Harmony Gold Mining Company Ltd (HMY) 2003 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Harmony Gold conference call. At this time all participants are in a listen-only mode. Later we will conduct a questions and answer session and instructions will follow at that time. If anybody should require assistance during the conference, please press star then zero on your telephone touch pad. As a reminder this conference call is being recorded.

I would now like to turn the conference call over to your Chairperson. Please go ahead, sir, and I shall be standing by for questions.

Thank you very much and good morning, good afternoon, ladies and gentlemen. My name is Bernard Swanepoel. I am the Chief Executive of Harmony. I am also joined by Frank Abbott, our Chief Financial Officer, and [inaudible], our marketing director. It is quite a lengthy presentation today for which I apologize. There are quite a few issues we need to address. Obviously it was the end of a quarter and the end of a financial year. I also want to start off by dealing a little bit with the current challenges facing us as a company and the way in which we have set about tackling and towards the ends we will briefly discuss the merger with ARMgold and how that is proceeding. I am paging through the slides which some of you have received by Faxed, those of you who have requested it, and others have downloaded from the Web site.

The first slide, of course, highlights what we are at Harmony and that is leveraged, un-hedged, pure exposure to gold, mainly in South Africa. The next slide titled The Perfect Storm and the sub title of, what are our challenges. I mean a whole host of factors have come together to create quite a challenging environment for us. People oversimplified and said all about the strong South African Rand. I remind you that we are still faced by the royalty changes, the proposed royalties in this country which will make a significant difference to us depending on the outcome. But those are external factors. Internally factors more under our control of course is the high wage settlement that the industry reached with its unions recently, an increase where in a country where inflation is heading towards 6% and other cost items as part of the settlement probably adding another 2% to that as well.

We have been in protracted negotiations with our union in the free state. The implement to continuous operations. I will deal with that a little bit later and explain what I mean by continuous operations. We have arguably not been as successful in our geographical diverse affects as we have been in acquisition and gold strategy in South Africa. We certainly have had for the last eight months now great problems at our Elansrand operation. I have a few slides to share with to you try to give you some comfort that we are actually winning the battle there. Of course one of the challenges in our industry right now in South Africa is to retain good people.

I am going to move on to the next slide and I am still dealing with this so-called Perfect Storm which is in the making. I want to give you a better plan to give you some feel for what we are doing to not only supply but to prosper in these times. Obviously strategically we will focus mainly on significant gold acquisitions. That is where our track record is at our best. That is where our past performances has indicated a real core competency. I think the last six months have forced us to do some self soul searching and I think we understand our strength and the application of that as it relates to the South African scenario. We will certainly continue at opportunities to rationalize our asset portfolio. We have a whole host the strategic investments in South Africa, in Australia and in Russia. And that's continuously under review. We certainly do not intend to overpay for Avgold. In the end we may have differing opinions on what the real value of Avgold is but right now in South Africa there seems to be a general acceptance that we will come in at some stage and just pay a premium to whatever the share price. The share prices has run up dramatically. And can I remind you all that Avmin recently gave an indication of value on the table when they placed Avgold shares at a level of 6.50 Rand. And right now the price is clever to the nine range. We have no intention of overpaying for Avgold. Significant as well we intend to sustain our CAPEX and that I put a little rider on it and it will be for as long as possible. Under the current scenario we foresee that we will be able to sustain it indefinitely. But of course dropping the gold price and the further strengthening of the South African Rand basically could impact all that. There's all nice to have bells and whistles CAPEX for the profile and therefore each of the Rand we spend is we believe in the best interest of the future of the company. Operations, of course, there are a couple of things we are busy with. Firstly, we must see that the merger with ARMgold continues to be implemented successfully. It's not a huge exercise for us but again if we get it wrong that could cost us in terms of other production, lack of focus, et cetera. The strong Rand has certainly made us rediscover some of the things we were based at in the past, opportunities to reduce cost is popping up everywhere and I think our teams are nicely excited about that. But we need to increase productivity to offset the ridiculously high wage increase that we had to implement. That's not an overnight exercise. But over the last three years we've invested huge amounts of money in our people, in the training and restructuring the organization, removing levels out of the hierarchy and we truly believe that it's now time for to us harvest. Just last night we reached an agreement with the unions of Free Gold to implement continuous operation. And this will see us increase the number of working days in the Free Gold operations from just over 270 days a year to something much closer to 350 days a year. Of course, if you set your capital for so many extra days there will be an increase of volume of gold, the margin will decrease in cost and all in all that really can be really good for the company. Once successfully implemented Free Gold the challenge for us will be to reach agreements with the other regions and the unions in the regions and to roll it out.

How unique our reserve management system and I will ask to adjust the recovery grade be it with a lag of some six to eight weeks by merely pushing up the [inaudible] and mining according to that we certainly intend to make a 5% adjustment to our capital initially and to our recovery grade, that's two to three months from now from doing that.

What I am trying to share with you here are the challenges facing us are significantly tougher. Overall significant in the strengthening of the Rand. However, this management team has cut its teeth at Harmony in times much, much tougher than this. This looks like a significantly challenging period quite honestly I think prior to this an area or a time where we have to stay focused, get back in the trenches and sort out the things that aren't right. And let me remind you that in times of low margin, the acquisition opportunities in South Africa present themselves and it's exactly in these times that we formed the company.

Sorry to have taken up so much time on those two slides. The rest will go a lot faster. I wanted to give you a broad overview of the issues facing the company and perhaps leave you with a sense of the management team has been through tougher times than this one and we can certainly not only weather the storm but come out much, much stronger again.

The next slide is titled Highlights and talked about the final dividend of 150 cents per share. I know initially at the time of the merger we indicated that there will be no further dividends payments before the merger is completed. Of course, the drawn out time spell of the merger has meant that that will only [be concluded] in September and therefore Harmony will reward existing shareholders with a 150-cent dividend. I state the obvious that the strong Rand has impacted on our result. We really had a good quarter operationally except at Elansrand and I will deal with that. We implemented a two-year rate agreement with [inaudible] year one is very expensive, year two is much more affordable in that it deals with inflation, South African inflation plus 2% with a minimum of 7%. The merger is on track and going smoothly. Continuous operations agreement with Free Gold will make a difference over a six to nine-month period. We have two transactions that increase our exposure to Avgold to 26%. And we are getting some really, really exploration results at our Wafi project in New Guinea, near Australia.

Moving on, the cash operating profit slide in table 4 is giving you the regional results. The free state, although showed a huge drop from 53 million range quarter on quarter to 4 million range, I mean this is purely because of the low margins of these operations and the impact of the Rand. These are still the base run marginal mine in the world. It's made money even today at just over 4 grams a ton. We have combined two of the shelves, the [inaudible] and [inaudible] shelf. That just makes operational sense at this stage. And our growth project, the Masimong we see a further increase in gold production up 12% quarter on quarter and it's become more and more important in our line. Evander you can see showed a drop from 45 million Rand for the quarter to 39 million Rand. It's a 6 million drop but you can immediately think that it had a very, very good quarter in order to minimize the drop to only 6 million Rand due to the Rand. The grade was back at [inaudible] grams a ton so we produced significantly more comfortable gold there, lower cost gold is what I should really say. Our Rand from plant operations showed a drop of 65 million Rand from 105 to 40. This is on the back of number reduction which is we've done during the quarter in order to mine to a slightly higher grade profile. Of course of the grade takes a few weeks before it comes out on the other side of the [inaudible] so we have 2 grams of [inaudible] gold but I am confident that the grades will pick up.

We've also reduced the surface [inaudible] needed dramatically. And surface [inaudible] is really the reworking either of [inaudible] or in this case mainly [inaudible] which contains low grades of gold and the strengthening of the Rand of course has made these [inaudible] ounces unprofitable. They were cut back [inaudible] during the quarter.

As I move on to Kalgold, their small [inaudible] operation. Again, the profits seem to have [halved] but we had commissioned a third load as we increased our capacity by some 40 odd percent commissioned [inaudible]in the quarter low-grade stock pile [ore] to create the minimum of [lock up] in the new [inaudible]. This operation is really, it's set to blossom will do so going forward now. Australian operations which is also where we've done a significantly [inaudible] which we announced a week or two ago, we are confident now with the management team that we put in place that [inaudible] problems, constraints in the [inaudible] shelf will be sorted out towards the end of the year probably as early as November. At Big Bell, those operations are coming to the end as we indicated a few quarters and certainly last quarter, a few quarters ago but definitely last quarter. The most significant change in Australia we suffered from a really strong Australian dollar as well of course we now produce all the hedging in the next 12 months. I think in line with what our shareholders want and we are only mining those ounces which are profitable when comparing total cost to spot price. That is the only model of mining and we are finally in Australia now where we can do this. It may mean a smaller Australian operation but it certainly means we only have those reserves which we can convert into some form of a profit.

Our Free Gold operations because of its higher margins of course are sustaining the lower gold price significantly better. But you can still see it going down from 141 million the previous quarter to 99 million this quarter. [inaudible] mine which has been a bad performer in South Africa for years before acquisition had an excellent quarter making a decent profit. The [inaudible] mine part of the Free Gold stable had a much improved quarter [inaudible]. The flagship and the steady performer actually does have some scope for improvement [inaudible]. Our St. Helena acquisition of some six months ago has been battling to be turned around simply because we were dependent on the agreement with the unions for continuous operation. That means that we require decent workers on some of the our profitable mines and we can now relocate workers with some ease and the St. Helena turnaround will now become evident.

Our next slide for those of you who have the inclination of mining engineering in you, and I apologize to people who are more interested in the financials, but there has been a few significant analysts who show some concerns that perhaps Elansrand has got a permanent problem or a terminal problem and I am trying to share with you that I am quite relaxed that despite the fact that the problem has been with us perhaps two months longer than what I was hoping, it certainly is getting good attention. I am showing you a section with the two thick black lines indicating the [shelf] system, this sort of Chevron shaped lines running parallel with that, the three of them, that's typically to vertical or close to vertical orepasses through which we [], reef part and the waste part. And then I just show you the detail of how in June and May one of our orepasses scaled to the extent that we could no longer use it. In using that orepass, of course, we were then short of an orepass which resulted in us having to mix waste rock which ideally should be kept separate from the reef with the reef. We renamed it low-grade or zero grade replaced by [inaudible] [inaudible]. You can say that's one of the stupidest things you've ever heard. But in a mine like this we are busy building a brand new mine at the bottom of an old mine. What is critically important for the next three years is that we have the reserves from the old mine to sustain profitability while we grow the new mine. We simply do not have the luxury of cutting back on development and opening up of new blocks of [ground during a time of lack of flexibility like happens here. We added some 42,000 tons of waste rock and overall grade reduced dramatically. So the numbers for Elansrand looks bad on paper. Underground firstly the production was going quite steady and the next slide I am going to try and show you how, what happened in effect was that we let some higher grade broken ore underground in order to keep the mine going. I will show you two lines on the slide. The one shows you the broken grade, the grade at which we are mining. And you can see it's up and down but it's really sort of hovering around 8 grams a ton. That's just one measure. We didn't [inaudible] track the recovered grade and it's too indirectly comparable but you can see the recovery grade follows with about a gram, a gram and a half sort of difference [inaudible]. Then you can see in the two months of April and May where we had to add the waste rock to the system, these two lines [inaudible]. All it's telling you is that a lot of the gold that was broken during April and May simply could not be brought out of the mine. We are now playing a bit of catch up. We will get most of that out of the mine and, like I say, this is really just one of the realities of opening a brand new mine in the bottom of an old mine. Elansrand has made us a lot of money, almost 700m Rand since acquisition and we really thought that in order to own the new mine which is just beginning to be opened up now.

The next slide which may be very difficult for you to follow, again for the mining engineers amongst you just shows you that how on this 102 level the first of the raised lines up through at 1,385 cmg/t that's decent grade, puts us right back in[inaudible] [inaudible] [inaudible] [inaudible] just a deeper level. There's some [inaudible]holes that needs to be holed in the next few weeks, you can see. I also gave you a feel for how the other raise lines are coming in, in five months, six months and ten months time. This is, I mean in two or three years we will look back at this little blip and say, it was worth the pain.

I am going to move quickly through some of the next slides now. At quarter on quarter the variance analysis show you how from 478m last quarter we dropped to 183 million this quarter, really important is that as we expected the volume increased following the fact that the previous quarter, the Christmas break with the volume increases came some of the 2% drives in new cost. But the real difference or the real issue of this quarter of course was on the one hand the grade or the [inaudible]underground at Elansrand and secondly the impact of the 12% [inaudible]. So of the total variance of 295, 241 million of that was purely due to the problem with currencies in the country in which we operate.

The next slide is just showing you exactly the same, it shows you how operating profit has been affected by the strength of the Rand over the last six quarters or so.

By the slide titled Leveraged to the Gold Price, I will show you how the company did at 84,000 Rand per kilogram which is the price we received last quarter, we made 183 million Rand. I also show you how a drop in the gold price could wipe out another 50% of our profits and an increase in the gold price of course can more than double our profitability depending on what happens on one hand to the gold price, and more importantly in the short term, the South African currency. Ladies and gentlemen, Harmony has always been leveraged to variations in the gold price. As a South African producer, of course we have the added impact of the South African currency as well.

I want to move on to the slide which summarizes our earnings. You can see for the quarter, for the [inaudible] and with the added adjustments coming to headline earnings of some 65 cents. You can see for the year we made 695, the bulk of this money was made in the first half of the year, when the Rand was still at much weaker levels. The Australian impairment which we dealt with a week or two ago in the press release, I will come back to it later. [inaudible] net earnings for the quarter of minus 259, for the year it's 359. The board decided to pay a dividend of 150 SA, we said earlier [inaudible] [inaudible] [inaudible]a year, an annual dividend of 275. That represents 40% of our earnings of 695 which is the earnings before impairment. As you all know, impairment is merely a book entry and not a cash item as such.

Our next slide is titled The Australian Reality. Our resource base in Australia is the same. Of course, the Australia dollar is stronger and we have removed all the hedging and therefore have got no choice but to declare our reserves at the spot price. Our reserves are therefore reduced, obvious depletion mainly through restating at different financial assumptions. I want to talk you through how we determined the payment of 140, payment of 140 million Australian dollars. A year ago our Australia assets were valued at 547 million Australian dollars. We did the Abelle acquisition of 234. We spent CAPEX of another 47. We amortized some 50m over the year. And, then, at year end when we did our new evaluation, our realistically expected value for these assets is now only 623. That left us with a shortfall of 155, and by putting that through the books [inaudible] of course there's a tax right back of 41 for a net impairment per foot $114 million. Converted into Rand it is 598 million, or 3.24 per share. There is no hiding the fact that an impairment in terms of acquisition costing and in the good old days we spoke of goodwill and goodwill write off . The fact of the matter is with the realities as they are today for us, I think it's fair to say that we overpaid for these assets to this extent. I mean, [inaudible] book adjustment [inaudible].

The Australian operations are now smaller but profitable, as I said before. We need to mine to the model we use in South Africa, which means we will focus on profitable ounces on a total cost basis. We restructured our hedge book for the 2003, 2004 financial year. There's no hedging commitments for the next 12 months. We've restructured a corporate and operational structures in Australia to something more in line to what we use in South Africa.

My last bullet point on this slide says the lack of value in our share price necessitates a strategic re-look. We keep on being told by various people including analysts and investors, that they don't think there's any value to Australian share price. It's difficult to determine as you know. We are open to such comments and we are certainly and continuously re-looking at how to extract value out of our Australian operation.

Our next slide shows the total reserve of the company in excess of 60 million ounces as announced two weeks ago including ARMgold's ounces. You can see in the last two years we have more than doubled our reserves. Good quality reserves, the bulk of that, over 90% of that in South Africa, part of the world's greatest ore body. Not a bad position to be in. None of these numbers include from the target mine. If the look at the 26% growth in reserves year on year, you can see that our resource base has jumped dramatically, this inclusion of ARMgold our reserves have gone up by 26%. Our gold production for the year came a few ounces short of 3 million, that's a new record for this company. We certainly at the start of the year saw [inaudible] 1 million ounces. It was mainly the same thing with the Rand which resulted in a different mining plan. We made only 3 million ounces so that [inaudible]. Cash operating profit, you can see over the last two years were positively impacted by the rising dollar gold price and for some of the two years, the second half of 2002 and the first half of 2003 financial years, we of course had a significant part of the impact through the weak currency locally. The EPS we dealt with. It is down to 695. Before impairment and dividend of 275 constitutes a 20% pay out ratio which we've always had in mind. The next language deals with our track record. It gives you a lot of detail over the last five years capturing if nothing else the significant growth of this company. It also shows that in U.S. dollar terms we actually made record profits in the last 12 months. A stronger Rand impacted on our Rand profitability but of course converting back into U.S. dollars, $260m operating profit was an all time high for Harmony.

The merger with ARMgold can be seen from many angles. It certainly isn't a desperation step by two companies that ran out of growth opportunities. We think it's actually a much more positive positioning for future growth. If one looks at it defensively, at least 600 billion ounces that ARMgold produced is really quality ounces. The bulk of that sits in Free Gold which we own yet a half of. Through this merger we also acquire the other fifty percent of all those growth projects which we like so much and have committed to, and there is also some synergistic benefits to be realized mainly in the Free State. [inaudible] how are you going to survive. But it looks a bit more graciously and says, how do we take this merger and cultivate a company when obviously post the merger we are a fully fledged black economic empowered company, not only compliant but compliant to the extent that other people can use us as the black economic empowered partners. That plus the fact that the strong Rand are squeezing margins in South Africa means that we are well-positioned for further South African growth. Continuous operations we have spoken about a few times. We are implementing it now at Free Gold, some 45% of our production in South Africa will come from areas where we are working continuously and obviously that enables us now to roll it out to 55%.

I want to share two or three slides with you, pro forma slides of what the company would have looked like if it was already one. And you can see the cash operating profits would have been significantly up from the 180 million that we made. The next slide just shows you how our quarterly results would have looked, more tons, of course. The underground recovery grade at 5.43 is up an average to Harmony's. Our ounces produced would have been 100 million ounces. Revenue at 85,000 Rand per kilogram, working cost 74,000; leaves us with a profit margin down to only 44 U.S. dollars. But it is still a profit margin, I remind you, and we are still making real money even at these current levels.

The last pro forma slide just shows I was pie chart indicating that Free Gold now, of course, increases significantly importance in Harmony's life but it is a big asset by quite a stretch.

The next slide titled Harmonizing the Free State, for those of you remember the Free State Goldfields as a geographical area. The regional Harmony mine has subsequently been expanded to the extent now that it's really down in the south, to the Beatrix and Joel mines that we've got no exposure to. We are by far the most dominant player in this part of the [inaudible] Goldfields. Harmony ARMgold merger timetable, the [inaudible] government institution approvals on the 1st of September. Both sets of shareholders are expected to approve the transaction. It goes to the high court on the 9th of September for rat fiction. On the 22nd of September, it's the operative date of the scheme and the five Rand special dividend will be paid by ARMgold, and on the 23rd, ARMgold or the new [inaudible] shares will be traded as such.

I am going to talk a little bit about where do we buy or should we buy mines? Of course it has never been an either/or strategy. I think as I've indicated we are quite optimistic that there will be further opportunities to buy turnaround situations in South Africa that will deliver significant future value uplift as you know and as we demonstrated that with our 15 odd acquisitions in South Africa. It is true that we've grown from two to 3% of South Africa to 30% but it's also fair to say there's quite a bit of further scope for us in this country. We are prudently reinvesting cash in highly prospective South African ore bodies to ensure future quality production. I will on the next slide share with you the projects that we are investing in. The next slide shows how our portfolio assets looks. We do own some marginal ounces, new regional Harmony mine [inaudible] to technically our Australian operations and ARMgold's [inaudible] shelf. Quality ounces, technically Evander, Kalgold, Ranfontein, certainly they are good mines judging by anybody's measurement. They record quality. I put question marks behind Highland Gold and Bendigo because these are strategic investments and really time will tell whether we proceed with it or whether we lock in the profits and move on.

Long life quality ounces, the column is the one that excites me. Masimong showed a 12% improvement quarter on quarter and it's continuing to expands. Elandskraal, of course Elansrand had a bad quarter but that doesn't change the fact that we are another three months closer to a world class brand new mine at the bottom of the old mine. The Tshepong and Bambanani assets of Free Gold, we own the other half of that as well. The project growth ounces, the Tshepong North project, the Phakisa project, both of those are associated with Free Gold. The Doornkop project which we are doing at our Ranfontein operation. And the 26% exposure we have to the Target mine in [inaudible]. The potential projects continue to include the platinum discovery at Kalplats and Rolspruit and Poplar [inaudible], and at Morobe and Wafi we are quite excited with exploration results and I will talk to that in a moment.

The next slide just shows you the project life slide that shows you how the gold in these projects kick in. It's 1.5 million ounces will come from these projects by 2010. Of course, the bulk of that is replacing other ounces which disappear out of the rest of the company. It does leave some scope in the first few years for real growth, quite significantly. So the recovery grade at Harmony today at 5,3 grams per ton is expected to be above 6 grams per ton by 2009. Again you can see how that makes us a much more robust company.

Abelle, we own 87% of the company and [inaudible] an Australian lifted company. It's really gives us access to two projects in upper New Guinea. Marobe is now by Abelle and there's a feasibility study under way. Wafi, drilling results include some really exciting intersections, 159 meters at 6,5, 71-meters at 8,4. It's really the exploration results are at the upper end of optimistic expectations when we got involved in it. The platinum project, I am not going to say a hell of a lot more about. We are continuing with all the work on the one hand, drilling the resources and, on the other hand, continuing with the feasibility work. The capital expenditure, in the conclusion of this presentation you will see that the operational expenditure of 147 million in the June quarter stays at that level, 150 million before the merger, so same number. After the merger it goes to 161, that's just a capital expenditure at Free Gold which we now double it. If you take a look at the projects, you can see that the projects of course are now picking up speed, the 15 million of the previous quarter goes to 99 million. Including the other half of Free Gold, 155 million. But this is the statement I make up front as we set to maintain to continue our capital expenditure. We put the BS forward, we put the cash in the bank forward, and we are still making cash as we speak. So all in all we believe that we can sustain this capital as we all know the future is difficult to four tell but we certainly are confident about the next few quarters.

In conclusion, before we open up the lines for questions, the new Harmony, we continue what we believe will be a unique investment opportunity. It's the ultimate leveraged, pure gold company. It is truly South African gold and it is a gold company producing approximately 4 million ounces. We have affordable growth [inaudible] which will ensure our long-term sustainability. On top of that we now own 34.5% stake in Avmin which gives us a 26% stake in Avgold. And we believe there is more value upliftment to follow.

I thank you all for what was quite a long presentation. I tried to deal with most of the issues and I would now gladly ask you to open the lines for questions.

Thank you, sir. If you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue please press the hash or the pound key.

The first question today comes from Victor Flores. Please go ahead with your question, stating your affiliation.

Thank you, good morning. It's Victor Flores with HSPC. Bernard, you are sounding a bit contrite about the whole Australian thing which is perhaps understandable given the write down. But could you perhaps give us ability of flavor on some of the stuff you are still working on which has some promise, spending the Bendigo assets?

Victor, thank you, yes, Australian assets I think it's safe to say we've left with most of them for some 18 months and certainly we haven't had any new surprises there. The external environment has changed. We are un-hedged in our effectively the Australian dollars has been strong, similar to the South African Rand. The challenges at [inaudible] are well in hand. So certainly we are comfortable that there is some significant value in there. The growth prospects of Australia, that's the crux of your question, I think our board now has to come to a final decision of how they want to proceed. Our money has been spent reasonably well, we feel. They've gained additional information. They've had an attempt at a first reserve statement. And that board now has to decide how to proceed at Bendigo. Then of course they will pass the ball back into our court and say, well, Mr. 31.5% shareholder, what are your plans with regard to our plans. This is the subsequent of events. The Bendigo board now has to make up their minds and obviously then I suppose engage the bigger shareholder with regards to how we intend to participate. It certainly Australia is not necessarily [inaudible] we are as you can understand being challenged by, we needed 450,000 ounces from Australia out of [inaudible] 3 million ounces. Perhaps it was relevant after the merger with the cut backs in the current Australian operation. We are going to do 300,000 or 350,000 ounces at 4 million ounces. It is relevant. All we are saying is recently we have open minds. We are very comfortable with where we are now in Australia doing the thing the way we want to do it. And in a year's time we may be very bullish on Australia but it's very important for us to earn a bit of credibility there, not only make promise. Of course, Abelle is in a different time horizon. I mean, it's Australian but it's really in proper New Guinea as you know. And by December, again, we expect the Abelle board to be confronted with new feasibility study, study from Morobe. It may be that we can give the Wafi project time to catch up with Morobe so that we certainly back the best of the 21st. So very exciting stuff and I think the Abelle share price [inaudible] including the good drill results show that there was quite a bit of excitement there now. Thank you for the question, Victor.

Certainly if I could just follow up, and that's with regards to the Russian strategy. I guess, Highlands has had a few issues of its own. Can you give us a sense of what the Russian side of the growth profile is going?

Yeah, thank you. Again, in Russia our strategic investment of course looks bloody smart [inaudible] if you excuse my French language here. At the same time, of course, it is not an operation that we have any significant influence in. We do not have any operational control. It's pretty much as we anticipated originally. Now the challenge for us is to either increase our influence or operational control over assets in Russia or otherwise say, hey, guys, we made a lot of money, thank you, we are out of here. The whole incident with the [inaudible] government about the assets that needs to be privatized, I mean certainly in South Africa with the prompting of one journalist from Moscow, they tried to make a nice story with regularly, I actually think it's a pretty [inaudible] better than the privatization process. The government decided to sell these assets rather than lease it and that was partly because the company wasn't comfortable with the higher lease rates imposed. And they put a minimum price on the assets. [inaudible]. Transparent. I mean as transparent as it is they ought to list the 5,000 potential buyers for these assets because if you've been to this mine like I have, you will no, sir that it's miles and miles and miles, hundreds of miles away from anything else. There's not a real chance of somebody buying this [inaudible] and instead of the [inaudible]. So I really think that is not something that significantly worse us. But as with all our other strategic investments our continued involvement with Highland Gold will depend on our assessment of whether we canned an additional value to such an investment, Victor.

Thank you very much.

Thank you. The next question comes from the line of Paul [inaudible]. Please go ahead with your question, stating your affiliation.

Paul [inaudible], HBC. Bernard, you alluded earlier in the presentation to your reducing of grades or changing of grades. You said I think it was a six to eight-week lag in getting the process going and then you said, I think you said the benefits will show two to three months from now. Can you just either verify that or just elaborate a bit on how long it actually takes for change these things in response to a lower Rand gold price? And can you just give us a price of what Rand gold price you are actually looking at budgeting for the next couple of quarters?

Yes, thank you, Paul. I think all of those things and the way he string them together, even I get a bit confused. Let's go back to the basics. When the gold price drops or the Rand strengthens, our orders of management system makes it quite easy for us to say, instead of applying a cut-off of X. let's use 5% higher than X. So you increase your [cut-off], or as most other South African miners would talk, increase your pay level. You increase your cut off and therefore you reduce that part of your reserve that is available for mining marginally. And you mine from a slightly higher grade ore body and therefore you expect your mining grade and your recovery grade to go up., by about 5%. But of course from decision making time like we did the Ranfontein a good three months ago now to seeing high-grade supporting to the [inaudible], that takes a few weeks and then it takes a week or two before the higher grades come out on the other side of the [inaudible]. Typically. It's not scientific but it's an estimation of six to eight weeks from decision making point to seeing how grades have gone up by four, 5%. And really that's the time period I'm talking about. I did also say two or three months but it's really the same six or eight-week period. And it is, of course you can say, are you now high-grading your reserve. Gentlemen, ladies, let's face it, mining by definition is a high-grading exercise. You go to an ore body, you determine which parts can be minds profitably and which parts can't and you focus on the profitable part. A lower gold price, currently we are like everybody else using an 83, 84,000 Rand per kilogram as a [inaudible] cost for the next few months and we are mining according to a plan that suits that. We wouldn't necessarily like to overdue that for an unnecessarily long because it does impact oath quality of the remaining ore body. But for six or nine or 12 months, certainly the ore bodies in South Africa can sustain that.

Thank you very much.

Thank you. Next question comes from Andrew [inaudible]. Please go ahead with your question, stating your affiliation.

Good morning. Bernard, everyone, strong capital. Bernard, I wanted to know are you in a position to comment on or update us on the exploration program that's underway at Target North?

Thank you, Andrew. No, I have no special insight, I have no further detail. I think that the actual exploration work has been done and that it's been converted into a new resource statement. But it hasn't been [inaudible] to a feasibility steady to the best of my knowledge. So Andrew, unfortunately I have no further insight than what is in public domain already.

Okay. I wanted to know, can you further elaborate on or prioritize the four projects which make up what you call project growth ounces and again which includes Target? Thanks so much.

Thank you. I will, I am just looking for the slide, just give me a second, Andrew, I have switched off my lap top so I am looking for my hard copy. I think that we are currently busy with the one that gives by far the best returns, and I am talking here about higher ore of high40s, 48 or so if I remember correctly, is Tshepong north, and that's some six months down the line already, and part of the reason why these are so nice is because it actually has a lead time of only some 2.5 years until you see your first gold. The Phakisa shaft, again, is a very nice project, slight many better than the Doornkop, and the Doornkop is one of our black economic impairment transactions through the way we structured it. We actually increased the IRRs for our shareholders to upper visit percent. And really all three of those are viable, continue to be viable even at 83,000 Rand gold price. Of course, the current gold price is more relevant to our ability to generate the cash to fund these projects. These projects kicking as I said in year three and five and seven, and by then the gold price will be completely different scenario. At this stage really I would caution people against expectations of dramatical significant movements. The South African market has really hyped our involvement up to the point where we will now pay dare I say quite a hefty premium, and that's not what our business is. Target I think is probably the least of our priorities, thanks for the question, Andrew.

Thank you. The next question today comes from Heather Douglas. Please go ahead with your question, stating your affiliation.

Hi, Heather Douglas from BMO Nesbitt Burns. I have a couple of questions. The first is to follow up on questions about Avgold, or actually more about Avmin. What are the plans for the 34.5% stake in that and how do you see that you can unlock the value and what's going to happen to the non-core nickel, manganese assets?

Heather, thank you very much. I think you will find measure price single evasive because obviously I am not in a position to speak on behalf of Avmin. We have up front said that we went in at a certain price and we see value at that point, and we certainly are [inaudible] exposure to the gold asset. That's what we've categorically stated and continue to state. It is, however, true that we are today the biggest shareholders in Avmin at 34.5%. Myself and some of my colleagues have joined the board. And obviously as would you expect of directors but as would you expect shareholders we are looking at Avmin to come up with a proposal of how to unlock the value which we believe is strapped in the current sort of structure. I think if you look at the components without going into detail, on the one hand you have the Avmin which is manganese, iron ore. Right now in South Africa there's a hell of a lot of talk about consolidation, the benefits that could come from that. Significant uplift potential, but historically in a joint venture which is a bit of a value trap with another party. It certainly adds its worth in quite a few billion range but it's a process to unlock that. If you look at the nickel, as you know nickel is in [inaudible] a market of its own and [inaudible] nickel mine of which Avmin owns 75 percent, is currently faced with significant capital [inaudible] in order to expands by a factor of four, it is a project that is worth doing but it certainly is not a top project that we at Harmony have specific interest in. Also at the early stages of developing a platinum mine. This platinum mine and nickel mine is geographically near each other and may always be a possibility of us putting up the nickel and platinum into some platinum [inaudible] entity. And really apart from the [inaudible], we really get to the Target mine which is now the only remaining asset in Avgold. I think I can't help but think in terms of the sort of speculation of how we can go about it. We obviously do back ourselves to sort of 18 to 24 month period to extract value out of this investment and increase our exposure to Avgold. I apologize for being, I am not normally this vague but it's difficult for me to speak on behalf of another company and really I can just refer you back to the logic of where Harmony will be a pure gold player, it is not diversification by itself, this is getting more gold exposure. But it is certainly not diversification in the long run. Thank you for the question.

Thanks very much. I have a second question. I understand that the South African government maybe made a turnaround on it's aids percent of sales see and can you update us on this side of the ocean? And also elaborate more on what Harmony and African minerals have been doing in terms of addressing the aids issue, how much you think it costs now and where do you see it going?

Thank you. It certainly sounds like the government has finally had a turnaround. We all knew it was coming. But obviously they wanted to get all the ducks in a row before they announced it. I've seen the [inaudible] and it sounds like the government is now about to roll-out the [inaudible] program which is the anti [inaudible] viral treatment. In two months certainly with Harmony we've already implemented antiviral as part of the treatment. I think it's a nicely hyped up part of it. It's a really important part of it. But it is never going to be the end solution because simply because as a country we still deny HIV aids. People do not live with it openly. People do not know that they have HIV aids. And therefore can't actually report to get treated for it. And the company as the whole mining industry has been at least 18 months ahead of government, we do a hell of a lot more than just giving the drugs. The drugs have become cheap and affordable through various aids [inaudible] non-government organizations, international [inaudible] and so on. All in all the economics of extending a productive workers productive life, it's now a no-brainer. It's not only the right humanitarian solution, it's a human solution. It makes good business sense. Overall our rough estimate is still that the overall HIV aids pandemic will add somewhere between two and $4 to our cost, probably about 1.5 of the $2 is already in our cost because we already live with HIV aids as a company. We do what it takes and continued to what it takes. But certainly some of the best news that we south after cans have had from our government for a long, long time.

That's good. I hate to ask a third question, two. About the competent persons report that was sent out in the circular. Do you know if they have incorporated the wage increase that you negotiated in the numbers that they put in as the forecast?

I'm embarrassed to say I do not know this. Frank Abbott here is now embarrassing. He knows. He says it is included. So the wage increase is already in the competent persons table.

The competent person report actually only identifies [inaudible] reserve of 29 million ounces and a life of mine plan sort of which includes resources of 42. Your release talks about visit. Where are the extra 8 million ounces?

You've lost me. I mean I am pretty sure 60 million ounces of which we mine 40 odd which you correctly stated. The 29, I do not know where that number is. I promise you that we will come back to you on that. I'm not sure weather we are crossing lines here but I will follow that up and Frank will give you a call if that's okay with you.

That's great. Thank you.

I unfortunately need to leave probably within two or three minutes. Perhaps you can take a last question, please.

Our next question comes from Dave [inaudible]. Please go ahead with your question, stating your affiliation.

J. P. Morgan. A quick question. You did mention you struck an agreement with the Free Gold union in terms of continuous operations. Now, obviously it's early days here but can you give us any idea of a sense of how quickly this can be rolled out, how feasible it is and any impact on costs on margin?

Dave, thank you, yeah. I'm excited. I am really excited as a schoolboy with a new toy about this and yet I have to caution all of us that it is a difficult thing to implement. [inaudible] perfect examples of badly implemented continuous operations, Joel to remember one, and therefore it ceased, it was undone, of course, LaReine closed down. Evander, by the time we bought it, it was just being unwound continuous operations. However, our partners are the people who have successfully implemented it and all of the operations are continuous operations. I think if implemented over a three-month period that you definitely don't see the full benefit in the third month already. I think it does take a bit of time. It creates some new jobs and that is very popular and that is of course has been great. It increases volumes, typically in the order of 15 to 17%. And the volume increase at the same grade of course requires more gold. Your unit cost comes down marginally. We expect our unit cost to come down certainly six months from now by some 3% because of the increased volume benefit. All in all, this is not the be all and ends all but it is certainly at a sometime where our margins are squeezed, it gifts us away in which to produce more gold at slightly lower price than obviously significantly enhanced profitability. I would argue, Dave, that in nine months from now we will see the firstly the full impact and secondly whether we see the full impact or not. It's going to take a bit of time. Thanks, Dave.

Ladies and gentlemen, those who have come on the line I am going to wrap this up. Thanks very much. I apologize the presentation took so long and we are cutting the questions and answers short. I really appreciate your time and good day to you all. Cheers.

Thank you, ladies and gentlemen. Thank you for your participation in today's conference. This concludes the conference. You may now disconnect. Goodbye.