The bottom line: Harmony’s lustre for life outside SA
And why did nobody spot the risks at African Bank?
Harmony has to show patience in Papua New Guinea
They say be careful what you wish for because you just might get it. In Harmony Gold’s case it has long wished for growth and expansion outside South Africa’s borders where close to all its gold comes from.
There was a brief spell when the Hidden Valley gold and silver mine shared with Australia’s Newcrest Mining in Papua New Guinea played a role in the Harmony portfolio before persistent difficulties stopped operations. Harmony subsequently bought Newcrest’s stake and invested $180-million to restart the mine as a wholly owned venture.
Hidden Valley will play a critical part in funding Harmony’s half share of the $2.8-billion development capital to build a monster copper and gold mine at the Wafi-Golpu deposit in Papua New Guinea. Harmony’s $1.4-billion spend over five years is more than its market capitalisation.However, the price tag could be smaller if the Papua New Guinea government buys a stake of up to 30% in the project, leaving Harmony and Newcrest with 35% each and a substantially smaller bill.
Assuming Harmony doesn’t sell its stake or dilute it by bringing in a partner – with speculation swirling that its 15% black empowerment partner and copper-hungry African Rainbow Minerals could be brought in – then shareholders have a long wait before gains from Wafi-Golpu are realised.
It could take up to 18 months to secure a mining permit and then five more years to build the mine. Once in commercial production it would take two more years before the operation turns cash flow positive. Harmony reckoned it would take nine and half years to pay back its investment.Why were risks missed at African Bank?
It is quite mystifying how an auditor who sounded the alarm about reckless lending years ago now finds himself the subject of a disciplinary hearing related to signing off audits for a company accused of … reckless lending.
The Independent Regulatory Board for Auditors intends to charge Deloitte’s Sihlalo Jordan – one of two auditor partners (the other being Danie Crowther) who signed off African Bank Investments Limited’s financial statements before its spectacular collapse in 2014 – for their roles relating to the bank’s audit.Just how Jordan came to accept Abil’s accounting practices is worth exploring. In fact, he came in for some criticism from former Abil chief financial officer Nithia Nalliah in his submissions to the Myburgh inquiry. Nalliah indicated Deloitte shouldn’t have given the group an unqualified audit opinion. Speaking generally about unsecured lending in the market, Jordan frequently warned about the formation of a credit bubble in the two years leading up to Abil’s collapse under a mountain of debt.
“I welcome steps taken to curtail irresponsible market conduct such as abuse of garnishee orders, reckless lending, curbing irresponsible loan consolidation and ensuring appropriate pricing of credit insurance products,” he warned in one interview. And in a remarkably prescient quote, he said a credit bubble could develop with “possibly fatal consequences for small lenders, who do not have diversified revenue streams like the big banks”. This is exactly what happened to Abil two years later.
It will be interesting to discover how someone like Jordan was able to sign off Abil’s financial statements. Was he cowed by Abil CEO Leon Kirkinis’s larger than life personality? What other explanation is there for missing the risks Abil was taking right under his nose as the bubble developed?