Harmony Gold Mining Company Ltd (HMY) 2004 Q2 法說會逐字稿

Welcome to today's Harmony Gold quarterly results conference call. At this time all participants are in listen-only mode. At the end of the presentation there will be an opportunity to ask questions, and instructions will follow at that time. I would like to hand the conference over to Bernard Swanepoel. Please go ahead, sir; I shall be standing by. Thank you.

Good morning, good afternoon, ladies and gentlemen. I am also joined by Fredi Dippenaar, my colleague, and I will be talking with you through some slides, which I think those who requested hardcopy should have received; and the rest would have received it in electronic form.

The title of this presentation is Excellent Cost Control and Recovery in Grades, obviously the lower gold revenues. Really, differently, if I put it differently, I think I am presenting to you a set of results which shows that we have adjusted quite effectively to the stronger currencies of the countries in which we operate, which of course is South Africa and Australia.

The first slide really just shows you the extent to which the strong U.S. dollar gold price was offset by the strong rand. You can see that where some of our peer group with less exposure to South Africa have seen some of this bull market. For us as a South African company, really in the last two years we've lost out on the gold bull market. The good news of course is gold bull market is not over yet.

The sort of last two years has really resulted in us in repositioning ourselves. I think we are leaner and meaner than probably ever before. And any turn in the South African currency, I can safely predict, will flow through to the bottom line. We have already seen a bit of that in the last four or five weeks.

If we turn to the next slide, that really is just a summary of the highlights. Again, I think solid operational performance. I will talk you through some detail, because on the average stats some of the excellent performance gets lost a bit. The CONOPS or continuous operations, which we are implementing at Free Gold and Deelkraal, it is early days. At the Free Gold shaft we've really been working the new shift arrangement for three weeks. We've incurred most of the cost associated with it. As I have said in the past, I caution us all that the full benefit is probably another six months in the future. But it can make a nice and significant difference.

The cash earnings of the company is such that the Board agreed to pay an interim dividend of 40 South African cents per share, and I think that really also confirms management's own trust in our ability to do better from here onwards; obviously subject to the dollar gold price and the rand-dollar exchange rate.

I will deal a little bit with ARMI, our 14 percent Black Economic Empowerment shareholder, and its deal with Avmin in which it actually increases its exposure to Harmony and it also establishes control over Avmin. More importantly for us is where we are with our acquisition of the 42,2 percent of Avgold from Avmin; and then of course an offer will follow to minorities. We actually continue to hope that the Board of Avgold will actually recommend such an offer to minorities as well.

I just want to point out that our growth projects are on schedule and within budget. More importantly they are all continuing, and they are all continuing because they give us good returns, even at a gold price where it was last quarter, at 85,000 rand/kg.

Abelle continues to be a source of good news. Its exploration in Papua New Guinea, continues; and also very importantly is Abelle's finished feasibility study, which we as Harmony are just, you know (ph), very fine for our own benefit in the meantime as well.

My next slide, which is a graph showing you the cash operating profits. The red line or the line shows you how the rand-dollar exchange rate has moved dramatically up; and the company results followed. Then of course the rand strengthened to where we were three years ago. But obviously three years later, in a high inflation environment, it really is a completely different world. We make more money now than what we made three years ago, despite the fact that the rand is back where it was. And of course the successful merger with ARMgold six months ago was a significant contributor that. The company I present to you today is so different from three years ago; so much more robust.

My next slide deals with the cash operating profit variance. I'll show you how last quarter's 332,9 million rands; this quarter which we are reporting on today came out at 271. The 5 percent volume decrease is a little bit misleading, because those volume decreases really came from places other than South African underground mines. The South African underground mines saw a reduction of less than 1 percent in volume, which quite honestly is statistically completely insignificant. The overall reduction from underground in South Africa was 45,000 tons.

To just give you a feel for some of the other areas, and this all comes out of the detailed Harmony quarterly review book, which is available on the website, and some of you will receive hard copies in the next few weeks. This is from page 24 of that booklet. But if we continue with the explanation of the volume decreases, the surface production in South Africa was the most significant contributor, off 24,000 tons less quarter-on-quarter; that is a good 11, 12 percent less. And this is just in line with turning on and off these surface retreatment operations in line with the stronger rand. All of these are basic contracted sort of holding agreements; and all you do is you phone the guy and say, listen, as from Monday next week don't bring me the stuff anymore.

They're open cost (ph) mine in South Africa. Kalgold also had 40,000 tons less, and we will deal a little bit with Kalgold and Australia, again, in line with our lower and more profitable production profile, at 90,000 tons, or 10 percent less. So really I think volume decrease, I showed you the company averages, and that is very, very misleading. The core assets of this company, the underground mines in South Africa, actually had a very good quarter.

Against that context, we have to see the working cost decrease, 47 million rand less spent quarter-on-quarter, 2 percent. These savings were effected mainly in the areas where volume stayed the same. And that really was a sterling performance.

The recovery grade increases in all instances are really just statistical variations from averages. The one exception is the Bambanani mine in Free Gold, which last quarter, as we reported, had below average grade recovered for the quarter; this quarter it has returned back to normal and perhaps even a little bit higher than average.

The next line shows you that the rand gold price reduction, (inaudible) a 1 percent reduction in gold price that made a 35 million rand difference; for a net variance of 61. So the rand impacted for the bulk of that difference, and the other differences really relate to us trying to keep up with the ever stronger rand, and rightsizing the company according to its new reality.

Of course where we sit today, that prospects are that the rand has actually turned. We are now likely to see 7 rand or even 7.20 rand to the dollar. And that benefit will flow directly to the bottom line, as I will show you in the slide to follow.

If we move onto the next slide, which is titled Solid Performance Again. I will just again give you company averages; 940,000 ounces, you can see us nicely on track to what I've been predicting as 3,8 million ounces for the strong rand environment; and after we have resized the Australian operations, we certainly are in that ballpark.

The revenue rand per kg is down by 1 percent; and the cash cost is up by 1 percent. These are all, again, averages including surface, Australia, and South Africa. Just important to note that the cash cost margin of 11 percent, marginally down from last quarter's 13 percent. But you can really see that the rand and the dollar and the dollar gold price have all really tracked each other quite closely over the last three months. The gold price is up by 9 percent, and the exchange rate has changed by 9 percent. Everything else has really just stayed flat.

I am turning the page now again to a slide which is titled We Generate Good Cash Earnings. You can see that in the December quarter our cash earnings of 105 cents per share; that is not too bad if we assume that we have probably just withstanded the worst quarter in terms of rand per kg gold price that we may see for a good few quarters.

Basic earnings at 92 cents, dramatically up from last quarter's 24 cent loss. The mainstream (ph) number of course is the profits we made through the disposal of our Russian assets. Headline earnings seem to have deteriorated from 28 cents last to 66 cents; that is a 38 cents difference or deterioration. Thirty-four of those 38 cents or roughly 90 percent is explained simply through the accounting of ARMgold, which for the first time now we incorporate completely into the numbers.

Obviously, we acquired ARMgold for about 8 million rand, and a significant part of that -- that's a much higher amount to be amortized than what ARMgold were doing historically. So last quarter we simply added two sets of quarterlies together to give you a feel for the company; this quarter of course we treat amortization of the asset value, the book value, the goodwill value. We amortize it now over the life of the mine, and that has resulted in a significantly higher amortization charge. As correct as this may be from an accounting point of view, this obviously misrepresents the extent to which the company actually generates good free cash flow.

Fully diluted earnings again speaks for itself and is the same as the basic earnings for the quarter. It is, however, important to know that on a fully-diluted basis the earnings for the six months is 76 cents per share. Again with the confidence of this, these were probably two of the most difficult quarters we could foresee, the Board was quite prepared to declare the interim dividend of 40 South African cents per share.

I want to move on now and just again reconcile basic and headline earnings for you. You can see the basic earnings line, which is the accounting sort of number. Of course, one has to just take out of that exceptional items, the profit on the sale of mining assets, and the profits on the disposal of the Russian investment, net of tax of 173 cents a (indiscernible) . We also add amortization and ARMgold goodwill, and we come to a net 66 cents. That is really I think as detailed an explanation as you may need.

I want to move onto the next slide. I still, even in the worst of times, I sit and I think, what if? What if the gold price was 90,000 rand/kg? You can see we actually got -- instead of 85,000 rand/kg, we got 85,139. We made 271 million in cash operating profit level. If we, on that same performance levels, if we receive 90,000 rand/kg, which is 6 percent higher in terms of gold price, we would have had a 52 percent higher operating profit.

Of course this is a conservative sort of simple reflection. In a higher gold price environment other things change. Your capitals drop. You can actually mine more. I am not even talking any of this; I am really just showing you a quarter similar to last quarter, the higher gold price environment.

We were receiving for the last two weeks or three weeks gold prices charging (ph) from 95,000 rand/kg. But I really truly believe we can look forward and probably expect to average 90,000 rand/kg. And it will flow through to the bottom line; no doubt about that.

I will move on to my next slide which shows you the cash operating profits operation. Our two Free State operations, namely Free Gold and the Free State operations, both did extremely well. At Free Gold we were already incurring some of costs associated with CONOPS and yet we are not seeing the benefits yet. With Free State, this is a regional Harmony mine; for those guys to make profits under these circumstances, I think is an unbelievable performance. I must say, however, that the bulk of that 25 million did come from the Masimong area, where that growth project, the long-life good-quality low-cost mine that we are busy building, is really coming into its own right now. It is the pillar of the whole region.

Really with the exception of the variations in the grade, especially from the Maray (ph) shaft, there are no real major issues there. Randfontein, the same; it is mainly a rand impact. The grades are a little bit below what we expected it to be; and for the last two quarters have been trending down. I really believe that is something that will turn around. I certainly have familiarized myself with the fact that the guys are blasting in the right places. So the trend in grades and the recovery grades always follow in due time.

Elandskraal, which was the combination of our brand-new Elandsrand mine we are building at the bottom of the old Elandsrand, as well as Deelkraal, you can see deteriorated. The bulk of those losses, 22 of the 29 million actually comes from Deelkraal. That is a mine that we are currently with the unions and other stakeholders reviewing. We are implementing continuous operations. But I dare say continuous operations is not a magical quick fix. It is still possible that Deelkraal will end up being closed. The people will be absorbed into the rest of Harmony to fill the vacancies created by continuous operations, hopefully.

The Welkom/Orkney part of the old ARMgold, as you can see really had a steady-state quarter and are adjusting extremely well to the period after the extraction of their high-grade shelf (ph).

Kalgold I want to spend a minute on, because this was the mine that we signed an agreement, to sell this mine to Afrikander Leases, a small junior company in South Africa. Obviously the normal players are involved with Afrikander Leases; well-known people in South Africa. And whenever they are involved, everything seems to be handled through the press.

I get many phone calls about Afrikander Leases' inability to pay, et cetera, et cetera. I want to assure you that from my perspective it is actually quite simple and straightforward. If you buy a house, and you end up not putting up the money, then you have never bought the house. And the same applies with Kalgold. We've been in agreement that by the 28th of February Afrikander Leases will come up with their half of the purchase price in cash; the other half we will take in shares. And a failure to come up with the cash of course would make the transaction null and void.

We certainly are remaining very closely involved with the operational management. It is joint management. But we are ensuring that if we end up still owning this after February, we will get the asset back in a condition similar to what it was. And we did not to solicit an offer for this. This was really a case of we own this mine; it is a mine that we are very comfortable owning. Somebody came and made us a very good offer, which we accepted. I think that is more or less in line with the way one should treat your assets. And the failure therefore of the transaction to proceed really is not a huge impacted in our lives.

The Australian operations, as you saw from the volumes, they have got significantly restructured. We are now mining or attempting to mine only those ounces which are truly profitable at spot prices. I am very pleased that we maintain our profitability level and in the process actually shrunk (inaudible) operations.

We also continued to restructure our Australian hedge book during December and the early part of January. We've actually done two sets of closing outs of hedges totaling another 365,000 ounces. That leaves us with a hedge book of under 500,000 ounces. I may remind you that two years ago this hedge book had 2 million ounces in it. So this is very consistent with our strategy of actively remaining unhedged, even where we inherit historical hedge books. Just for the record, that means that the next 18 months we can mine in Australia along business principles, and not a single ounce gets delivered into a hedge.

And finally turning the page, and sorry for all that detail on that slide, the next slide really is just to try and convince you that I once was a mining engineer, and I know a little bit about mining. It is really difficult to do this telephonically, but it shows you, for those who have got it in color, two different labels; one indicated in blue, one indicated in red. The sort of vertical lines are what we call the raises or winches connecting those two sets of excavations, enriche (ph).

The little blocks, the sort of square blocks, gives you in centimeter grams per ton the value as expected from the earlier exploration and the block models. The 2,000 cm (ph) grams typically you can divide by about 100 to 120 to get to grams per ton. So 2,010 grams, that's about 18 grams a ton in situ. That is what we expect.

Then at the bottom I show you some of the actual values, and that is sort of a lot of detail. But for those interested, you will see that this area is living up to the expectation. Because at exploration phase you've got fewer holes, you get extreme values; you expect in the one area 2,300; in the other area 140; and of course as you actually mine on the reef it is a lot more consistent. And you get 1,800 to 1,400 consistently.

For those of you have followed the Elandsrand mine, we bolt in (ph) the new mine formue (ph) level for the bottom of the old mine, which historically had four or five levels as well. This is just confirmation that we are right in the middle of what was previously known as the Elandsrand pay chute (ph) . Another 2 or 2.5 years and all the mining will come from here, and Elands will go from the fairly variable but profitable sort of mine of now, into a seriously profitable low-cost mine. This mine will be around 15 to 20 years from now as a low-cost South African producer.

That is a good point to step onto capital expenditure. Investing in Our Future, the next slide. The top part of that table shows you all our operational CAPEX. It doesn't show you a total; but anyway it shows you the operational CAPEX. As we spent, as you can see in December, just about half, 119 million rands on the ongoing operations. Some of these like the Venda (ph), the 23 million goes into those declines, which we continue to extend ahead of us, to make sure that we can continue to mine. You will also note that the Australian operations is really a pretty high operational CAPEX environment, and that's what we need to change going forward with further restructuring.

The bottom part of the table shows you that 104 million was spent on project CAPEX. Those projects are well known. You can see the mines that we are building there. The Doomkop South Reef; that is the finishing off of a project. Elandsrand we spoke about. Tshepong decline, that is a small lode but a really really significant project in our lives. The Phakisa shaft. Nala (ph) is really just a reopening of an old shaft, and therefore the capital is quite low.

The key thing is in last two quarters we were able to fund the capital. We were able to continue to spend on our own operations and also fund the future growth of the company. These projects are all returning 25 percent plus iron ores even at a gold price of 85,000 rand/kg. So this is not blind faith. This is smart, proven investment even at the bottom of what was the sort of South African rand cycle, I like to believe.

My next slide just deals with ARMI, 14 percent Black Empowered shareholder; and how it converts its 14 percent in Harmony with other assets into a controlling stake of Avmin. You can see the steps. We at Harmony acquire Avmin's shareholding in Avgold, in a 1 for 10 exchange of shares. Avmin then acqures ARMI share holding, the 14 percent in Harmony, as well as its effective stake in a platinum joint venture. That platinum mine is actually up and running and a few months away from breakeven. Avmin also acquires from Harmony our Kalplats discovery for the issuing 2 million shares; equivalent to 100 million rand. And really all in all, what we do is we take three companies and we rearrange it such that we as Harmony end up with all the gold; all the platinum and other base metals, minerals, end up in Avmin. We enhance our Black Economic Empowerment credentials. And we actually increase this Black Economic Empowerment stake, as well, as I said.

If we look at the diagram, which is the next slide, ARM Structure Following the Transaction, you can see Harmony had a 17-odd percent stake. Actually that was before the merger. After the merger we had a 34 percent stake in Avmin. That now converts into a 20,1 percent stake of the new Avmin, the enlarged Avmin. However, we put that with ARMI's 43 percent into a control vehicle, a voting pool arrangement. That is necessary in the South African context in order to protect our Empowerment credentials.

This control entity then controls 63 percent of Avmin, which now means 22 percent of Harmony. That 22 percent of Harmony dilutes to 20 percent once we've issued more shares to acquire the minorities of Avgold, which is obviously what we want. So the long and the short of it is we moved our stake in Avmin to be a smaller but more influential stake in a new Avmin which is better diversified, more diversified. We end up with 20 percent Black Economic Empowerment and to shareholder against the previous 14 percent as well.

I really think, all in all, a good transaction; and that is ignoring the fact that in the process we got our hands around the Target Mine in the Free State. And that is the subject of my next slide, Target and Target North Project areas. The Avgold team presented with us today their quarterlies. They are on line to achieve 350,000 ounces for this year, and they are currently producing at $210 an ounce. Both of those are quite dependent on the current high-grade phase that they are going through. I'm giving you that small conservative number. Really the difference between my numbers and their numbers sits in the grade. The ore body obviously is more easily sustained 9 grams a ton than 11.5 or 10.5 grams a ton. The reserves at Trekom (ph) are 9 million; you can see you mine there for a long time. And then, of course, there are huge resources to the north.

We will deal with Target and that potential we see when we get to next quarter. Hopefully, the transactions are concluded by then. We are currently very involved in a project feasibility study, but it's a joint project between us and the current management of Avgold. The timetable, which is still an indicative timetable, you can see lots of things have to happen. Then finally, by the 19th of April or thereabouts, the new Harmony shares should be listed, and we certainly would have control of Avgold, and hopefully 100 percent would be the optimum for us.

I want to quickly deal with the continued restructuring of our asset portfolios. We sold out of the Russian assets, made good money. We allowed the option we had to acquire 360 million new shares in Bendigo to lapse. That was an easy decision. The stock price was at 19 cents; the option exercise price was at 30 cents. And quite honestly, there were much easier ways for us to increase our stake at this point if we wanted to. We retain our 31,6 percent of the company; and, therefore, the exposure to this prospective resource. It is really now in the hands of the Bendigo management board to make up their minds on what it is that they want to do, how they want to proceed. And then, of course, we've got a whole suite of options open to us in terms of participating, maintaining our current level, increasing our stake, or decreasing our stake.

The Kalgold disposal I dealt with in some detail. I'm really not going to go back to that. The transaction in Jo'burg, there is a lot of discussions about whether it will proceed or not. Obviously if it does proceed, then we have done a good deal; and if it doesn't proceed then we own an asset which we own anyway. And we (inaudible) for that either.

I will get to my last two slides and that deals with Abelle; this is the company in which we own currently about 85 percent; fully diluted, about 75 percent. We have cleaned this company up or assisted in cleaning it up to the extent that is now purely exposed to Papua New Guinea, and to very prospective areas in Papua New Guinea. Previously known as Morobe, or as it is currently known as, Hidden Valley project. Abelle with the necessary external advisers completed the feasibility study. They see 20,000 ounces of gold; another 4.5 million ounces of silver; for a total gold equivalent of 360,000 ounces.

There is also significant gold to be produced from Phase I. You can see 2 million ounces. That gives it a good seven-year life, just Phase I. There are significant in-field resources already identified but not included in this mining schedule.

Quite significantly and smartly, an agreement was reached with Mesimer (ph) Mines, a Placer Dome entity, to acquire current plant, which is on the island, for quite a low capital amount. Obviously this would do two things for us. It will decrease the overall capital cost of the plant; but more importantly it cuts down on the leadtime on some of these items, to source them and to ship them all the way to Papua New Guinea. Morobe is exciting and it is really coming up with the sort of higher ores that we would expect to make it comparable to the South African projects and comparable to the country (indiscernible).

And even more exciting, but unfortunately a good (indiscernible) down the line, is the Wafi gold project. The drilling in the link zone continues, and you can see there are really some standing intersections. The whole WR-188, 55 meters (indiscernible) 6 grams a ton. And the base of that (indiscernible) it wasn't a 1,000 grams a ton of rometa (ph) and a lot of other lower quarry intersections. It was a really consistent intersection over a wide width. This project really continues to bode the 6 million ounce resource that Abelle saw at the end of December. It's got all the potential to grow to 10 million ounces in a year or two from now. We are spending is much as is required on exploration in this area.

These projects are really -- they are not that inaccessible. It is mountainous areas, et cetera, but people live here. You can get to this. Of course, in the capital we would allow for building roads and so on, but you can get to these projects.

I want to conclude briefly with just a sort of comment. We've continued to deal with the hedging issues in Australia, especially, and the next 18 months we can mine, we can have a business approach to mining and not let the bankers or the hedging counterparties prescribe to us. And that obviously will also to some extent be the approach we would take to Avgold and Target if we get involved there.

I think I want to briefly also just deal with the repositioning of Harmony. I mean, the Target acquisition two years ago was not even thinkable for us. Now I think everybody accepts that it is a logical quality upgrade for Harmony. There are more things we can do internally in terms of our own quality. The quality focus works all the way through to the implementation of continuous operations, where you can move your crews from the lower grade areas to the higher grade areas, et cetera.

And really I think I feel like a guy who can look back and see a huge storm which is behind us. We really truly waited the storm; we came out arguably fit and leaner, but certainly financially in a pretty good space. And all our capital projects, all our growth projects were kept on track and online. The Board even showed enough faith in the company and in the management and in the assets to declare a dividend.

Gentlemen, ladies, that is me. We've got some 20 minutes or so left for questions. I am going to hand this back to Paul, our moderator, and he will facilitate the Q&A session. Thank you, Paul.

(OPERATOR INSTRUCTIONS) Victor Flores.

HSBC. Good morning. Just a question on the cash flows. If you reconcile the three months to September with the six months to December, it appears to me that cash flow from operating activity was on the order of -57 million dollars. Is my math wrong, or is that the number? And could you explain why?

Victor, I don't know offhand. I can't give you the sort of quick answer. Obviously the cash flow from operating, let me just turn to the right page and see if we can work through this. Otherwise of course I will get Frank Abbott to give you a call and talk to the detail.

But let's just get to the right page; and again on the detailed booklet that was page number 32 or thereabouts. Which cash flow statement? That is six months; I am actually looking for the quarterly one. Victor, sorry, let me not try and give you that detailed answer. I will get Frank to answer that.

Obviously if we make some 270 million cash operating profit, then of course there are the real expenses of running the company that needs to the deducted from that. And that will take the 270 million to 200 million. Of course the capital expenditure of the company is more than 200 million. So let's say 250, 260 million. And that's right now in sort of a steady-state rand, the way it was three months ago, we probably have a cash outflow of some 30 odd million rands. That is 50 million rands a quarter. Nothing to get too panicky about, because we are in the process still reinvesting, as I said, some 100 million into growth and growth projects.

What skews those numbers from time to time is in the last quarter we had a tax payment of 338 million, which I can't pick up in the numbers, but I know that, because it hurted like hell. That is a cash outflow which is not directly this quarter's; it is an annual number; it is an assessment and you pay it.

We also of course was a dividend payer from time to time of significant outflows in terms of dividends. To give you a feel, the dividend declared now, the 40 cents, equates to about 108 million rands; and so on. But Victor, this is just giving you the sort of ballpark numbers. The quarter on quarter analysis I simply am not able to give to you. But I promise you (indiscernible) to confirm up on this that Frank will give you a call and reconcile those numbers for you.

We are not bleeding from a cash flow point of view. In the last quarter of course we did the disposal of the Russian asset. That made us a lot more money in terms of real cash inflow than what we will be losing, even if we had four quarters at 85,000 rand/kg. So all in all I really am very comfortable that we added to our overall cash balance. But I'm not giving you a satisfactory detailed answer, simply because I don't have it in front of me.

That is fine. Can I ask another detailed question? Is the 65 million rand of other income net on the quarterly income statement? Can you tell us what that is from?

That is really -- let me find it again. The other income is interest received, and that's really what it is. That income net is just -- from time to time you also have other income, disposal of assets, mine houses, property, et cetera. In the last quarter that was purely an interest received number, Victor. So net interest received.

A question if I can very quickly on Target. The feasibility is now proceeding as Avgold mentioned under a joint project team. Avgold had previously presented to the market a two-shaft phased development program, that probably -- in fact I was there; I don't think it was received that well. Can you give us a sense of where you see this project going forward under this joint project team?

It truly is really early, and I think the one thing we as Harmony, as a bigger company with a bigger balance sheet and perhaps, dare I say, a longer-term outlook sometimes, can bring to the table is we can actually optimize the technical solution; and then look at its fundability. And I'm pretty sure we will find it fundable.

Of course, and this is no criticism to Avgold, the smaller company, especially one which sits with a pretty bad hedge and a few other challenges, starts off with what can we fund? And then they optimize, within that funding constraint, they optimize their technical options.

We so about things the other way around. We truly first look at what is the optimal solution, what is the optimal sort of extraction of the ore body. We truly believe, and back ourselves and our shareholders, to come up with the money to do that.

There are current constraints there. And a lot of the current constraints gets addressed with the sort of cheap and nasty solution they came up with last time. They solved the ventilation problems quite significantly with the shaft, and they get a few thousand tons extra, 40,000 tons extra. But, hell, that's quite a lot of money. Although it is the cheap option, it is quite a lot of money for 40,000 extra tons.

Avgold as a standalone suffers from some bottlenecks and constraints. Some of them are real and some of them are perceived. The real one, Victor, would be the plant capacity. Integrating Avgold into our Free State operations, we've got hundreds of thousands of tons of plant capacity available; so the plant bottleneck immediately disappears.

That also challenges some of the other perceived bottlenecks or self-imposed constraints. And that is that in Avgold's pursuit to be a truly mechanized sort of mine, they are simply not looking at some of the lorraine (ph) resources, reserves actually, and they lie at 6.5 grams a ton (inaudible) to recover 5.5 grams a ton. We make money out of all 5.5 grams a ton ounces or tons we mine in the Free State.

So really as far as the optimizing of Avgold and Target, it goes even beyond this capital project. I am losing no heart in the capital project. I actually think as part of Harmony we can truly optimized the failure (ph). But I know this company was run very much through the market perceptions, announcements at regular intervals, and then the team has to work their backs off to catch up with, sometimes, the promises.

We certainly would rather take three to six months before we talk, and then can (inaudible) stick to that story for three years or five years. So it is a different approach, but I think you do know out approach; and we will talk with you as soon as we've got something to say. Our first objective is to own the company, quite honestly.

Fair enough. Thank you very much.

Chris Hall (ph).

HSBC. Bernard, I just wanted to ask. The grade of 6.3 grams a ton in Free Gold, is that sustainable? Or should we be looking at a lower figure?

The only grade at Free Gold which is marginally above a sustainable grade is actually Bambanani. But now the Bambanani grade really came in a little bit above what our expectation is. But last quarter it was quite a bit below.

All in all I think this sort of 6,5 to 6,7 grams per ton is the right grade for Free Gold. One of the major contributors apart from Bambanani, of course, was that we shut lower-grade lossmaking parts of St. Helena, the most recent acquisition.

So really the other mines are at the same grade, but the average is higher because we took some revis (ph) off them. So I'm pretty comfortable that the grade at all our mines, as all mines are available; but as for this, I think every year we expect that 6,5 to 6,7 to be an average for the year. I'm comfortable with those grades, yes.

One more question is, where are you in terms of your Empowerment credentials? Can you give us a quick update? You must be pretty well finished as far as the 26 percent is concerned.

Yes, we do believe that. If this transaction proceeds, then you can see our anchored (ph) shareholder increases his stake from 14 percent to an effective 22, which dilutes to 20 percent. So (inaudible) in one visible transaction sits an Empowered entity that owns 20 percent of us.

Of course, on top of that then comes all the other, the past deals, the potential credits we will get for the beneficiation we are involved in. All in all I truly believe we have successfully achieved a 26 percent, which is a 10-year objective. The real relevant number, of course, is the 15, percent which is a five-year objective; and which is the one you must meet before you can convert your old order licenses to the new order licenses.

We are extremely well positioned. We have 18 months ago bought up the capacity. I think we've got the best team in the country in terms of preparing to relicense. We certainly will be ready in April to submit our first license, which will be the Venda (ph) one. And then we should be able to submit one every two months after that; six or seven in all we need. Well ahead of any sort of legal deadline.

What I can tell you is I don't think the government will be ready to receive our application in April. The law has not actually been promulgated and the clock has not started ticking yet. We are currently in good consultation with the government. We are working together on our application, so that they learn the ropes as we do.

Nobody has done this before. So that the delay in the promulgation of the act is giving the government good time to build capacity in the department to do the licensing. I would expect that certainly towards the end of this calendar year we would have a few licenses. Then really the Empowerment discussion will forever be crystallized into, we have done enough.

And the royalty bill? Are we going to hear about that in the next few months?

I think we are almost as bad as America now. This is the year of elections. I think the whole world has to stop until Bush is reelected, and the rest of the world, our world has to stop until our elections are over.

I really can't see the royalty bill getting attention before the latter part of this year. But we for the moment just make the assumptions along the lines that government has indicated. And we work along those lines. It's not really a major additional negative in our lives right now, Chris.

Tarov Shimelda (ph).

American Century. The question on presentation, if you could clarify something; I think and correct me if I'm wrong, somewhere on the page where it said cash operating profit variance, when you talked about volume decreased (technical difficulty) percent; that it was statistically insignificant. Can you please go over that again and clarify how you arrived at the fact that it is statistically insignificant?

Unfortunately, after we sort of built the slides, we realized that we are talking with company averages and totals. And actually in the company, of course, there are three main types of assets. The one is the South African underground assets; the other one is the South African basically waste, rock dump, retreatment facilities; and of course thirdly, then, the Australian operations.

What I tried to point out there was that the Australian operations had a significant, almost a 10 percent drop in volume, after the restructuring plan, which we are six months into now. No surprises. Pretty much in line with the stronger Aussie dollar.

The South African surface treatment facilities are real turn-on turn-off type operations. Again the stronger rand means we treat less tons. We've got lots of spare capacity in the plant, and we just manage that according to the day-to-day spot gold price. Again about a 10 percent reduction. And those are the two main contributors to the overall reduction of 5 percent.

The South African underground operations, which is the bulk of our operations, that's where the gold comes from and where the money comes from. That had a 1 percent drop in volume, so it contributed a fraction of the 5 percent; and that 1 percent is what I commented was really insignificant. I mean, by the time you've added five or six operations' volumes together and you come up with an answer which is not quite 1 percent down, that was what I said was really statistically insignificant.

There is no trend there. There is no negative trend. There is no positive trend. It is really just that that is how the average comes out. So the 5 percent now is not insignificant. But 1 percent from South Africa underground is a statistically insignificant number.

Thank you.

Georges Lequime.

RBC in London. Congratulations on a good quarter in a pretty tough environment (technical difficulty) and your team. I have just got a couple of questions; I will try and be brief. You discussed earlier about a 1 percent move in the rand/kg gold price translating to 36 million on the bottom line. I wonder if you can just briefly go through those five key South African regions and your expectations for cash growth by the year end, this calendar year end?

And discussing whether the expected improvements are grade-related or panish (ph) related or CONOPS related? And if you weave in your answer the expected inflationary pressures that you expect through the year; and any additional productivity benefits that you expect will come through, to offset these cost pressures?

Georges, thank you. My goodness; that should keep us all -- I think everybody can go fetch a cup of coffee whilst I answer Georges's essay. Or what shall we call this, Georges?

Thank you. Let me quickly run through or rush through this. I think let's deal with inflation first. There's no doubt that South African inflation is dropping down to the sort of 4 or 5 percent level.

Our inflation has got two components. The one is very much in line with the sort of producer inflation in the country, and the PPI, and that is low. The second component of our inflation in South Africa especially, of course, is our labor increase. And that will be 7 percent from the 1st of July. So though inflation is low, half of our inflation input is still pretty high.

Let's say we get 4 percent and 7 percent; you can see we are going to average that at 5.5 percent, despite the fact that the country is operating at a 4 percent inflation. That is the reality of an agreement signed six months ago for two years. So it is automatic ticking after 12 months; and that is really pretty significantly out of our hands.

It doesn't particularly worry me, Georges, because actually, no, we function or we work on the basic assumption that we will give wage increases of half a percent to a percent above inflation. And claw that back during the year through productivity improvements.

The single biggest diver in our cash cost expectation for the coming year is the successful implementation of continuous operations. Continuous operations see us work on those six days a month that we were not working; in other words, every second Saturday and all four Sundays. Obviously that is a significant potential improver of productivity per panel; of productivity per total employee cost. Because you really just bring additional production people in, and the rest of the people, obviously, you get the scale benefits, benefit of scale sort of coming through.

Those are being implemented at Free Gold, and we really expect our Free Gold cost per ton in six to nine months from now to come down by some 5 percent. As I say I am quite happy with the current sort of grade profile of Free Gold. And therefore you could really expect, all in all, sort of a reduction of 5 percent in the cost per kilogram kescod (ph); offsetted of course by whatever the inflation does to us.

The Free State and Evander and Randfontein, Eland, really it is a case of still negotiating with the unions. It is a bit premature to make that assumption. Especially in the case of Randfontein and Eland. Both of those cash costs will be affected by recovery in the grades. At Eland, if we shut down Deerkraal, which is a very likely scenario, then of course Elandsrand mine will stand on its own two feet. And the cash cost which averaged out at 95 will probably in a sustainable way draw back to 75.

At Elands, of course, there is also still runoff mine (indiscernible) as opposed to splitting leaf (ph) and waste; so that 95 is really just a misreflection of what that mine should be. And the Free State, I wish I could make you promises on; but I tell you, those guys are doing extremely well to mine at 80,000 rand/kg at a grade of 4,3 or 4,4.

So CONOPS is the key number in our lives. Beating South African inflation is something we back ourselves to do over any decent period of time. And by decent I mean like a year or two years or three years. And then really that leads to a large extent for an annate (ph) producer today, down to the external factors of what happened with the currency and so on.

You started off very complimentary in terms of good results in a tough environment. Georges, I must tell you it is the first time in seven quarters, if not eight quarters, that I truly believe the coming quarter, the external environment is going to be more favorable than what it was last quarter.

The rand has probably turned, and if it has turned, then we will get 90 something thousand rand/kg as opposed to 85,000; and that makes a huge difference at operating profit level et cetera. Thanks for the question and I hope I'd given you some broad guidance in terms of escot (ph).

As you say, with the high gold prices there's always a tendency to take the foot off the brake a little bit or the eye off the ball on what is going on in South Africa and let your cost creep up again. So it's going to be interesting to see what happens over the next few quarters.

Yes. Thank you, and all I want to say in defense of poor South African managers like me is sometimes we don't take our foot off the pedal. Sometimes somebody else pulls it off the pedal.

We are still in a country and in industry in the middle of real huge transformational issues. And cost pressure obviously does build up. But the main sort of an area where we as management can screw up is in wage settlements. We cannot screw up any further. We for the next 18 months are working under a current agreement.

One quick question and I'm sorry I took so long with the first one. Just on PNG, a completely different subject. You spoke a little bit about Hidden Valley. I wonder, in light of the Placer plant, can you give us a new capital estimate for the project at this stage, and possible timing?

The Abelle number which is in public domain, and I am just saying where it comes from, I am not necessarily disowning it, is in order of about 118 million Aussie dollars. There's three main components. There is obviously some savings from the plant. But this is still -- we buy the plant and then we have to relocate it, so this is not the true plant cost.

There is obviously a fundamental decision to lease the equipment fleet, as opposed to purchase it. There is also a different approach to a smaller put (ph) that mines a higher grade for quicker payback, than do a regional sort of three, four-year-old (ph) sort of feasibility study. So 118 million Aussie dollars seems to be a pretty good number. Although at Harmony we really are now in sort of the second week of a four-week process of verifying the numbers for it, and that is for our own benefit.

Decisionmaking is now and here (ph); realistically probably the Board of Abelle will be ready to push the button in three months. And then of course really the funding is going to take a bit of time, for the simple reason this is quite a big funding challenge for Abelle in its current format as a small Australian listed company.

Later all of that, Georges, is done by sort of June or thereabouts. The amenta (ph) project kicks off by June. There is still a real chance for first gold hitting the market or the vaults in January of 2006. So it is I think a conservative six months to get the project up and running, or announce in 18 months ought to get it to the point where it producers gold. Of course a pretty steep ramp up from there, (ph) as these open pits go.

Thank you very much. I will ask the other question some other time.

Heather Douglas.

BMO Nesbitt Burns. Most of my questions have been asked. I just have a quick one. Could you tell us what the current assets and current liabilities were at the end of the quarter, please?

Heather, I told Frank that he can get on with the meeting. So I have to quickly find it here in the balance sheet. Are you talking about total assets or net?

The balance sheet that says published; it nets them out. I would like to know what they were separately.

I must admit to you that's the only number I have got in front of me. Heather, can Frank give you a call?

That would be great, actually. Thanks.

You are here in Australia so it is still a decent time.

No, I'm in New York and it's a very decent time, 10 in the morning.

I am on the wrong side of the world. Heather, Frank will phone you, I promise you, within the hour. (multiple speakers)

Thanks.

Conrad Cogil (ph).

I. Burnett (ph). First of all congratulations with a good set of results, especially the cost performance. And then I probably have to say to you also, happy to see that you will be with us for a little while longer, contrary to some of the rumors going around.

You should share these with me.

Just want to know, it is a fairly large investment, your 20 percent odd stake in Avmin. What is the latest on value outlook on Avmin, specifically on the, call it on the base metal side? And then perhaps maybe a little bit more detail on the iron ore side. And (multiple speakers) largely on the platinum side; are there any developments that we should be aware of?

And then just a quick second question. I understand that Avgold lost eight days over Christmas. Have you lost any days?

Thank you. I will deal with those issues. Let's start with the famous Christmas break. We certainly on most of the operations had a Christmas break, and we do our damnedest to schedule the year such that the year actually has got four equal quarters. The only remaining impact on our operations then is the issue of when the guys come back after Christmas break.

There are some safety issues with regards to re-establishing the workingplaces in a safe condition, et cetera. And the normal sort of -- when you're back from leave you are on the one hand energized, and on the other hand quite slow to get started. That impact really does impact, but it's not a full eight days; it is not as if your month is eight days shorter. We put four pretty equal quarters in terms of number of days.

January is not the best operating month. But February March is really very very normal months. So I am not putting either profit (inaudible) on the back of (inaudible) Christmas break.

If we move to Avmin, our investment of 1.7 billion rands, of course, initially was to influence the outcome of where Target ends up. And we are in the process of acquiring Target, so we certainly have achieved that.

(indiscernible) does two things for us. On the one hand it secures our Empowerment credentials, because Avmin to be renamed ARM will be an Empowered company earning 20 percent of Harmony. Secondly it is an Empowerment company diversified with stunning growth opportunities, we believe, in this window of opportunity that presents itself in South Africa. It is a sizable investment. We truly believe that that money is well invested there for strategic reasons, but also for investment regions.

The update on all those issues is very much the same as some two months ago. I think in the iron ore we have got new players now. We've got ARM getting involved through Asmane (ph) on the one side of the fence; and then of course Anglo has established themselves as a controlling shareholder of Kumba on the other side. Technical people, as technical people do, have different views on what the best solution is.

But the interesting thing is both parties agree that it is about a billion rands worth of synergy value to be unlocked through better operation. That's inevitable that it will take place. And of course we do not necessarily think it is in the share price yet a very significant value uplift potential there.

On the manganese side, the story is similar. The players are different. It just on Semangco (ph) and Hessmang (ph). Really the shareholder agreement in Hessmang, which has been a significant value trap over the years, continues to be a value trap. Obviously there is a political reality that unless the company restructures itself it won't have the necessary Empowerment credentials at Hessmang level and it will likely lose its license. No rational shareholder would allow that. So I'm pretty confident that the core problem of the value trap will get addressed, and must be addressed, and I am quite optimistic about all of those.

On the platinum side, the platinum market is quite an interesting market. Certainly between Modikwa, the ARM asset, and Two Rivers, to Avmin assets, and Kalplats, our (technical difficulty) little asset, and Unkamaki-daniko (ph) mine, there is really stunning growth potential. And that is going forward a listable entity. If you put all those things together, you could probably list it in a separate entity; raise capital to fund its own growth; and to continue to fund the growth of Avmin/ARM.

So everything is preceding, Conrad, but it really is early days. And ultimately I am a significant shareholders representative at Avmin, but I do not speak for Avmin. I think as you alluded to, I continue to think that that can add most value at Harmony until the Board decides differently.

Okay. Thank you for your insight.

There appear to be no further questions at this time, sir. I would like to hand back to you for any closing comments.

Thank you very much, especially for those who are still on the line. This is a very long a call. I really appreciate that. Like I said earlier in a reply to Georges, I really for the first time in two years feel like the coming quarter has got a lot of things going for it. I know it is on the back of a rand which has depreciated quite a bit, but the two years' tough environment was also caused by a rand which appreciated. So I really expect us to be in for improved profitability, subject to those external factors. Thank you so much for your time. Good day to you all.

Thank you that concludes today's conference call. You may now disconnect your lines. Thank you.