Harmony Gold Mining Company Ltd (HMY) 2006 Q2 法說會逐字稿

Good afternoon and welcome to the Harmony Gold Mining conference call. All participants will be in listen-only mode.

There will be an opportunity for you to ask your questions at the end of today's presentation. If you should need assistance during the conference then 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 the turn the conference over to Bernard Swanepoel. Please go ahead.

Thank you very much. Good afternoon and good morning, ladies and gentlemen.

I would like to proceed with presenting the quarterly results, and my first slide should also be the slide, your first slide if you downloaded this electronically, it's titled "Quarterly Highlights" and there are indeed a couple of highlights.

The main one of course is the increase in cash operating profits to 389 million, and increase of 227% quarter-on-quarter and in subsequent slides I will show you how, although the gold price was the main contributor to debt, some really pleasing operational numbers came through as well.

Cash operating costs decreased by 3% down to 83,100 Rand/kg and although this is still a good distance away from where we want to be, obviously, it does give us some satisfaction that at least we are making progress. And the progress was especially visible in our two sets of core assets, on the one hand our quality assets where there was a significant improvement and in also in our leverage assets, and we'll deal with those in a moment.

The leverage saw us return to profitability and again a combination of better quality mining grade-wise and especially gold price making a big difference.

We have not dealt for the last eighteen months with our growth projects, we are very proud of the mines we are building. We are making good progress and we're also making good progress with the [seasons] we need to make with regards to the mines in Papua New Guinea and Wafi Golpu as well as Hidden Valley.

As you would expect after protracted drawn out retrenchment struggles we had the relationship between us and organized labor was [inaudible] in the satisfactory win a very good constructive process of re-establishing such relationships. These things do take time, but so far we are making really good progress.

The next slide, which for those who have downloaded from our Web site, just comments briefly and upfront about where we are relative to our goal of reducing our costs to what was originally 75,000 Rand/kg and then obviously as we change the accounting treatment of our development costs, something lower than 70,000 Rand/kg now.

As you can see in this quarter, the labor costs, the surplus labor, and especially the labor on those shafts that were no longer operational is out of the system. Some of that sits above the line.

Some of that sits under the cost, the care and maintenance costs below the line and [inaudible] in its own right was a huge step forward for us and the impact of the lower volumes, I mean [inaudible] the company in terms of tonnages of volume by some 20%. The fact that we manage to do keep that impact to a minimum and we are actually bringing the unit costs down is a great achievement although we are quite a distance away from where we want to be.

In the last two years with the curtailments of operations and planned closures which got delayed more than once by the unions winning legal challenges against the process, and our productivity of course has deteriorated and one of the key issues for us going forward now is to increase our productivity by and order of about 10% back to the levels where we were before.

We aren't planning for sort of new breakthroughs in productivity. We are really just plan to get productivity back as the team settle down as all these people transfer from surface jobs to underground jobs getting to the hang of things as the teams start to work together, and hopefully earn bonuses together, productivity we do believe will be a driver for the cost reductions going forward.

Of course a lot of what we are aspiring to achieve here with regards to costs [inaudible] orebody flexibility and the implementation of CONOPS, which we deemed to be successful, it requires additional flexibility and obviously mining more days and therefore a faster rate, and our underperformance in terms of volume, or our increase in volumes that are required, plus our grade improvement that are required, all really speaks to so-called orebody flexibility, you will see a positive trait in our development meters that needs to continue going forward, and these are the basic causes and symptoms that we are addressing and instead of walking away from our sort of challenging aspirational straight targets, I think we still continue to take huge steps towards those as we go forward.

My next slide shows safety results.

I have to say probably in the negative of the quarter we took a step back in terms of safety. That's partly explained in terms of the disruptions that was caused in our workings underground through all the restructuring, lots of people redeployed to new jobs.

We knew all of this and yet [inaudible] still allowed it to work through to deteriorated safety results. A lot of work ahead of us to get back to where we were last year.

My next slide is the quarter-on-quarter analysis.

You can see our gold production is up by 6%, our revenue is up by 11%. That was all dollar gold price-driven, the currency, the exchange rate was really flat over the period, and cash costs down by the 3% as we've indicated, and all in all is resulting in quite a significant increase in cash operating profit, cash earnings per share and up by 230% and a smaller earnings per share as opposed to loss per share of last quarter.

Moving onto the breakdown in the quality ounces which is a grouping of shops which we deemed to be of potential to make higher margins, and you can see 136 million Rand improvement there, basically a doubling of profits from these shops. The growth projects, which are really two small [lease] old mines being run whilst we are completing the new mines at the bottom of them and development of Elandsrand definitely not performing well during the quarter, it has really all got to do with orebody flexibility and the Elandsrand one is the main contributor to the underperformance.

It is not big in our lives but it certainly is getting attention and I will deal with this [inaudible] Elandsrand a bit later on.

The leverage ounces had a significant reversal of fortunes. The variance is almost the same as it was on our quality ounces, a positive variance of 120 million from a loss of 46 million to a profit of 76 million [inaudible].

Service operations I will deal with later although it looked like you had a doubling of profits. Our Kalgold open pit mine is going through a period where we are filling the mold with strategic stockpiles while we're doing a very necessary fourth and final cutback and that leaves the [inaudible] operations up by some 260%.

Our Australasian operations, which are really our mines in Australia [inaudible], increased by 11%, basically just in the gold price benefits flowing through for the total as we discussed before.

On my next slide I do quarter-on-quarter variance analysis. You can see how the volume net of costs made quite a positive contribution, obviously as you do 6% more volume, you expect some incremental cost increase.

Recovery [growth] is a fractional improvement and that quite satisfying if you think we are busy implementing CONOPS on quite a few of our mines and at least we seem to be able to get to higher volumes without a reduction in grade, and then really there is dollar gold price which translated into Rand gold prices being the main positive driver of our results for this quarter.

On the next slide I just give you all the various earnings per share from cash earnings per share all the way through to $0.06 fully diluted earnings per share. I also give you the reconciliation from basic earnings and we removed profit on the disposal of our gold field shares to give you the number for the head line loss as well.

I want to move on to the detail on the quality ounces. This grouping of [inaudible] as I indicated are of higher potential in our own estimation.

You can see that volumes increased by a very satisfactory 8%, the recovery growth, although it's flat, it's a positive improvement of 2%, 10% more gold, 3% lower costs and quite a satisfactory performance all around.

The detail and the highlights and the concerns to [inaudible] for the second time implementing CONOPS we added very successfully implemented there. We then ended the dispute with the unions about the retrenchment, they withdrew their support for Sunday permission which means we had to undo CONOPS, we've now reimplemented it and obviously the team knows what they're doing, they're making a good success of it again.

For the March quarter, Target mine where we have re-established orebody flexibility, during the quarter we indicated to the market that we are taking over the equipment maintenance because we were very unhappy with the low levels of availability. Those two things now being in place, we expect quite a more normalized quarter from Target which tends to be up in the order of about 20% and grade could even be up by 5% as well.

That would obviously make a currently profitable target extremely profitable for the foreseeable future.

At Masimon, one of our mines in the Free State, the implementation of CONOPS is going on, it was really just a hold up in terms of sourcing [drop drill] operators. We have now addressed that and so we expect increased volume and margin increased grades as well.

Evander's seven shaft, we have been flagging for some time that we are mining excessively high grades that can't be sustainable, and the next slide actually speaks to that for those of more technical background, that is just a section through the orebody and you can see the rates for those who got color prints of the Kimberly Reef and what happens from to time is you've got you're footwall sill, the rock underneath the reef sort of basically eroding your reef and discontinue as these typically unfolds and so on. We call it a footwall sill breakthrough and it basically just erodes the reef.

The next slide, which is even more detailed, just shows you a plan of how typically, although you are under the well known and well defined payshoot in this case the 3 decline payshoot where the grades are typically much, much higher than in the average orebody. When these fill breakthroughs cut into your reef and erodes a certain portion and all you can really do is establish yourself on the other side of this and continue to mine the pay chute.

That's what we are currently busy doing. Sorry for the detail but there are always a few people who are interested in that level of detail.

I want to move on and not say a hell of a lot on the growth projects. They are quite small in our lives right now. They are meant to be quite big in our lives going forward especially the Elandsrand mine is now in a position where we can start to expect build up.

You can see in the last quarter the lack of flexibility did not result in a drop in tonnage but certainly in a drop of grades. All in all not a very satisfactory performance and we keep on having to focus on the fact that we are busy building two brand new world-class mines at the bottom of these two struggling old operations.

And on the next slide the growth operations, the highlights and I just point out that at Elandsrand a mere 20% of the current mining mix is coming from the new mine, and so although we've established a few raised lines, we're only mining one of them at this moment. And so the bulk of the tonnage and therefore the grades is really more representative of the old mine.

And for the quarter going forward, and there will be significantly higher tonnages from Elandsrand we believe in the order of about 40,000 tons, but then I have to point out that half of that 20,000 tons will come from waste. That is because we are now linking up the old mines orepass system with the new mines orepass system, and doing that we have to take one of the two sets of orepasses offline, link them up, then swing around do it to the other set and during that time we really only have a single pass for the rock which means we are blending the reef and the waste. It's not a disaster as the waste also contained a little bit of gold.

We do expect that this may actually assist that and we will certainly experiment with that in that older gold rock [inaudible] for gold extraction we then use these lines for backfill and we expect that the quality of the backfill will actually improve with the adding of waste drop. If that is the case, we will use this as a longer term solution for some of our backfill challenges as well.

As I indicated earlier we actually got a couple of rate lines at the top level of the new mine now established, three to be exact. The previous mining method, the so-called sequential grip really only allowed you to mine one [inaudible] line in one direction at a time.

We've done all the redesign work, it unfortunately took us three months longer than what we were hoping initially to get all the necessary sign off's from consultants, experts, rock engineers and all other related people for the new mining method. The multiple sequential growth means that we actually kept to all of the safety features of the mining method but give ourselves multiple attacking points and therefore a significantly in [inaudible] build-up profile.

This is all promised for the next quarter and subsequent to that, certainly by the end of next quarter, we would expect to have mining operations established on three of these [inaudible] and thereabout increasing the contribution from the new mine significantly.

Moving on to the operational results for the leverage operations. It was a quarter where the focus on the quality mining to getting the grade right flowed right through to the bottom line and you can see why in my first or second slide we spoke about the gap between [inaudible] and where we want to be in terms of cost.

You can see why there is such emphasis on grade or quality as well, and you know, if you increase your volumes as always in incremental costs to some of the benefits flow through to your cost per kilogram line and when there's an increase in grade, really typically that is at no cost type sort of benefit and therefore the significant improvement of 10% in our underground working costs per kilogram. Still not where we want to be, but certainly the type of step forward which makes it possible for us to celebrate with our teams the positive movements.

In this grouping of charts there were a couple of highlights. Firstly, [Unisel] and Harmony Two have both re-established themselves at above five grams a ton. Those are the types of grade that these two operations can and were significant profit contributors, and Bambanani had a bit of a bonanza quarter, but this had a lot to do with the fact that we did not only get significantly higher volumes after the restructuring, we also were able to for the first time since I think about February 2005 go back into working places where we had sort of unexplained fires at the time as well our higher grade areas, obviously, we got more tons from higher grade areas for a very, very positive result all over.

This shaft has cost us quite a bit of mining and operating losses in the last six months and made a huge contribution and we need to improve even further on that going forward.

In the coming quarter the sort of highlight, or the biggest challenge for us here would be to finally commission the north shaft. This is an old -- not an old shaft, this is a shaft that was found but never commissioned by the JCI or Anglo in its previous life.

We have been trying to commission the shaft for some time. We run into a few technical problems that seems to be behind us, and this will enable us to mine from the next levels of this orebody and see an increase in volume.

This is a lowest grade orebody and therefore an increase in volume is really quite dramatic in our lifetime.

This [exits] and that's my final point on that shaft and the leverage answers, highlights and concerns these assets are gold price dependent. If we continue to get a gold price higher than what we got last quarter, one would realistically expect a bigger financial contribution from these leverage shafts.

Surface is really a bit of a mixed bag of underground, sorry, the open pit operations at Kalgold [blasting], the activities of filling the molds especially over the Christmas break with waste rock [inaudible] material. And at Kalgold because of the [brand] cutback and the slippage on the wall, which we need to cut back, we kept the bowls full but with a strategic ore from the stockpile and obviously at a lower grade and then of course the higher turning just mainly came from low grade stockpiles.

So there's nothing to be rating the grades as such. Still came in with a profit but the next quarter Kalgold again will be impacted upon by the eastern wall slippage.

My next slide deals with Kalgold. Slippage took place in May 2005. I think it was quite well known at the time.

Obviously at the time with the gold price where it was and although we did some clean-up, there was no financial intent for us to contemplate the cut-back at the time. We have subsequently supplemented the [inaudible] will all from the lower grade A-Zone to higher gold price and resulted in us being able to justify the fourth cutback.

This will be the final cutback. We do expect that this cutback will make a profit of about 150 million range and an assumption of 100,000 Rand/kg.

At Kalgold S with our Australian operations we have run ourselves into the phenomena of contractors who can now pick and choose and therefore, as the contract came up for renewal, the best we could do was give a 9.5% interim increase while taking the mining contract out on [inaudible]. The same phenomena apparent in Australia where most of their mining activities are outsourced as well.

Dealing with Australia you can see that we really had a quarter very similar to last quarter. We do believe this is a little under par and we can do better.

The gold price that make a positive contribution and that was really the main feature in Australia. Under the highlights for Australia, the St. George underground mine has finally started to fold up in December and will be a bit late, but it is now on track.

Of course, Australia continues to be our benchmark with regards to safety performance and it consistently performs at a level where our [inaudible] operations get to from time to time and we are seeing some exploration success for more feet at our South Kal operations and again I dealt with the increase in contractor costs which we hopefully now have absorbed [inaudible].

For the March quarter, the real challenge for our support continues to use the dips in the gold price to restructure our hedge book, and I think at this stage we've basically geared up the sort of commitments of 15,000 ounces for February and we certainly will deal with the March commitments in the same way as well.

My next slide deals with the cash position which increased dramatically quarter-on-quarter. The main driver of that was the disposal of the proceeds on the sale of the Gold Fields shares and due to a little printing error right at the bottom of this slide for close to the bottom is looked like Gdd Fields shares, it's a bit of a printing error.

I think depending on how your printer printed it you'd say Gold Fields.

And let's work through that briefly, operating profit of 389. Cap Ex, we still give you the two lines separately.

The normal definition of Cap Ex, or the old definition, and it included also added to that the development costs which is now capitalized in terms of the accounting standard.

Corporate and exploration expenditure, I'm not sure why we've thrown it together. Break it up for you corporate was 72, which included a 22 once-off value added tax payment to the significant revenue services, and we are still of the opinion that was an aggressive assessment and we will take it up with them, but the law of the land is that you pay your taxes, otherwise, you know, you're get into trouble and then the 33-odd million or 32 million Rands worth of exploration expenditure, the bulk of that of course is now very exciting Papua New Guinea and exploration target areas.

Employment termination and restructuring are the drips and drabs of the process that is now hopefully, finally finished and this has got to do with people who were on extended leave and came back and were retrenched and the final payout with regards to that.

Care and maintenance cost of non-operating shaft is a dramatic improvement from much a higher number last quarter and I think it was about 88 million last quarter, and obviously that is one of the below the line places where the restructuring has made quite a significant difference. This is what it costs us for bumping and for care and maintenance on shops that are no longer operating.

We've got a management team in place that will continue to manage it down wither through cost reductions or through disposals of some of these shafts, and especially the ones where we don't really feel this orebody potential lift and the higher gold price in [inaudible].

The rest of the numbers are sort of consistent, movement in working capital of course is not something that will be repeated. It is a combination of the early payment of salaries related to the Christmas period in this country and in also gold [inaudible] and it has gone up, and I think that speaks to most of that.

I want to point out to you on the other Avgold hedge payment, the final installment of 72 million Rands inherited hedge position we have for 80 months, been looking forward to December '05 when this will be out of our lives. It is out of our lives, and in the proceed in the sale of Gold Field is really the main driver of this.

The investment line on our balance sheet changes dramatically with the disposal of the Gold Field shares. I'm just giving you the breakdown there, and the net profit on the sale of the Gold Field shares is also reflected in our income statement.

I'm not going to speak much to the world-class growth projects. I made this presentation at the Mining and [inaudible] in Capetown.

This is a slide we've used extensively and continues to make the point that we show real growth and it also makes the point that the ounces that we will bring onstream here is typically of a higher grade and therefore higher quality and lower costs than the ones that they are replacing. It does result in a net growth from this year's expected about 2.6-odd million ounces closer to about 3.4, 3.5 million ounces by the year 2010. This is not too bad a project pipeline to have.

My next slide is actually just a diagram showing all of that for those who got it in color at the bottom is the existing Harmony excluding the projects. Of course, all of these projects are adequately capitalized and we haven't cut back on them, some of them are already delivering.

And this shows how the quality replaces some of the existing stuff and in this line running from the left to the right which shows you the average grade of Harmony's underground mining and you can see a very, very positive sort of [inaudible], which of course, is one way of improving the quality of your mining.

I then go on to talk a little bit about Hidden Valley, it's a great project and it's getting better and I show you pictures of the roads we are building because, I mean, I just think [inaudible] is a road building exercise. We've done about 20 kilometers of the 40 kilometer road.

The pictures make it look easy, it's been quite a job but we're very pleased with our progress and now believe and think we can demonstrate our ability to operate in remote areas like this. The feasibility updating is really a result in us having a more robust mining plan with even higher levels of confidence.

The funding of this mining fleet is progressing and we're having good discussions with P&G and authorities with results to securing electricity supply from the national palace supplier. We have acquired and will install generating capacity for 100% of our needs, but obviously, with the diesel prices being slightly out of control now having a good alternative may not be a bad idea.

More pictures of [inaudible] machines building roads over mountains and it's actually not too difficult itself if you look at this sort of conditions that we are encountering there.

The next slide, this is sort of a update of where we are, and you can see that we are mining substantially more gold for a longer life and although the grades as they are it's actually a result in the same annual gold production and cash costs really some of that to what we previously indicated.

The [FISA] project was significant silver [inaudible] and that's why the gold ounces of 2.85, the equivalent gold production and 345 seeing that we get about 60,000 ounces of gold equivalent from the silver production and mine construction is a period of some 26 months and life of mine now seven years instead of the previous six and a half years. And previously we thought we would be mining at a slightly higher grade for the same annual production that extracting some 1.9 half million ounces and right now we believe we will do some 2.6 million ounces.

My next slide which just shows you the financial parameters. If we were to use $500 gold price and 7.5 per dollars to ounce silver, which looks quite realistic relative to current prices, you can see decent returns, actually very good returns in the cash cost of 2.20.

At a bullish scenario of 550 and 8.5 per ounce of silver you can see a vastly improved pretax cash flow, net present values, increased IRR and IS silver assumption would bring down the cash costs as well.

I want to briefly touch on our other exciting project, the Wafi Golpu for the [inaudible] orebodies. The pre-feasibility work is really in hand, it obviously especially Golpu contains so much copper that we have been approached and certainly will entertain suggestions from copper smelters either for off take agreements or copper miners for some form of joint venturing.

It is early stages and we certainly haven't made up our minds but as part of our pre-feasibility process anyone you could deal with what will happen with the copper, who will take if off our hands or assist us with the technology to refine it.

The next slide is really just more detail section to indicate the geotechnical drilling program. It obviously will also give us further geological information as well.

We then commence with the pre-feasibility about six or seven months ago now, we still believe that that's on track for completion by December 2006 at an estimated cost of about 8 million Australian dollars. And because this is a massive orebody with, or wanting to be mined from an underground blockading mine quite a bit of geotechnical work is required to be done.

The next picture is a just lovely picture from Papua New Guinea and that's not really our management team. We haven't get gone to those extremes yet.

In conclusion, I want to wrap it up and give decent time for questioning. I think a refocused harmony and as where we are, the two years of catching up with the stronger end is finally behind us. We believe our growth track remains in place.

We taken the bitter medicine as we said before, the operational improvements are starting to show. Very importantly our growth projects are also nicely on track and we do have a pretty good track record of making value in harnessing acquisitions as in when the prices allow for that, so it's up to us now to rebuild the growth story which is Harmony.

Thank you very much for your time. I am going to hand this all back to the Operator for a question-and-answer session. Thank you very much.

Thank you very much, Mr. Swanepoel. [OPERATOR INSTRUCTIONS]. Our first question comes from Victor Flores of HSBC. Please go ahead.

Thank you. Good afternoon, Bernard.

I was hoping that perhaps you could address what seems to be a fair amount of variability from quarter-to-quarter in the grades at primarily the marginal shafts and you sort of touched upon it. It is gold price dependent, it's dependent on, I guess, the restructuring, but going forward, should we expect to continue to see grades jump around from quarter-to-quarter or do you think that these are going to normalize at some level?

Thank you Victor.

I think the nature of some of the orebodies we own is such that the availability is probably a bit more the phenomena for us than perhaps for some other guys and also I think that the way in which we structure the company and each shaft as a business gets disclosed is that we obviously also just see more variability than perhaps in some of the other sort of [inaudible] operations. The point I'm making is that if we were to group literally all of the Evander shafts together then a lot of the variability that may have been visible at per shaft level will be canceled out on a per region sort of level, and that's to some extent what some of the others [inaudible] producers are doing where they're disclosing at a higher level and so you just see less variability.

Having said all of those things, do remember that our leverage shafts is that sort of portfolio of assets which in many instances are variable, lower grade, and therefore the variability is quite visible. Some of the reefs are known for their variability. Again, I could make the example of the Kimberly Reefs at Evander where you could be mining 20 grams a ton or you could be mining 5 grams a ton.

We believe we've got a suitable approach to all reserve management to try and sort of negate that. But we made our bed so we made our minds up years ago with serving detail at the [bi-shaft] level and therefore to some extent and exposing ourselves.

We are not quite where we want to be with regards to the great on the leverage shaft, and although we've seen a nice increase and certainly the first challenge will be to bank that increase and to maintain it. We believe there's a little bit more scope for grade improvement in our leverage shafts.

Ultimately, Victor, it is about the flexibility. If your panel changes from a high-grade panel to a marginal panel and you may still want to mine it because it continues to be profitable, but if you're mix and blend is no longer right, the ideal to remind many [here] would be to have the flexibility to move the crude to another spare high-grade panel. It all comes back to orebody flexibility.

Sorry for a long answer but there is no simple answer. I think in the end I have to say that the way we disclose our results you will probably always see more visibility in the Harmony results than some of the other guys.

I think a significant contributor in the last quarter was the stunning grade turnaround at Bambanani, and I tried to deal with it by indicating that Bambanani for the last year has been unable to mine from the high-grade areas where we had fires about a year ago. We are back in that area now and so we are reasonably confident of the sustainability of those trades. Thanks, Victor.

Great. Thanks. Can I ask a follow-up on Hidden Valley?

It seems that in previous presentations the capital cost was given at about Australian 250 and now it's U.S. 250. I mean I wouldn't be surprised given the cost escalation that we've seen throughout the industry. But could you confirm that that's the case?

I can't remember, but you are correct. It went up from about 180 U.S. or 190 U.S. to 250. It is simply a case of 80-months later reconfirmation of equipment costs et cetera, et cetera. And then of course a much better handle on the actual construction costs for example the road to conveyors to [inaudible], it is a higher number.

It is a more up to date number, and it certainly is higher than in the past. I just can't stand in for the 250 Aussie dollars, I just offhand can't remember. But it is higher, yes.

Thank you.

Our next question comes from George Lequime of RBC Capital. Please go ahead, sir.

Thanks. I've actually got a couple questions. I'll ask one and [inaudible].

It's probably a question for Nomfundo. Just trying to reconcile on the cash operating profit and the cash generated from operations, there's always a large working capital adjustment that comes through and this quarter was pretty large and you went through some of those items.

I'm just trying to get a feel for what to expect next quarter or is this sort of the end of a big negative number that comes out on that side, and then if you add to that there's retrenchment costs of 42 million Rand and the 77 that you spoke about the currency hedges. How are those going to look over the next three to six months?

Just looking at the working cost movement, a lot of that was based on the retrenchment, the payments for employees, so it's just looking at the last quarter. The accounts payable, a lot of those were paid early because of the Christmas break, and also if you look at the accounts receivable there was an amount of 468 which are the gold receivable. Off that 121 was the actual increase on quarter-to-quarter.

All in millions.

All in millions, and basically that was because of, again, the Christmas break that affected the plants went on until the end of the month and the refinery was closed.

Can I just add to the other detail that 40-odd million that you talk about is the summation of the two numbers, the new one is the retrenchment cost of 14, 15 million [inaudible], my eyes are giving up, I can't see the small print of our [inaudible] book anymore, and the remaining one is that's ongoing cost of care and maintenance. And as I indicated during the presentation, that 27 million is down from 88 to 27, and this 27 will now be 27 until we find ways to either stop bumping in some of these shafts or sell some of these shafts to whoever, et cetera, et cetera. There's a program but this will take time to sort of realize.

You are correct in your assessment, or in your question or assumption that the Avgold [inaudible] number was a [loss] installment, and that 72 million was the last installment, we had for some time promised ourself and everybody that that [inaudible] some states it's behind us. It is now behind us, and I'll be clear about numbers, Mr. Lequime, really the big unknown for us would always be the mark-to-market on the financial instruments and that's a number that on the end of the quarter we should start to have a good feel for it, and I think most people have got models by which they can make an estimation of what that sweet number is as well as.

I myself am quite keen for us to, with all of these abnormal charges et cetera, et cetera behind us to also below the line at more predictability in terms of numbers. In the December quarter we received the proceeds from the Gold Field shares disposal late in the quarter, and so we didn't have a high interest received charge. Obviously with the current cash balance there's a positive interest received sort of variance expected for the coming quarter, but apart from that it is really the gold price and its impact on our financial instruments that plays a bit of havoc with the below the line numbers.

That makes sense. If I can just sneak in one last question.

It's part of what you're talking about, the, can you just give us a little bit of an idea of normally in the March quarter we have excuses about the Christmas break and the impact on production. We've gone through the [inaudible]. Can you just shed a little bit of light with what to expect on the March quarter and as far as that's concerned?

George, we ask Philip to do a proper analysis for us of our own and Anglo Gold, South Africa and Gold Field South Africa sort of March quarter and it's not pretty picture. I mean, you know, I think over the last three years or so there's like an average of about 6% volume drop in the March quarter as compared to the December quarter.

And in every year it is a bit of a range between the three, but we don't have stunning March quarters.

Where I sit now I'm more optimistic than that and so please least me not give you a profit warning in this guise. We've nice positive momentum with CONOPS implementations with the bounce back, I mean, you know how far we are from where we want to be. So that nice positive momentum will have to be seen in the context of historically our seasonal weak sort of quarter.

Please don't make me forecast a hard number because I'll just embarrass myself and I've done enough of that lately with us not meeting the sort of public demand focus and promises. I think we'll do better than that sort of 6%, you know, because there's positive momentum and so many things we are doing in Harmony. But the reality of the after Christmas period is in our lives.

I tell you if we get close to a similar quarter in terms of sell out, you can volume I think we will certainly internally celebrate as a step forward, you know, and there's enough positive stuff happening in our lives to make that at least a viable objective for this quarter.

Thanks, Bernard. [OPERATOR INSTRUCTIONS]

Our next question comes from Heather Douglas of BMO Nesbitt Burns. Please go ahead.

Hi. Thank you. Good afternoon, everyone.

I just have a question about the Australian operations going forward, the ones in Australia. What are your plans because they have quite high costs, you mentioned you have ongoing cost pressures. Anyway, so what are your plans for your Australian operations?

I mean it's very much a sort of a, and I put it badly and I will get criticized for it, but it's a bit of a sort of hand-to-mouth [inaudible] sort of operation and that is harsh, I mean, so let me try to quantity that.

I'm of the opinion that a lot of the mining in Australia, if you make 100 million, you need about 90 million of debt to drill and explore and find the [more] feet for the next 100 million you want to make. And that platform has certainly been the platform from which we've been able to acquire [Bell] and given that the offshore capital base but also the people base with which we are building Papua New Guinean sort of platform which I think sets much more comfortable in Harmony's sort of future.

Right now, all of our operations they have got on the one hand windfall of the higher Australian dollar gold price, which creates a little bit of flexibility and in quite a few of the capital projects of the past, you know, in terms of the water tank yield and [George] mine and I think our next sort of 18 to 24-months in Australia hither doesn't look too bad and arguably these assets sit comfortably in Harmony's current portfolio because our current South African portfolio isn't quite the way we want it to be, you know? But it's certainly, I mean, you know, they take hard work and they take continuous sort of near-mine sort of exploration just to feed the [inaudible] and we took our bitter sort of medicine in Australia some 18-months ago when we got our non-profitable ounces, you know, there's really marginal ounces.

We're reasonably happy with what we've got there and as a springboard it probably served its purpose but at the same time continuing to own it is the way we are currently now thinking with regards to that.

Okay. Great. I have a follow-up to George's question about guidance in the next couple of quarters.

You've mentioned your 70,000 Rand/kg cost target. When do you realistically expect to achieve that? Is that Q1 2007, December, a year from now?

You guys are pulling me over the table again. I'm not taking enough of a beating yet. No.

For us to achieve that as I dealt with on, I think the first or the second slide, we need to do some really longer term issues like addressing orebody flexibility and we are, and the gold price does help, but we can't let the gold price flow through to level cutoffs because we will never get this cost of it. So that's sort of our one challenge.

We are midway in the planning cycle and so we have no plans to replan at different cutoffs and therefore change that below 70,000 Rand target. The two main components for us, I mean, they're actually three components but they speak to the same thing.

The one is, if we get our grades to improve by 5, 6 or 7%, and it's a range, some shafts it's the same percent, some shafts it's zero percent. But if we get that right, that flows, drops straight down to the cost per kilogram. It really does as we demonstrated on our leverage ops.

Now again, on some of our shafts like Bambanani, yeah, we've done that and we can do a little bit more. At Target, there will be some of that and some volume and that will flow through.

The volume challenge is where we believe to be a good thing to say below 10% what we are capacitated for in terms of people production capacity does, the volume increases of course if you do it well, then for a 10% increase in volume, you probably give 5% back to cost and there's a net benefit of 5%. But it is quite significant.

The other one which again takes time and especially seeing that we've reshuffled virtually every worker in Harmony in the last six months, is on the productivity front. Now again, our assumption that goes into us getting close to or below 70,000 Rand/kilogram is that we go back in people productivity to where we've been. We aren't breaking new ground.

Now again, I mean you know when you deal with an organization consisting of people, it takes people to turn it around and yes, it takes time, but once you get to where we were in the last quarter, where most of our teams had a better quarter, all of them start to experience improved earnings, better bonuses, there are reasons to celebrate not only kick teams, those are the dynamics which [inaudible] excite me. And in terms of exact timing, all I can tell you is it is somewhere in the future, this coming quarter we dealt with adequately.

I am still optimistic that there would be good progress shown in the June quarter, but I really am, I suffered a little bit from burned fingers in terms of making our hard and firm promises and the commitment, the energy, my personal excitement about getting there [a year], I mean those are the things I can tell you. The rest can now please be measured by performance and do less talking because I've done a lot of talking and not so much performing lately.

That's a good answer. Thank you.

Mr. Swanepoel we have no further questions. Would you like to make some closing comments?

Other than saying thank you to everybody, I've got nothing else to say. Thanks a lot for your time as always. See you soon.

On behalf of Harmony Gold Mining that concludes this afternoon's conference. Thank you for joining us. You may now disconnect your lines.