A Tale of Two Annual Reports

JOHANNESBURG (ResourceInvestor.com) Two heavyweight SA gold producers - Harmony [HMY] and Gold Fields Limited [GFI] - have just published their 2004 Annual Reports.

Comparing the two publications is fascinating because of the rivalry between the groups. There's also the needle between Gold Fields CEO, Ian Cockerill, and Harmony CEO, Bernard Swanepoel, over the future of the Beatrix mine.

The Harmony report is very original in design and concept as the group self deprecates its strategy and investment image, yet still presents the essential facts, figures, outlooks and disclaimers.

It resembles a tattered and worn "pulp fiction" novel; the kind found in undisturbed heaps in second-hand bookshops. That is a clear reference to the hand-me-down mines Harmony has acquired and made better.

Gold Fields stays conventional. The cover of its report has a predictable montage of work scenes and "happy, smiling" employees. The Gold Fields executive team and board of directors is photographed in standard poses as around a boardroom table and grouped wearing hard hats and safety gear underground.

The Harmony executive team shots look like a cross between wanted posters and a publicity shot for some little known hard rock band (pun intended).

Set that aside and the bottom lines are similar. Both are under the gun because of the strong rand. Both stock prices have been thrashed in the past year though now recovering.

At the profit line Gold Fields is winning because of its higher quality mines and greater exposure to non-SA operations as well as better control over costs.

Gold Fields made net earnings of $117m in the year to June (previous year - $443m profit) while Harmony lost $80m ($98m profit) in the comparable periods.

By another key measure - growth - Harmony is ahead. Harmony's gold production rose 11% to 3.3moz (3.0moz) and its reserves increased to 62.2moz from 61.9moz at the end of June at a gold price of R92,000/kg.

That's thanks mainly to the acquisition of Target and the former ARMgold mines which offset the reserves mined during the year and the losses from closed shafts.

Gold Fields' production dropped to 4.2moz (4.3moz) and the group's attributable reserves dropped to 75,5moz at end-June from 81,5moz a year previously. Increases in the group's international reserve base were not enough to offset a 10moz drop in SA reserves because of depletion plus closure of the Kloof 9 shaft and revisions at Driefontein.

What happens next will be interesting. Swanepoel makes it clear Harmony's fortunes will be dominated by developments in South Africa. The risks section of the Harmony report points out that "our strategy depends on our ability to make additional acquisitions."

Swanepoel is looking to score out of further consolidation in the SA industry. He is interested in Beatrix and has dropped repeated hints over the past year. Cockerill put up a slide in his June quarterly presentation showing Beatrix with a "not for sale" sign across it.

Gold Fields has a better, organic growth story and has moved decisively to improve its merger and acquisition capabilities with the takeover of Iamgold to create Gold Fields International (GFI).

Will the rand weaken and send Harmony's share price soaring? Could GFI be the next big North American success story? Will Swanepoel eventually have his way with Beatrix? Keep your browser on this Web site for the next instalment.