enter into share buyback programmes as a way to return capital to shareholders as oppossed to making acquistions.
Harmony say that the acquisition meets all investment requirements such as:
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