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Economic performance and governance

Harmony’s role in the global and South African markets

Harmony is a significant role-player in global markets, in South Africa and in the provinces in which it operates.

• In global terms, Harmony is the seventh-largest producer (source: JP Morgan), based on statistics published in 2008.
• Although gold production in South Africa has been declining in recent years, South Africa remains a significant gold producer in global terms, having produced some 33% of new global supply in 2008 (source: JP Morgan). In South Africa, Harmony is the third-largest gold producer; producing 15% of South Africa’s gold production in 2008. In the provinces in which Harmony operates (namely Gauteng, North West, Mpumalanga and Free State provinces), it is an important contributor to economic activity and employment. Importantly, Harmony has acquired a number of operations and invested capital at mines and shafts that were closed or due to be closed by their former owners.
• This is particularly the case in the Free State, where Harmony is one of the few major mining companies operating in an area that was formerly a flagship gold-producing region.

Another indication of our economic contribution is both the direct and indirect employment created by the group. In 2008, Harmony employed 45 685 people – approximately 28% of the individuals employed in the gold mining industry in South Africa.

Harmony’s financial performance in FY09

Notwithstanding trying global economic circumstances, Harmony delivered a satisfactory financial performance for the year. Details of this performance on a quarterly basis and for the financial year may be found in the quarterly reports and the Annual Report.

Key features of this financial performance in FY09 are:

• Total gold production of 1.5 million ounces (45 437 kilograms)
• Average gold price received of R250 826/kg ($867/oz)
• Revenue generated of R11 496 million ($1 277 million)
• Capital expenditure of R4 382 million ($487 million)
• Net profit for the year of R2 927 million ($311 million)
• Operating margin of 33.4%

At the end of June 2009, Harmony’s market capitalisation was R34.1 billion ($4.4 billion).

Value-added statement

Harmony Gold Mining Company Limited and its subsidiaries

Value-added statement for the year ended 30 June 2009

	FY09 Rm	%	FY09 Rm	%
Sales of gold	11 496		9 617
Less: cost of material and services	(3 369)		(4 117)
Value added from trading operations	8 127	76	5 500	87
Profit on disposal of assets	965	9	129	2
Income from investment	444	4	284	5
Value added by discontinued operations – net *	1 218	11	359	6
Total value added	10 754	100	6272	100
Distributed as follows:
Employees (including directors and management)
Salaries, retirement and other benefits	5 261	49	4 693	75
Providers of capital
Dividends to shareholders	-	-	6	-
Interest on borrowings	280	3	496	8
Government
Taxation	335	3	160	3
Total distributions	5 876	55	5 355	86
Retained for reinvestment:
Depreciation and amortisation	1 467	14	846	13
Impairment of assets	484	4	280	5
Profit/(loss) accumulated in the business	2 927	27	(245)	(4)
Total re-invested	4 878	45	881	14
Total distribution including re-investment	10 754	100	6 272	100

*All other amounts in this statement exclude the effect of the discontinued operations.

Payments to government

	South Africa (Rm) FY09	PNG (Km) FY09
Total income taxation paid	736	-
Income taxation asset	26	-
Withholding tax (STC)	-	1
Indirect taxes and duties	9	4
VAT/GST paid	500	-
VAT/GST refunded	(1 173)	(72)
Employee taxes and other contributions	693	-
Skills development levy paid/refunded (net)	47	-
Total	812	(67)

No significant assistance was received from government, in South Africa or PNG.

Economic transformation and empowerment

Harmony is fully committed to economic transformation and empowerment in both South Africa and PNG. Key areas of interest here are:

• Equity ownership in the company by historically disadvantaged South African (HDSA) interests. Harmony has achieved compliance with the Mining Charter in respect of equity ownership through partnerships and the sale to HDSA companies of interests in the company and the underlying operations. At the end of June 2009, Harmony estimates that some 36% of its production was attributable to HDSA interests.
• Empowerment and transformation of the procurement base in South Africa, both in doing business with large HDSA companies, and through the development of small, medium and micro enterprises (SMMEs) that are HDSA-owned, and based in the provinces of operation. A group strategy and policy governs Harmony’s procurement processes and expenditure. Preference is given to HDSA companies in the awarding of contracts, and particularly local HDSA companies. (See discussion below.)
• Contracts awarded by Morobe Mining Joint Ventures (MMJV) to the landowner company NKW Holdings Limited owned by three landowner groups - Nauti, Kwembu and Winima - for catering, fuel haulage, general freight, plant hire, security, labour hire and bus services. The MMJV has met all the requirements of the Memorandum of Agreement (MOA) on the Hidden Valley Project and will continue to offer business development opportunities to landowners as the mine enters its production stage, and more opportunities become available.

Implementing affirmative procurement in South Africa

Harmony has made good progress in complying with its SLP obligations, and has met the targets set in its SLPs. See graph above. In FY09, Harmony committed to HDSA procurement expenditure (as a percentage of discretionary expenditure) of 40%; procurement expenditure actually achieved during the year was R3 190 million or 45% (including parastatals). Excluding parastatals, this figure was 27%.

Less satisfactory, however, has been the province in which these HDSA companies are located. Although it is the company’s intention to support local suppliers as a matter of preference, this historically, has been a function of the economic activity primarily undertaken in particular provinces. The group’s expenditure patterns on a provincial basis reflect this: engineering expenditure is typically undertaken in Gauteng Province, which is an economic hub for these businesses; and Harmony’s fuel and timber is sourced from a major supplier in KwaZulu-Natal. The province that is under-represented here is the Free State, the historical primary activity of which (other than mining) has been agriculture.

Harmony has now started reporting on HDSA expenditure segregated according to consumables, capital and services in FY10. Previously, the company’s IT systems did not allow for this.

Going forward, Harmony has plans in place both to increase its HDSA/SMME expenditure and to better account for expenditure currently. Only 246 of all vendors have provided certification of their HDSA status and it is therefore likely that this is currently under-reported.

Harmony is progressing towards the Department of Trade and Industry Codes of Practice in respect of procurement towards the DMR mining codes of good practice. The DMR has recently published a draft of the company’s ‘mining code of good practice’ that provides clarity on many of the issues we have faced. See the discussion on PNG landowner initiatives.

Risk management

Harmony has extensive risk management structures in place, supported by an out-sourced internal audit function. Harmony manages all categories of risk identified through a formal risk policy framework. Identified risk factors and their management are covered extensively in the group’s Annual Report,  including the primary risks identified. While risk factors are considered from both a financial loss and reputational perspective, the financial loss is clearly more easily quantified. This section on risk management should be read in conjunction with the section on material issues as a slightly different emphasis is placed on these risks when considered from a sustainability perspective.

Appropriate levels of due diligence and risk management are applied when evaluating all new investments and engaging in significant contracts. Safety, health, environment and human rights risks are considered.

It should be noted that, in compliance with South African environmental legislation and good practice, the precautionary principle is addressed in planning for and developing new projects. The Precautionary Approach requires that risks that are plausible, but not necessarily the result of scientific consensus, be considered when an action or policy may cause severe harm to the public or the environment.

Governance structures

An extensive discussion on corporate governance may be found under Corporate governance where supporting documentation, such as the board charters and company policies, are also available. Specific indicators raised by GRI are summarised as follows:

• Harmony is governed by a unitary board. At the end of June 2009, the Harmony board was made up of 12 members, of whom eight have been determined to be independent non-executives, two are executive directors, one a non-independent, non-executive chairman and one a non-independent, non-executive director. Two of the non-executive directors are women, and four directors are drawn from groups considered to be HDSAs. Determination of independence has been done in accordance with King II and Sarbanes - Oxley (SOx).
• The board is guided in its actions by the board charter which is reviewed on an annual basis. The charter serves as a guide to each member of the board in terms of their purpose and role.
• The roles of chairman and chief executive are separate and distinct as required by King II. The chairman, however, is not considered to be independent.
• In considering new appointments to the board, Harmony takes cognisance of the gender and racial mix of the board and believes that it has achieved an acceptable balance.
• The board considers performance when considering the remuneration of executive management. This includes performance in terms of non-financial indicators including social and environmental performance. The members of the Empowerment Committee and the Sustainable Development Committee are particularly accountable for performance in these areas.

Evaluating board performance

The board conducts an annual self-assessment on the performance of individual board members. Also considered is the performance of the board as a whole, including on matters relating to the company’s economic, social and environmental performance, and its sub-committees (including the Sustainable Development Committee and the Empowerment Committee). These assessments are based on whether the board member displays:

• expertise;
• an inquiring attitude;
• objectivity and independence;
• judgement;
• an understanding of Harmony’s business, understanding and commitment to the board’s duties and responsibilities;
• a willingness to devote the time needed to prepare for and participate in committee
  deliberations; and
• timely responses and attendance at meetings.

This exercise was executed by KPMG in FY09 following interviews by means of interviews and questionnaires. A full report was generated and circulated to the board.

Code of ethics

Harmony’s Code of Ethics (PDF - 270KB) commits the company, its employees and contractors to a certain set of values to ensure that they are free of conflicts of interest, namely:

An Ethics Committee (made up of the company secretary and executive management) meets on a quarterly basis to:

• monitor ethical behaviour within Harmony’s business environment;
• take measures to ensure that the Code of Ethics is distributed to and signed by all employees of Harmony, and all contracting parties concluding any agreements with Harmony;
• monitor disciplinary action taken against employees who do not act in accordance with the code;
• review the gift register;
• assess the reports received from the White Collar Crime Committee; and
• evaluate the Code of Ethics on an annual basis.

Harmony protects the identities of employees who report non-compliance with the Code of Ethics and encourages employees to make use of the company’s whistle-blowing or crime line, called the Khuluma line. The crime line is manned 24 hours a day and is managed by an external security contractor. Anonymous calls and faxes as well as e-mails were received in respect of alleged irregularities. All cases were logged and examined by the White Collar Crime Committee. Only one matter warranted further investigation and led to disciplinary action against an employee. A review of the Code of Ethics is currently under way and will be aligned with the provisions of King III.

As part of our comprehensive risk management processes and analyses, all business units are assessed for risks relating to corruption and mitigating measures are put in place. Harmony has a procedure in place for identifying and dealing with irregularities and this is the responsibility of the Security Department. Both fraud and corruption risks are specific headings on our risk register. In total, 103 incidents of fraud and corruption were identified during the year, 40 of these by contractors. By the end of June 2009, 39 cases had been finalised and 64 are still pending. Of the finalised cases, 37 people were dismissed and two received official sanctions.

Employees are taken through relevant sections of the Code of Ethics when they return from annual leave. The code is also distributed electronically to all employees with access to e-mail.

At a board level, the board charter considers specifically the issue of conflict of interest, and advises on how this must be dealt with and declared. In line with the Companies Act and JSE listing requirements, directors are required to declare any interests and potential areas of conflict at every board meeting.

Political donations

A donation of R4 million was made to South African political parties during the current election year in the interests of promoting democracy. The R4 million was allocated to the ruling party and three other political parties in proportion to their performances in the 2004 general election. There were no political donations made in PNG in FY09.

Support for external initiatives

Harmony is involved in public policy development on a wide range of issues through the Chamber of Mines of South Africa. Issues addressed by the Chamber of Mines, with government, labour and civil society as a whole include collective bargaining, health care, socio-economic development, environment (including climate change), beneficiation, BEE and legislation. Harmony is an active member of the Chamber of Mines and is represented on its governing committee and at leadership committee levels. In FY09, Harmony was also a member of the World Gold Council (WGC), which promotes the interests of gold.

Harmony also participates in the Mine Health and Safety Council (MHSC) a tri-partite government, industry and labour entity, and is supportive of the MHSC safety and health targets. Harmony is a signatory to the Cyanide Code and has adopted international environmental standard ISO14001 as the basis for its environmental management systems. Harmony is a member of the National Business Initiative (NBI) .

Harmony also participates in the Illegal Mining task Team which is addressing the issue of illegal mining. Other members of this task team are: the SAPS, the Department of Justice, the Asset Forfeiture Unit and the Directorate of Public Prosecutions. Working closely with the task team is a Stakeholders’ Forum, in which Harmony also takes part. The forum involves community representatives.

Significant legal issues and fines

No significant fines were paid by the company in any of its areas of operation. No actions were brought against the company in respect of anti-competitive behaviour, anti-trust and monopoly practices.

There is a pending class action in the United States whereby certain ADR holders are seeking damages against Harmony pertaining to company business practices. Harmony has filed a Motion to Dismiss all claims asserted in the class action case with the court, the plaintiffs have filed an opposing response, and we have subsequently replied to that response. At this point the matter is in the hands of the US court and ruling is expected by the end of the calendar year, although it may be later than that.

An excessive pricing complaint against ArcelorMittal South Africa Limited lodged in 2002 was withdrawn by Harmony and another gold miner in September 2009, following the conclusion of a settlement agreement. The complaint had remained unresolved after several years of litigation. This settlement agreement will permit the gold miners to focus their energies and resources on their core businesses, and represents a satisfactory outcome to the matter for them.

Beneficiation

We participate in the Chamber of Mines Working Group on beneficiation which has been established in response to the Mining Charter’s consideration of and position on beneficiation. A primary task of this working group is to determine the capacity of the country for beneficiation, the resources required, the support to be given and the economics involved.

Harmony’s beneficiation strategy is to be involved in those beneficiation opportunities that will enable the company to offset the value of such beneficiation activities against the company’s commitments in terms of the Mining Charter; and that are cost-effective and add value to the company’s business and do not divert excessive management time from the core business of gold mining. Read about our support for Project AuTEK.

Engaging with shareholders and employees

Harmony encourages interaction with stakeholders at all levels and on an ongoing basis. Stakeholder engagement is not the remit of any one individual or department at Harmony, but is the responsibility of line management. For specific stakeholders, such as the financial community (investors), employees and unions, communities and regulatory authorities, support is provided by centralised functions both at a group and operational level.

Harmony communicates and interacts extensively with shareholders, both institutional and retail, and has a comprehensive investor relations programme throughout the year, and in almost all geographic locations where shareholders are based. Shareholders and board members are encouraged to attend the Annual General Meeting, and questions from shareholders are encouraged. In addition to results presentations, conferences, roadshows and the company’s quarterly results (and their presentations) are transmitted via tele-conference calls and webcasts, where questions may be asked directly of management. In addition, Harmony’s website provides a valuable and immediate portal for information to shareholders, and investors and media frequently ask questions of management via the website. No significant issues were raised by shareholders during the year.

Harmony actively encourages the participation of employees in the business, in the belief that those who are most closely associated with the mining and processing operations are best placed to understand and optimise the business. There is significant interaction between the company and the various recognised unions on both a formal and informal level, particularly on matters that are regulated (such as conditions of service, safety and health), but on other matters too – such as employment equity, HIV & AIDS, and education and training, amongst others. Team-based training initiatives and processes are in place at many operations and efforts were made to reinvigorate these processes, so as to encourage greater sharing of ideas, and communication.