Harmony Gold Mining Company Ltd (HMY) 2005 Q3 法說會逐字稿

Good afternoon and welcome to the Harmony Gold conference call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. An operator will give instructions on how to ask your questions at that time. If you should need assistance during the conference, please signal an operator by pressing star and then zero on your touch-tone phone. Please note that this conference is being recorded. At this time I would like to turn the conference over to Bernard Swanepoel. Please go ahead, sir.

Thank you and good afternoon and good morning, ladies and gentlemen.

I will proceed to present to you the quarterly results for the year January to March 2005 quarter. It is definitely a quarter in which over and above the normal seasonal weak results, we've also, I think, taken some significant steps towards restructuring our Company.

These steps have been underway for some time. We do believe that we're at quite a critical stage and we certainly are confident that following this restructuring, we will begin to show the results which people expect of us again.

My first slide, which is just a title slide, deals with our South African asset base as being restructured for improved operational performance and a sound financial position. That's really what I'm going to cover by and large.

I introduce my presentation with a slide which deals with the shrinking South African gold mining industry. The graph really shows just how South Africa's production which has been a low since 1931.

It also shows that South Africa now as a gold mining district produces only about 12% of world gold production, also, a low for many, many, many years, almost 100 years now.

The next slide just deals with the Chamber of Mines numbers, which shows that gold production decreased by 8,8% to 343 tons in South Africa, the lowest since 1931. That's up, already said, of course this is due to a combination of factors, the fall in the rand per kilogram gold price over the last three years has contributed a lot, cost pressures remain despite the fact that it as an industry and as a Company we have made sufficient productivity and efficiency improvements and really, this is a mature industry with generally higher costs associated with the certain industry.

My conclusion really is that the need to further consolidate the local industry remains. I have no doubt that if it wasn't for our current bid for Gold Fields being so controversial, that the discussion on the need for consolidation may have been more constructive.

My next slide is titled, "The Gold Fields Bid" and I make two points there. Firstly, there will be no conditions presented after the Competition Tribunal hearings. Those hearings have been set for the 3rd to the 6th of May. We would expect a ruling reasonably quickly after that.

And if the merger was to be approved, that then means that our offer will for the first time be on the table as an unconditional offer. The Norilsk's irrevocable undertaking remain intact. That will lapse on the 20th of May unless there's an extension, which is more likely to be requested from their side than our side.

And we are comfortable that we will get the ruling from the Tribunal and probably with good time left for us to be able to close the offer on the 20th of May as per the current targeted date. I make the point that our offer of 1.275 Harmony shows for one Gold Fields share offers full and fair value which also includes a premium for control.

I continued to state that we are price sensitive and will not destroy value by buying certainly last Friday's closing ratio of 1.51 as just an example of the types of prices we would not pay in order to secure control of Gold Fields.

My next slide just deals briefly with our estimated to date costs associated with the Gold Fields bid. Our cost to date is a whopping 150 million rands. And the March quarter saw an additional 64 million rands with the cost being incurred, some of these are obviously carried over costs from the previous quarter.

I also give a break down which really just shows firstly how the 150 is made up between the investment banking fees, which is quite low, because of how we structured our advisor fees to be success fee-based. Legal fees, which is of course the big number, over a third of the costs have gone to legal fees, not necessary through our making, but you get charged, so when allegations get made against your Company, you have very little choice but to defend them in some instances.

The other costs are associated with the creation and share issue expenses, printing and publication, the CPR report, the cost of that will come through in this coming quarter. Other costs are 5 million and so we have incurred 150 million so far with another 9-odd million outstanding, for the process up to where we are today.

If were you to express this as a percentage of the cost of our investment or the value of our investment, if you assume our Golden Fields shares are worth about 4 billion rands, you can see they're 159, is very close to 4%, 3,-something percent cost for the investment.

My next slide just briefly and hopefully for the last time deals with the reconciliation of our ore reserves. There's nothing new here. I'm restating what I've stated before.

This is the reconciliation between Harmony's declaration of January, which I think we, may have put out in late December, an then of course the CPR, or Independent Persons Report for the same date. This is an independent process. And again, I just continue to make the point, if independent people who do their own process happen to come up with exactly the same number as we a Company do, I would have been quite cynical and suspicious.

If we work through the numbers, you can see on the table the proven and probable reserves associated with our operations. Our 43, 7 million, the CPR came out with 41.7, a difference of 2 million ounces. If we look at our projects below infrastructure, our number was 10,1 million, their number was 9,9 million, really significant, no significant difference.

One of the areas where we agreed to disagree with the CPR people is in the area of vamping tonnages. We declared a reserve for just over a million ounces there.

They're trying deem possible due to time and other constraints to verify these numbers, and obviously, there's no geological model, these are mainly underground broken rock, and yet we run mines and profit centers on these vamping tonnages. We continue to believe that it will be misleading to our shareholders to exclude this million ounces from our reserve declaration.

The surface proven and probable category are very small and therefore there aren't significant differences between us and the CPR. For a total proven and probable on Harmony's declaration of 55.6 million, being compared to the 52.1 million, a 6% difference between us and SRK's declaration.

In the Life of Mine plans, we therefore mined a little bit less and in our Life of Mine plans from inferred resource category, the SRK Life of Mine plans, mine is a little bit more. And when you get to the total ounces extracted through the Life of Mine plans, there's a mere 3% difference between us and SRK.

We have consistently said that all the noise about our reserves are exactly just that. I'm pretty sure this will put that to bed permanently, I hope.

I want to move on. And that was the end of sort of the noisy allegations and the Gold Fields bid and I want to deal with the quarter, because in the next 20 minutes, I hope to convince you that as I've indicated up front, we've taken most of the bitter medicine and we are beginning to see the positive impact, and we certainly are very confident that in the next few weeks we will put the restructuring substantially behind us.

My next slide is titled, "Restructuring Our Balance Sheet". During the March quarter, we disposed of 3.5% of our ARM shares for 200 million rands. The carry value of these shares on our books were 311, so the 200 million cash inflow into the quarter resulted also in our taking out 111 million rand book loss, which you will pick up in the detail numbers.

Post the quarter, we also proceeded to sell 14% of our ARM shares for 830 million, or 29 rands per share, to an empowerment trust which will now continue to onsell these shares to Black Economic Empowerment groupings and thereby concluding ARM's own strategy of creating broad-based ownership right at the top. This is important for us for the reason that ARM, as our biggest shareholder is also therefore the bulk of our Black Economic Empowerment credits comes from the ARMs shareholding. And that leaves us with about 2.5% of ARMs shares, we started off with 20.

We also post quarter, we disposed of our 11.5% stake in Bendigo for 32 million Australian dollars. In this instance this was done at the small profit under book value and that also is reflected, or will be reflected in our coming quarter's numbers.

If we look at our financial position, the slide concludes with the fact that we've got a strong balance sheet. Obviously, in the quarter, where we have consumed cash on operations, on capital, but also on the repayment of some of our short-term debt, our net debt position has increased, our near cash and cash equivalents have decreased from 7.5 billion to 6.3 billion. Our net asset value shows the decrease of just over 1.1 billion rands.

I'll talk in more detail to that. That is in payment charts that we have booked through, and I will give you detail in that in a slide, too.

Our solvency ratios continue to show our debt to asset ratio at .27, and our debt to equity ratio at .37, in both instances the same as the previous quarter, and hence my conclusion that we've a pretty good, or pretty strong balance sheet.

My next slide deals with our overall fatality/injury rate, they are safety statistics. We are very proud of the improvement in our safety statistics. In 2002, we took a few huge steps forward in terms of growth.

We acquired the Free Gold assets, a huge operation including some old and some very deep mines and also the Elandsrand operation and you can see from that point on we have continuously achieved improvement in our fatality rate. The last quarter did, however, see us a very unfortunate seismic event right on one of our working places, which did kill four of our employees in a single incident.

I'll move on to the quarterly summary. I will make a few points there. The one is that we are at the critical phase of our restructuring, that the process of issuing the latest of retrainsment started last week.

Two of our three unions have accepted the proceeds. The one union is taking us on a legal review tomorrow. Even if the legal review results in a delay of a day or a week, we still believe that after some 15 months of process we have not only complied with the letter of the law but also the spirit of the law, and obviously we do believe that in the end we will be able to restructure down to the lower levels of employment.

Our cash operating loss for the quarter is 54,7 million compared to an operating profit of 163 million the previous quarter. I'll go into much more detail on how that happened during the quarter.

Our working costs of course has gone up due to the lower volumes, mainly we've acclimated significant cost reductions especially in our leverage operations.

The CONOPS of continuous operations roll out is progressing well with the exception of our Free State operations, whereas part of the whole stand up between us and our union, and CONOPS was actually undone on the 7th of January, if I recall correctly. And the Eden Valley mine in Papua, New Guinea or PNG got final mining and environmental approval and we are quite excited about proceeding with that over the next two and a half or three months after coming up with the final financing plan.

I'll come back to the specific operations and there should be detail on each one of our shafts available on our Web site. If it isn't already, it certainly will be soon. And I will discuss the operational detail in a bit.

If we do a quarter-on-quarter analysis, we can see that our production in terms of kilograms is down by 14%. This was mainly due to a reduction in tonnages and I'll point that out in a minute.

Our revenue was flat, down 1% in rand per kilogram terms. The U.S. dollar per ounce price we received was virtually the same. And it's the volume reduction which is seen as our increase in our cash costs of 11%.

Now, this is due to a few reasons. The biggest ones would be the seasonal Christmas break impact, where typically now gold miners in South Africa breaks for somewhere between eight to ten days over the Christmas, New Year period, that falls into this quarter.

I indicated that this would be the case, and we have said that this is our weak quarter. We also had a 13 or 14-day strike at our Free State operations. This is all part and parcel of the current restructuring process there.

The Free State makes up about 50% of our overall production, so 14 days lost on 50% of our production clearly had a significant impact on the overall numbers as well.

Beyond the normal specific issues, we had two underground fires at our Bambanani mine. That impacted. But clearly the big impact was the seasonal Christmas break and then of course also the strike which did cost us quite a lot in terms of volume.

If you can please turn to the next slide with me, where I claim that we are still on track with our delivery and working costs.

This is just a reminder of the promises I made you way back in June, 2004. We made our September targets. We made our December targets.

I made absolutely no promises for the March quarter, exactly for the reason of it being, this is the weak quarter, which is really difficult to predict. And I still believe that we are on track to make the 75,000 rand a kilogram target by June.

I no longer think we'll make it for the June quarter. I think we will make it for the June month and then onwards. And it's got mainly to do with the extent to which the restructuring process, which I was hoping would be finished by now, is really only now in its final stages.

It is worth noting that our costs for the financial year to date so far totals 80,000 rand a kilogram, which is still significantly down from where we were in June 2004. We are actually, despite this sort of confusion of this quarter, making good progress in terms of really establishing profitability on our operations.

I think our quarter-on-quarter cash operating profit variance analysis, the next slide, really shows the impact. Last quarter, we made 162 million.

There is volume changes and there are lower tonnages through, because of those reason, as I've indicated before, you can see resulted in a negative variance of 294 million. About two-thirds of that was due to the Christmas break and about a third of that was due to the strike.

The strike cost us a lot of money. We said so at the time. And we still argue that it was a very expensive strike not only for us but also for the employees who lost 13 or 14 days worth of wages.

If we look at the working costs, that bulk of the 90 million rand reduction in cost came from our leverage operations and it unfortunately gets lost in the totals, because of the lower volumes and so on. But our leverage operations actually took a huge step closer towards breakeven and profitability in the last quarter.

The recovery grade was really flat and therefore made no significant difference. The gold price was marginally down. And the net variance of 217 million rands therefore resulted in us making a cash operating loss of 54 million rands.

If we look at the reconciliation of the headline earnings, and you can see we show you the cash earnings, basic loss, the fully diluted loss, and the headline loss of one rand and seven cents per share. You can see here that the big difference between the basic loss and the headline loss of course is the impairment of the fixed assets net of tax, which contributed some 3 rands to the fully diluted loss number.

If you turn with me to the slide which is titled "Impairment Calculations," you can see a list of charts in which we reran our current macroeconomic assumptions and gold price and working costs and you can see that resulted in some impairments being done. In the case of Bambanani, although the payment is a big number, it is only 24% of the book value of that operation.

In the case of other shafts, like St. Helena, Evander 2/3/5, Nyala, and others, it is 100% impairment. That really just means that with the assumptions as we see them today, those shafts come out with a small negative or a neutral zero net present value, and therefore, we have to pay the book value of those assets down to zero.

I do give you an indication of the reserves associated with those shafts, especially in the case where we do impairments down to zero. Not all of those mines are being shut down. And in the case of Nyala, where we are putting in care and maintenance, I by no stretch of the imagination infer that those ounces are lost, I just give you a feel for how many ounces are involved.

Merriespruit 1, which is this M1 on the table, although we do 100% impairment, we actually continued to operate that and have got a mine plan which is subject to the rand per kilogram gold prices especially may still extract all of that 1.4 million ounces. So all of the optionality in these ounces are being retained and quite a few of these ounces are still being mined and hopefully post the restructuring will be mined profitably.

The cost of retaining the optionality in the Company, there are some 130 million ounces of resource associated with shaft and care and maintenance. Our estimation is that the total cost, not only the direct costs, associated with this care and maintenance is some 35 million. You can see that that works out to a cost for the Company of somewhere between 5 and 6 U.S. cents per ounce per annum to retain the optionality on these ounces.

I am aware of a quite of a few of my shareholders who I'm extremely comfortable with. I'm trying to obviously minimize the costs, but also keeping exposure to these resource ounces and I think this is very consistent with what we at Harmony have always done.

If I continue with the impairment calculation, we previously showed you the billion range worth of impairment on those ten on South African charts. And we also do an impairment on the undeveloped properties associated with our Kalgold open pit mine.

In Australia, the same methodology and approach results in our operations being impaired by 200 million rands in this instance, and the undeveloped properties being paid by 270 million rands, for a total impairment of 1.5 billion rands left to deferred tax driveback leaves us with a net impairment of 1.182 billion rands, I apologize. 1,182 million rands worth of impairment.

If we turn to the next page, where I speak about the estimated annualized production, this table, we believe, will be a good reflection of the Company's plans of what we believe we are capable of right now post this current round of retrenchment. I show you that the leverage chart after this retrenchment will be in a position where it should be breaking even, and at a rand, of 6 rand 25 to the U.S. dollar.

Obviously, these are shafts which aren't incurring a huge amount of capital and therefore the cash costs and the cash costs plus Cap Ex are very similar, near $5 difference.

Now quality shafts, which you can see makes the bigger contribution, which is now more than half of our South African ounces, we actually share our cash costs on those shafts at just over $330 an ounce, or 66, 67,000 rand a kilogram, and even inclusive of capital, it's still very profitable.

Our project shafts are continuing to grow in contribution in terms of ounces and in both instances this year we are mining the old mines at Elandsrand and ant Doornkop whilst we are bolding the new mines at the bottom of these two. The Phakisa shaft doesn't really contribute ounces as yet, and we believe that these ounces can and will be profitable enroute to converting them into high grade and low cash cost mines.

So the total for our significant underground sources is some 2.57 million ounces, at just under the 75,000 rand a kilogram target that we set for ourselves when we set out to restructure, and some 15 months ago now.

In Australia, the 270 odd thousand ounces we believe can be produced at about $358 to the ounce. It should be cash generative under our current assumptions.

We do a little bit of surface mining in South Africa, one open pit mine, and in a little bit of waste drop dump retreatment which is profitable and it contributes 100,000 ounces.

So the Harmony that we believe we have after this restructuring is still a player of just under 3 million ounces, at cash costs of just under $370 an ounce. That should be more than adequate to fund our capital and our growth going forward, as long as the rand is as strong as it has been over the last year or two.

If we look at the cash reconciliation for the period, April, 2004 to March, the 12 months, you can see we started with cash of 2.3 billion rands and the operations consumed cash of 2.1 billion rands, and operating profit actually made us some 200 million rands, Cap Ex was 600 million rands, this we unashamedly continue to be proud of. We are investing in our own future. We are keeping our ore bodies in a good condition and we are building five new mines in South Africa.

Corporate and exploration costs of 235. Corporate costs is just under 50 million a quarter. Exploration costs was about 45 million over the time.

Retrenchment and restructuring again is a charge which includes some 122 million rands for the current restructuring. But at 600 million rands is very important to know that we've actually invested a significant amount of money to downscale and right size Harmony to this new level where we believe we can be profitable again.

Interest paid, of course, comes with the debt financing, the two corporate bonds. If we look at the other cash flow items and adjustments, movement in working capital, the movement in working capital, the main contributor to that number year-on-year is a change in how we account for the gold in our own refinery.

We use our own refinery and the gold in the refinery which is typically at a quarter end in order of some 300 million rands, now gets treated differently so we don't reflect it as cash anymore, we just receive it, we show it as sort as a receivable and that makes 300 of that 400 million rand difference. That leaves us with a negative cash balance of 230 million at the end of the year.

And I think if with one looks at this in the context of our balance sheet, you can see why we actually are very comfortable that our balance sheet is in a good shape, we spent specific amounts of money on the capital exploration, capital expenditure, exploration, and the restructuring of the Company, and certainly the next year, we could real expectation of us harvesting on some of those investments.

If we look in the quarter-on-quarter operational performances, the table shows you that our quality ounces were profitable but we had a huge negative swing of 150 million [day]. I will come back that.

The growth projects actually, although they were still loss making, actually showed a positive variance. The leverage ounces, despite a 90 million rand cost reduction still showed a negative and we'll talk about the volume impact on that.

The surface operation showed an improvement. And the Australasian operation showed a significant negative variance which I will talk about in a moment.

If you stick with me for a few more minutes, we are getting there. The operational results, the quality ounces, and in the booklet, it will be available, you will see the detail target which is the only mines in this grouping which is still on CONOPS.

As we indicated last quarter, the grades came down quite significantly due to the excessive dilution associated with this type of mining. These are all what we believe are design errors pre our time, but I mean we certainly expected this to happen. And this lower grade, which still results of, despite the lower grades, targets still produced at 60-odd-thousand rand a kilogram, and will be with us for the next for or five months according to the operations director in charge of these operations.

Tshepong, at a standing quarter, despite the undoing of CONOPS, the strike and Christmas break, the bulk of this had to do with kicking the grade up to nine grams a ton. This unfortunately is not the new grade for Tshepong, but it was nice to see that our efforts to catch up with some of the backlog sweepings the [mineco] factory issues did result in a huge kicker in the grade.

At Masimong, which is part of the quality ounces, the tons was down quite significantly, mainly due to the Christmas break, and then these operations were also subject to the two-week strike. Now Evander operations, which are part of these quality ounces to the k, and our rand [contained] three shafts, [Kuk] one, two and three really just had a bad quarter for different reasons, but certainly there is a lot of scope for us to improve in the coming quarter.

So the quality ounces, quite a significant portion of that where is subject to the two-week strike. All of them were subject to the impact of a Christmas break.

If we go to our leveraged operations, the next slide, you see a 25% reduction in volume. A small increase in grade, as you would expect, the very purpose of the restructuring is to do less tons at marginally higher grades.

So kilograms was down, kilograms produced was down 21%, and working costs in terms of rand per kilogram was only up 9%. And this is due to the fact that we managed to decrease the cost base of these operations from 680 million to 590 million, a net reduction of 90 million.

Obviously, some of this is due to the volume reductions. But this is a significant reduction, and we believe in a normalized quarter, with the benefits of this current retrenchment of 4,900 people underway, we actually believe that we have taken enough of the bitter medicine to make these operations marginally profitable again.

My next slide deals with the growth projects. These are really at the ounces that come from two mines.

At Elandsrand, there was a really good increase in grade. The losses at Elandsrand has been reduced to 4,9 million rands now and this is a mine where we are building a new mine that will ultimately produce 450,000 high grade low [gas] cost ounces at the bottom of the old mine, which we bought of Anglo some two and a half or three years ago now.

At [Doornkop], although the tonnages refined grades and the old mine is down to three grams a ton, we simply can't make money at three grams a ton and that resulted in us making a 13 million rand loss there. These are actually two completely independent projects, but they form part of the management district for us.

If I move on to our surface operations, here we do real mining in terms of an open pit at Kalgold, with regard to the [standing] quarter, they made 8 of the, 8 million of the profits there. And our surface operations show the significant increase in tonnages.

This is the waste drop dump treatment where during the Christmas break where we ran out of rock from underground we obviously used capacity to treat more surface tonnages, seemingly not particularly profitable because really the surface operations other than the output mine contributed a million or so rands in terms of profit.

In Australasian operations, the Mount Magnet area, and permitting issues which delayed our Cue open pit saw us running out of the right grade of open pit material, and although we [fold] the mold, which seems to be the way things are done in Australia, it still resulted in a 38% reduction in the blended grade and therefore quite a significant reduction in the profitability of our Mount Magnet operations.

All of the grade issues are not completely down there and once we start up this open pit, we should recover most of the grade in that area. At South Kal [inaudible] to Mount Marion underground grade, it took a knock of some 20%, again we expect that to recover over a period of time.

If we look at our capital expenditures, you can see that we continue to spend the June quarter's full cost is higher, the March quarter was again, if you've got 10 less days in which to spend capital, you just end up spending proportionately less capital. There's no real significant change. We continue to spend on all-out growth projects and we continue to capitalize our ongoing operations as well.

And I want to move briefly through the drilling, the drill hole results from Papua, New Guinea. At the Hidden Valley mine, we received our licenses, as we say it, we are continuing to draw, you can see some of those intersections, 11 meters at 11 grams a ton, and that is 5, 14 meters at almost 12 grams a ton. Those are all good intersections and we continue to believe that it is already holds some potential for further upgrading reserves which of course will make a huge difference to the financial results of that project.

At Papua, New Guinea as well, the progress at the Wafi project, if you look at the drill holes you can see they continue to confirm that we are sitting at a huge ore body, and we certainly continue to be very excited, and the board has approved an amount of money for us to take this project all the way to pre-feasibility.

In conclusion then, what may the future hold? In terms of gold price, it's very difficult for us to, in the short-term, be over-optimistic.

It will be especially not prudent for us to right now take our focus off the restructuring exercises, so we are assuming a gold price in the range of 83 to 85,000 rand a kilogram. That will keep us focused on the restructuring of our cost base, which we believe we are in a very critical state.

And we will finally have finality on our Gold Fields. So we believe that with or without Gold Fields, that we remain on track to our targeted cash costs of 75,000 rand a kilogram.

I know this was quite a mouthful. I appreciate your patience and I now want to hand over to Dylan to facilitate the Q&A session. Thank you very much, Dylan.

Thank you very much, sir. [Operator instructions] Our first question comes from George Lequime of RBC Capital Markets. Please go ahead.

Thanks. Bernard, just a couple of questions here. I wonder if you can just expand on this labor inflexibility that we see in the Free State, especially with respect to CONOPS? In light of the fact that we are actually seeing the impact of CONOPS is having both positively and negatively on your financials. Also, if you can kind of expand a little bit where you are as far as labor negotiations is concerned over the next few weeks, with respect to further restructuring and the wage increases?

Thank you, George. Yes, I think we certainly have seen the positive impact of implementing CONOPS, and we've always said that it will take a little bit of time to get to the full benefits, and then we've seen the impact of undoing CONOPS especially in the Free State and no more so than for example on a shaft Tshepong where it was extremely well implemented.

The amazing thing is I don't think there's much debate about the role of CONOPS in prolonging a shaft life, saving jobs, making the shaft marginally more profitable through making it marginally, you know, lower cost per ton, sort of, and this confirmation we get all the way from the national leadership of the NUM, you know, in the general secretary publicly says that working on Sundays and having different shift arrangements contribute to the challenges, to addressing the challenges we face as a mature industry.

The labor inflexibility of the Free State has been bedeviling us for the 15 months of restructuring. We've reached the same agreement three times now and the first time, it was quite successful in the regions where we implemented it, not throughout the company. Unfortunately we reached the same agreement. We then rolled it out to virtually all of the rest of the Company except the Free State. The third time we reached the same agreement and we still didn't get proper implementation.

This agreement dealt with surplus labor, implementation of CONOPS, transfer of surplus labor from one place to another place where there may be vacancies, and then of course voluntary retrenchments. The voluntary retrenchment exercise, which you see the restructuring costs on our cash flow statement, that increased like a 9,000 people surplus in the regions other that the than the Free State.

It is not a coincidence that this forced retrenchments are almost exclusively confined to the Free State where we simply have had no successful implementation of previous agreement.

And with regard to the negotiations, we continue to discuss and negotiate with the union, especially in the Free State, because after this restructuring, unless we reimplement CONOPS, we will have very little doubt, if we start process of reducing the compliment in the Free State by a further 2,000 people, because these are the 2,000 people that we employ for the jobs that got saved by us agreeing on CONOPS. So the undoing of CONOPS has resulted in some 2,000 people being on our charts without having [blue] and proper and value-adding jobs and that is a process which we still believe will come to a logical conclusion.

And wage negotiations, George says simply not started yet. The process is that somewhere during May, typically, the union holds their conferences, they get their mandates. They scare us all with their demands, and we do our best to, you know, to try and attend to the expectations. It is going to be a tough round.

And you can imagine, you know, inflation in the country, you know, the numbers quoted range between very low 1.5 to 2% to 4%, and I don't think, you know, the expectations of people have yet been reduced to those levels. So we're, I suspect it's going to be a tough round of negotiations.

The sort of to build up to this has been very noisy in the newspapers. The actual negotiations typically take us into July and August. I would expect that we would probably battle to get more than a one-year agreement, and you know, because of this little macroeconomic environment. I hope that answers your question, George.

Yes, thanks. Then I mean, you can see where I'm coming from here, with the Harmony model is one of being pretty nimble and trying to address the loss-making charter you've given a presentation on a lot of restructuring with the target across the 75,000 rand per kilogram. I think what has been confusing to the market, has been the resistance that you've got, and I think there is a degree of setting back and saying, well, we don't believe that you'll achieve 75,000 by the end of June. It seems like it's an arduous process. Or put it this way, not believing that you want to achieve it but will be difficult given this inflexibility and we're not really seeing a situation where the reality is hitting home with the labor force.

George, I take your points. I must say, I think this is a process which we've been at for 15 months. And thank God we started 15 months ago because it certainly isn't achievable in the six-month period. And there may be other sort of jurisdictions in which you can do this, you know, in a week or a month.

In South Africa, you know, especially the number of people involved, it is always going to make it a drawn-out process. And we are at the point whereas from last week, we have been issuing the final letters of notification to the individuals with regards to their retrenchment. So we are busy with the last step.

Of course, again, because of the numbers involved, one of the three unions decided to take the whole process on legal review. It may be that the labor court may put temporary halt on the process but that temporary halt, we talk about, you know, two or three weeks not two or three months. So the confidence with which I believe this phase of the restructuring will be over is in the worst case scenario, we're three weeks of it being over and the best case scenario, we're a day or two days away from it being over.

But I repeat what I say, is thank God we started 15 months ago, because the alternative to this would have been to not do anything and then to file for bankruptcy, which we've seen an example of that, or to simply pretend that the strong rand doesn't impact on us and therefore, in order to curry favor with, you know, with the unions, or other stakeholders, to just say, you know, we don't need to retrench. Neither of those two options was practical or viable. I think we've, you know, we've invested time and money into restructuring.

We've adjusted to the strong rand environment. And yes, we owe you demonstration of the results. But stick around. You know, this coming quarter will be first of those results showing up and the quarter after that, I think we'll have a normalized quarter, and we'll begin to show you, you know, why we've invested so much time and energy in the restructuring operation.

Thanks, George. I think we better move on to the next question.

Thank you very much, sir. Just a reminder, at this time, if you'd like to ask a question, please press star and then one on your touch-tone phone. Our next question comes from Alan Leon of [Paligon]. Please go ahead.

Good afternoon. Bernard, can you hear me? This slide has been quite [inaudible] for the call.

Alan, I hear you clearly. I apologize if you've battled to hear me.

I wonder if you can just clarify for us what slide seven means? When you say we are price sensitive and will not destroy value by paying last Friday's ratio 1.5, 1.6. Does that embrace therefore a legal commitment not to pay any ratio higher than that?

That is what it would embrace. And it certainly would be, I'm pretty sure Gold Field's lawyers would spell out the consequences of such a statement, and we really deemed it necessary because, you know, we continue to be confronted by people who allege that various people, including sometimes allegedly Gold Fields phoned in with so-called information about ratios that we may or may not pay, obviously in this game there are professional people that can look out for themselves and there are lots of smaller people who may, you know, end up making an investment or taking a position in either Harmony or Gold Fields on what is clearly what is just misleading information.

So with our lawyers and our advisors we thought it prudent to indicate that the ratio as it was at last Friday was certainly in the territory where we had no intention of going, Alan, so I hope that puts it clearer. As you know, I should say as little as possible about what we may or may not do, because, you know, I could be forcing too formal announcements but that statement certainly was put out to just protect investors from not acting on misleading information.

Right. I mean I don't want to be semantic about it but just so I understand, would it be legally possible for you now, if you wanted to, for example, off a ratio of 1.55, is that now legally not possible?

I would assume it's legally not possible. But more importantly, we obviously decided that we have no intention of going there.

Understood. Thanks. Thanks very much, Bernard.

We have a follow-up question from George Lequime of RBC Capital Markets. Please go ahead.

Sorry Bernard, I've just got two quick questions. One line answers. Just on the restructuring costs we saw 171 come through this quarter. Can we assume that there's another 150 next quarter? Is that the last such costs in order to adhere to your production rate that you've estimated in the past?

George, I got one question, I think, and you really don't want to be put off so I'll answer this question, no. That 171, George, because we gave the formal notifications of retrenchments in mid-March, we're to bring the cost of this process, this retrenchment, the 4,900 people which are currently being retrained, 122 million of that is included in the 171. So the 171 was the big bullet. The bullet amount. The coming quarter in May show odds and sods but a dramatically lower number.

There isn't another 150 million coming through. And certainly not as part of the current process, George. So 171 includes to the best of my recollection 122 million rands associated with this process of 4,900 people which you read all about in the South African press. Thanks, George.

Okay. One, the second one on the cash flow, that's the last one, is just on the, you said you incurred 159 million to date on the bid. If your offer is unsuccessful and the offer lapses on the 20th of May, are there any other additional fees over the 159 that will come through?

George, effectively the 150 is what we've incurred up to quarter end and the 9 million therefore is our sort of best estimate of the additional costs, you know, you see the CPR, you see there's another few million rands of money wasted on lawyers to, you know, to handle the Tribunal fees and sorry, that's just my sense of humor, so that 159 would be a pretty close to final cost if we were to sit with only 11.5% of Gold Fields' on the 20th of May.

Okay. Thanks so much, Bernie. I'll let the other guys ask a question.

Thanks, George.

Our next question comes from Russell Fryer of Deutsche Bank. Please go ahead.

Hello, Bernard.

Russell.

A couple of questions. First of all, Elandsrand. Nice pickup in the grades from what, 6.4 to 8.4. So can you tell me what levels you're seeing an increase in those yields? And then also, to Target just continually seems to disappoint, you may have mentioned it earlier, I was late getting on the call, but what are you going to do to turn Target around? I mean that was supposed to be, you know, the crowned glory, and it's just a continual disappointment.

Russell, thanks. Let's deal with Elandsrand first. Certainly the new mine is going to end up as a 7.5 gram a ton, that's even 7,9 [inaudible] mine. But you know, we're only mine a few stokes from the, and the bulk of the mining stoke takes place on the upper old mine levels where we're been battling to maintain even 6 grams a ton. So this was a bit of a hallelujah quarter and we all deserve a better good luck and we certainly had some of that, some due to our own making and some was really just fortunate sort of grade recovery during the quarter.

So we don't think the current grades of Elandsrand is sustainable as yet, but we certainly are building a mine that will see us closer to 8 grams a ton than to 7 grams a ton going forward over the next two years or so.

I don't quite share your perceptions on the Target, and certainly not in our time, I mean we've promised that at Target, we'll reduce costs dramatically, which we have done. We've reduced costs from over 450 rands a ton, to 320-odd rands a ton, and we believe that's quite sustainable. I mean towards the end of last quarter we were below 300 rands a ton because the volumes were right.

And at Target we suffer in the short-term from a flexibility problem, mining flexibility. You know, we are to a large extent caught up in the mining plan pre our acquisition, where the massive stokes have being mined, and in order to extract a broken rock now, of course you draw it out at whatever the grade is after the dilution, and that's the issue, there's quite a bit of hanging wall caving in. We believe it was a design error in the original mining, but that's the rock we are dealt with so that's the rock we're bringing out.

So we've got mining flexibility challenges which we're addressing from day one. And I was told today by our ops director there that we've increased development rates by 50% since we took over Target. Now that's all in that much-lower cost per ton number, so I think that's a standing operational and cost savings number.

The grades of Target aren't going to be below 6 grams a ton for long. But for the next four months or so, we are drawing mainly from these highly diluted massive sloping areas, and until we've got more mining flexibility, those are the tons we've got and those are the tons we are feeding.

I have to tell you that even with these much lower grades at our now lower cost structure, Target still produces gold at what 60,000 rand a kilogram. Last quarter, we showed that at a decent grade it produces gold at 40,000 rand a kilogram.

You know, these assets and these mines we buy, we do buy them with a 10 or 15 or 20-year time horizon. We continue to lick Target but we always anticipate that sort of challenges of changing it from a mine that was being extensively high graded to a mine that will be mined at a high, at optimal grade, Russell.

So I differ slightly from your views on Target, but, you know, in six or nine months we'll like to demonstrate that the Target doesn't only have a much lower cash per ton cost structure, but it's actually, you know, has got the right grades and is there for the world class mine that we believe we bought there.

Just to follow-up. I forgot to ask you this. Just with regards to pumping, you know, I saw that the, obviously the, you know, you had filed for application and it was dismissed, with costs. You know, what's the next step with regards to that pumping there in Northwest?

Yeah, the Northwest issue is really just one of the pumping issues facing the industry and not just Harmony. There's almost not a mining district there where there aren't some unresolved sort of some pumping issues. You know we have some pumping challenge, facing us in South Deep, you know, at the South Deep Western Areas joint venture where we don't no longer need to pump and the guys have used our pumping facility to pump on their own behalf and now want to hand it back to us, and of course we don't want to pump for them. And in the Free State, you know, we will be the last man standing and therefore we've got a real interest in the policy decisions that the government takes.

Obviously, Devon Deep took a very opportunistic sort of route of just collecting all the future environmental liabilities with the Company and walk away from that. We find that an unacceptable approach in terms of good corporate citizenship. And as Anglo Gold all agreed that obviously we need, you know, well thought through long-term solutions.

You know what, we won on the one side, we lose on the other side. So conversely the ruling that we didn't like in the Orkney district is a ruling we would gladly accept in another district. But we are deliberately trying not to be opportunistic. We're deliberately trying to get all of the relevant stakeholders to apply their minds and for government to come up with good policy that will resolve this.

Our real issue with this specific ruling was that an official from the Department of Water Affairs effectively instructed neighboring mines to pump on behalf of the mine which had decided to go to bankrupt. I mean that's an interesting ruling. We find it an uncomfortable level of authority being vested in an official and that's issue that we'll take on appeal.

But I've got no doubt in the next few months, good policy will catch up with all of these challenges. Quite honestly, it is the extent to which the issues in this industry are inter-linked and the extent to which the mines are inter-linked which will make further consolidation actually a necessity and quite a clever move, Russell.

Thanks, Bernard.

Ladies and gentlemen, just a reminder, if you'd like to ask a question, please press star and then one on your touch-tone phone.

And Dylan if you can hear me, I think we should probably, if there are more questions take one more. We have used our hour we normally ask people to join us. So if there is a final question, perhaps.

There are no further questions. Mr. Swanepoel, would you like to make some closing comments?

Well, if anybody's still on the line, thank you very much for your time. And we will speak with you in three months' time. Thank you very much.

Thank you very much, sir. On behalf of Harmony Gold that concludes this afternoon's conference. Thank you for joining us. You may disconnect your lines.