Do Not Add to Harmony Gold Mining

The stock will likely underperform

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Harmony Gold Mining Co. Ltd. (HMY, Financial) is trading cheaply because, following a 12% drop on the New York Stock Exchange for the 52 weeks through Nov. 14, the closing share price of $1.61 on Wednesday was below the 200-, 100- and 50-day simple moving average lines.

The closing share price was 12.6% off the 52-week low of $1.43 and 57.1% below the 52-week high of $2.53.

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The price book ratio of 0.48 is below the industry median of 1.74. The EV-to-EBITDA ratio is -3.99.

Harmony Gold is a South African gold producer with mineral properties in Papua New Guinea. The company is also engaged in exploration activities for copper and silver deposits.

In South Africa, the miner is producing the yellow metal from one open-pit mine, nine underground deposits and several surface treatment operations.

In Papua New Guinea, the company operates an open-pit gold and silver mine in the Hidden Valley and two gold-copper mineral projects, which are the Wafi Golpu and Kili Teke.

Harmony Gold holds attributable gold and gold equivalent mineral resources totalling 117.9 million ounces as of June 30, of which 60% is located in South Africa and 40% in Papua New Guinea.

The miner has attributable gold and gold equivalent mineral reserves totalling 36.9 million ounces, with the South African reserves contributing 46% and the Papua New Guinea reserves giving approximately 54%. The average grade of underground South African reserves is 6.02 grams per ton of ore.

As of November, three analysts have been surveyed about Harmony Gold Mining. Two of them suggest holding the stock, while one expects it to underperform over the coming weeks. As result, the mean recommendation rating is 3 out of 5.

The average target price is $2.30 per share, reflecting a nearly 43% upside from the market value at close Wednesday. Analyst estimates range between a low of $1.89 and a high of $2.67.

Although Harmony Gold is trading cheaply, I wouldn’t buy shares of this gold producer currently. I agree with the analyst who foresees an underperforming stock because the miner will not beat earnings estimates if the precious metal doesn’t trade sufficiently higher than $1,275 per ounce. At this point, gold prices are not looking very bullish.

So far this fiscal year, low commodity prices have impacted the company's annual adjusted earnings before interest, taxes, depreciation and amortization. As a result, poor EBITDA results will negatively impact the stock.

The trailing 12-month adjusted EBITDA margin was -20% versus an industry median of 24% when gold averaged $1,296.96 per ounce from July 1, 2017 to June 30, which was fiscal year 2018.

Gold also has to trade higher than $1,275 per ounce because Harmony Gold mines the precious metal at a profit from its total mineral reserves. The average price of $1,275 is the basis for the determination of its reserves.

The company is also is a high-cost operator. Each hike in the gold price will drop straight to the profit line when the price of the commodity has reached a level that fully covers fixed costs.

For the first quarter of fiscal 2019, which ended Sept. 30, the mining company reported an all-in sustaining cost of $1,166 per ounce, representing one of the highest in the industry. The cost was sustained with reference to a first-quarter gold production of 378,500 ounces. Gold production increased 30% year over year thanks to the addition of the Moab Khotsong mine in South Africa, but decreased 2% from the final quarter of 2018. The AISC increased 8% from the prior quarter.

Harmony Gold has one of the highest all-in sustaining costs per ounce in the industry. A low commodity price environment, which is expected for the coming weeks, will not be supportive to the company's margins. This situation will put pressure on the stock, so I would take some profit off the table if I were a shareholder.Ă‚

Disclosure: I have no positions in any securities mentioned in this article.

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