Harmony Gold Mining Co. (NYSE:HMY) watched its shares drop a painful 17.5% last month. So far this year, the stock is down more than 25% after posting a 2016 advance of more than 100%. That said, it was up as much as 300% at one point last year.
Harmony's 2016 stock performance, however, roughly followed the ups and downs in the price of gold. The share price had been tracking gold this year, too, until around April. That was when the stock began to do notably worse than the precious metal.
Harmony's first big problem is its cost structure: It's all-in sustaining cost target for its fiscal 2017 (which ended June 30) is $1,100 an ounce. Compare that to Goldcorp (NYSE:GG), for example, which is expecting all in sustaining costs of around $900 an ounce in 2017 -- and other gold miners have even lower all-in sustaining costs. Goldcorp's shares, for reference, were only down 5% last month, tracking roughly along with gold. But that performance difference makes some sense since Harmony needs higher gold prices to make money because it has higher costs. Thus a drop in the price of gold will have a larger impact on Harmony's results than it will on Goldcorp's.
But there's another factor at play at Harmony: It has hedges in place to protect itself from falling gold prices and currency shifts in the South African rand. That's good news, overall, except that those rand gold hedges started to roll off in April. In other words, falling gold prices will have an even larger impact on Harmony through the rest of the year. The company's hedges will continue fall away through December, which prompted analyst concerns as far back as November 2016.
So, putting it all together, investors appear to be pricing in worse results for Harmony through the rest of the year now that those protective hedges are starting to fall away. With that as a backdrop, Harmony's less than inspiring stock price performance last month makes a lot of sense.
Harmony Gold is a relatively small gold miner with relatively high costs. Based on its cost structure and size, its stock is most appropriate for aggressive investors who expect a notable gold rally. But it's important to remember that as its hedges roll off, the downside risk to the company's financial results will increase.