Johannesburg - Trading weapons manufacturing for gold production, Denel chairman Sandile Zungu has launched a career in the mining industry by taking up a 26 percent stake in Harmony Gold Mining's R1.27 billion Doornkop South Reef project for R250 million.

Zungu's new mining company, Africa Vanguard Resources (AVR), put R140 million cash on the table and said the remaining R110 million would be funded with call options.

AVR was also part of the Sibumbene Investment consortium formed to acquire 10 percent of French group Pechiney's $20 billion aluminium smelter at Coega, the deep-water port and industrial development zone in the Eastern Cape.

"The funding of the project commits us to the long term," said Zungu, who declined to comment on the other deals being considered by AVR.

He said AVR Doornkop had been set up as a special purpose vehicle to house the joint venture between AVR and Harmony.

Zungu said he would consider listing AVR to raise capital further down the line.

In the meantime, the emerging resources group has received the backing of Nedbank Corporate, which acted as financial adviser to the joint venture partners and has been appointed as lead arranger for the financing of AVR's participation.

BoE Merchant Bank, now part of Nedbank Corporate's Capital Markets, last year funded ARMgold, Harmony's empowerment partner in the R2.7 billion Freegold Joint Venture.

Bernard Swanepoel, the chief executive of Harmony, said the structuring of the deal had "actually enhanced returns for shareholders".

Harmony estimated that the six-year project would deliver an internal rate of return of 48 percent.

The Doornkop South Reef project would extend the life of Harmony's Randfontein operations in Gauteng by 20 years, add 330 000 ounces to Harmony's annual 3.2 million ounce gold production and create 2 798 jobs.

Exploration started at Doornkop in the early 1930s but the establishment of the shaft was stopped more than once by previous owners, who abandoned the project because of the low gold price. Harmony estimated that more than R1 billion had been spent on the project already, cutting its costs by almost half.

"The model of dumping rubbish into emerging companies' hands is not sustainable," said Swanepoel, who said empowerment deals were "smart business" that advanced its compliance with the mining charter.

"The industry has spent the last six months debating the sociopolitical agenda for the sector. Now it's time for companies to get back to business," he said.

An approving department of minerals and energy has already encouraged Harmony to apply for the conversion of its old-order mining licence into new-order mineral rights.

Sandile Nogxina, the director-general of the department, believed Harmony was "conversion ready".

Established mining companies have to cede 26 percent of their assets to historically disadvantaged South Africans within 10 years if they want to have their mining licences converted under new mining laws.

"We don't want emerging companies to use black economic empowerment as a backdoor through which they can speculate," said Nogxina.

Harmony's shares closed R7.60 higher at R148 yesterday.

With acknowledgements to Sherilee Bridge and Business Report.