South African billionaire Patrice Motsepe's Harmony Gold launches a $500 million bond sale

Harmony Gold launched a $500 million sale of convertible bonds on Monday, Sept. 21, which its chief executive said would cut the miner's cost of capital.

The bonds mature in 2031 and are expected to pay annual interest of between 1.5% and 2%. That is cheap for a company of Harmony's size, because investors are also buying the right to swap the bonds for Harmony shares if the price rises far enough.

Patrice Motsepe's African Rainbow Minerals holds about 10.6% of Harmony. The Public Investment Corporation, which manages the pensions of South African government employees, holds about 16% and is the larger shareholder.

The price at which the bonds convert into shares will be set 35% to 40% above the price of a placement of existing shares running alongside the sale. At a 35% premium to Friday's closing price of 319.71 rand, the bonds would convert into about 18.9 million shares, roughly 2.9% of the company.

Harmony can limit how much of that reaches existing shareholders. If bondholders convert, it can pay them the face value of the bonds in cash and hand over shares only for any gain above that amount.

Chief executive Beyers Nel said the offering reflected a disciplined approach to managing the balance sheet from a position of strength, would widen the company's sources of funding, and that its capital programme remained fully funded.

Each bond has a face value of $200,000. Interest is paid twice a year from March 29, 2027, and the bonds will be repaid at face value around Sept. 29, 2031 unless they have been converted or bought back. Harmony can redeem them early from Oct. 20, 2029 if its share price stays well above the conversion level, and investors can demand repayment if the company changes hands or leaves the stock exchange. The bonds are to be listed on the open market segment of the Frankfurt Stock Exchange.

Some buyers of convertible bonds protect themselves by selling the company's shares short. To make that possible, the banks running the deal are selling existing Harmony shares to other investors on their behalf. Harmony receives none of that money.

The bonds are guaranteed by Harmony's operating subsidiaries in South Africa and Australia, including the copper businesses MAC Copper and Eva Copper Mine, which show how far a company built on deep-level South African gold has moved into copper.

Citigroup and J.P. Morgan are running the sale, with Absa, FirstRand and Nedbank as co-lead managers. It is being offered only to qualified institutional investors through an accelerated bookbuild, with pricing due on Monday evening and the bonds expected to be issued around Sept. 29.