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Barry Sergeant: Investigations editor, Moneyweb

22 August 2007 23:08

MONEYWEB: Well, the gold story of the moment involves the world's fifth-largest producer, Harmony Gold. Not long ago, chief executive Bernard Swanepoel, on 6^th August, departed with immediate effect. He hasn't been allowed to talk with us. The board has put a blanket on that, which really is a strange way of approaching things. And today Nomfundo Qangule, the financial director since July 2004, was replaced with immediate effect by the former financial director of Harmony, Frank Abbott. Frank is a 51-year-old chartered accountant who has worked his way through the mining industry, starting at Rand Mines in 1981, where he was a financial manager on operational level. Nomfundo Qangule is a 39-year-old chartered accountant, and this was her first job in mining. Barry Sergeant is our investigations editor here at Moneyweb. Barry, you've been uncovering stuff. You were in fact quoted today all over the place - your article that was on Moneyweb. What's coming to light?

BARRY SERGEANT: Yes, Alec. What happened last week, some rumours started coming in from London side to my desk that there was a R2bn hole in Harmony's accounts.

MONEYWEB: R2bn!

BARRY SERGEANT: R2bn, yes. Now, if you just put that in a bit of perspective it's not such a serious deal. I mean, on August 6^th there was a sudden termination of Bernard Swanepoel's relationship with Harmony - no reason given.

MONEYWEB: And he was the CEO of 12 years before. He made the company.

BARRY SERGEANT: He refounded it, yes. And on the same day there was a trading update which said that the results for the June quarter '07 would be substantially below expectations - between 130c and 166c loss per share. The stock's got about 400m shares in issue. So let's say about R1.50/share loss. That's about R600m, which compares to a profit in the March quarter. Now the trading update also referred to certain software issues.

MONEYWEB: Accounting software?

BARRY SERGEANT: Absolutely. And you know, going behind the scenes it seems that what happened a couple of months ago, Harmony was offshore marketing a $350m senior note, a bond.

MONEYWEB: So it was trying to raise money from investors?

BARRY SERGEANT: Yes, and I mean even today Harmony, despite all the decline in the share price has got a market cap of about $4bn. So $350m is not a huge deal. Now apparently what happened is States-side Bernard Swanepoel was making presentations, and one of the analysts picked up some anomaly in the numbers, so Bernard Swanepoel referred it back to source - and that is where the issues started. The bond-raising was subsequently cancelled, the reason given being conditions in the markets.

MONEYWEB: Let's just go back there. Bernard was making a presentation to different investment analysts. One of the analysts there said he didn't like what was in the numbers.

BARRY SERGEANT: Yes.

MONEYWEB: That was investigated, and immediately the bond issue, or the reason why he made the presentations in the first place, was put on ice.

BARRY SERGEANT: Yes.

MONEYWEB: Now, that's serious.

BARRY SERGEANT: Yes and the reference given at the time was "market conditions". Subsequently, make no mistake, we all know what happened in credit markets - liquidity has completely dried up. But that really only started happening about ten days ago. So we then take the lead up to the resignation of Bernard Swanepoel on August 6^th, and today the resignation of the financial director. The knock-on effects have been severe. I use the New York Stock Exchange stock prices as the setting mark for gold stocks in what you might call the global tier-one gold stock arena. There are nine stocks, and Harmony on the New York Stock Exchange is down 49% from the 12-month high. The average for the group tier-ones is about 25%, so Harmony is roughly double that. And you know, some of the best performers, like Barrick, are only down 6%. There's been a big knock-on effect for South African stocks - Gold Fields down 34% from the 12-month high. So the foreign investors are looking at this as a governance issue, and the fact that Harmony has given no reason so far or articulated the story has raised a lot of alarm bells.

MONEYWEB: Well, we haven't heard from the chairman; we haven't heard from the head of the audit committee, either. And on CNBC Africa today this afternoon Liston Meintjes from Metropolitan was likening it - he was talking to Byron and Bronwyn - to Ken Lay and Jeff Skilling, the chief executive and financial director at Enron.

BARRY SERGEANT: Alec, I think that's going too far. I talked to a number of people who are familiar with what happened, and this is a case of incompetence. There was a software issue and the reason behind it was incompetence. I think at this stage to suggest that there was any kind of dishonesty involved is way too ...

MONEYWEB: Incompetence in what way?

BARRY SERGEANT: In the sense we don't want to use any brand-name software, but there's some very expensive, sophisticated software which, when not properly installed, can cause complete chaos. And that, in a nutshell, is what happened at Harmony. So it's a combination of software issues and also management issues. Surely the financial directors look daily, if not several times a day, at the cash balances. I mean, the banks don't fib to you about what's actually in the bank, what's going in and what's going out.

MONEYWEB: Pretty tough for a financial director who comes from the banking industry. Nomfundo was a credit manager at Nedbank and then in the credit division at ACMB, at ABSA Corporate and Merchant Bank. And then she was involved with CS Holdings - not a very strong recommendation at all.

BARRY SERGEANT: No.

MONEYWEB: And from there appointed financial director of a mining group. Now that is asking a lot of anyone, even a chartered accountant.

BARRY SERGEANT: Yes, Alec, I couldn't agree more. Harmony's got operations not just in this country, but all over the world, and it's got a very sophisticated machine. That's what Harmony is, a big machine. If we go back on the 12-year career of Bernard Swanepoel there, there were something like 24 acquisitions. This is not a Mickey Mouse company. It's in the top tier of global gold diggers, and to have a software system installed that doesn't work - well, we've seen what happened. Bernard Swanepoel's taken the accountability, he's taken it on the nose, he's fallen on his sword, and there's no question that by arrangement the financial directors put a bit of a space between his resignation and hers. I mean there was news coming in already last week in the markets that Frank Abbott would be moving in as the interim financial director. So today's news came as no real surprise. The R2bn hole in the accounts - that's already in the stock price, which is down 49% in dollar terms. And also it's a historic issue. It's historic.

MONEYWEB: Does this mean that profits were overstated for a period?

BARRY SERGEANT: It's probably more on the cost side - but not to get into the technicalities, yes. And we're going to see - remember, Harmony delayed its results by several weeks until, I think, Monday next week - we're going to see the re-statement of quarterly profits and perhaps other financial statements going back for some time. So this is a big issue and, no question, the sooner that Harmony gets to the bottom of this and puts the whole thing on the table the better it's going to be for the stock and the quicker everybody at Harmony can actually get back to doing what they do, which is digging gold.