Long-rumoured takeover target Harmony Gold cheapest in a year

American Depository Receipts of Harmony Gold Mining (NYSE:HMY) briefly dropped to a year low of $9.68 in mid-afternoon trade on Friday after the company announced a steep fall-off in output for the first quarter.

Just like at fellow South African miner Anglogold Ashanti, Harmony’s cut in output – down 18% from the 345,000 ounces in the December quarter – were the result of an increase in mandatory safety stoppages.

Johannesburg-based Harmony said before it will produce some 1.35 million ounces this year, already a cut from earlier forecasts, which may now have to be revised downward again.

Harmony’s announcement also came on the same day a report from Statistics South Africa painted a bleak picture of the nation’s mining industry’s productivity.

By 3pm EST the gold miner had recovered somewhat to trade at $9.77 in New York, still down 5%. The mining sector was generally weak on the day with the TSX S&P Global Mining index losing 1.4%

The stock is showing losses for 2012 of 16% compared to a 9.4% gain in the broader S&P 500 market index.

Harmony has long been rumoured as a takeover target and with a market valuation of only $4.4 billion, down a third from a year ago, it is becoming more attractive for other gold majors looking for new supply.

The company is fast diversifying from its South African base and in March announced it is considering a Hong Kong listing once its massive Wafi-Golpu project, a 50-50 JV with Australia’s Newcrest Mining, is up and running. Harmony sold the half for $525m four years ago.

Harmony also told Reuters bringing the project to production would cost around $4 billion. A pre-feasibility is expected in June.

Harmony CEO Graham Briggs said in August Wafi-Golpu was a “game-changing asset” for the company.

The latest drilling results showing a 1 billion tonne resource bring the Wafi-Golpu deposit into the same league as Freeport-McMoran’s Grasberg mine across the border in West Papua, Indonesia.

As the value of Wafi-Golpu climbs – Deutsche Bank put it at almost $10 billion last year – suitors may be lining up for the assets.

M&A activity in the gold sector is at a 10-year high and top takeover candidates are Harmony’s South African peer Gold Fields, Canada’s Barrick Gold, Newmont Mining and partner Newcrest itself.

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