Harmony Gold Mining Company Ltd (HMY) 2006 Q3 法說會逐字稿

Good afternoon and welcome to the Harmony Gold conference. 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, sir.

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

I want to talk you through our quarterly presentation. You'll see we've titled it, A New Game For A Rising Gold Price. I will come back to that. I will first get the – what shall I call it? – the business of dealing with a bad set of results out of the way. I think the results were anticipated to be bad, certainly by most analysts who have been paying attention. I think we've also tried to give guidance last quarter that we will need a good gold price to make us stand still. We certainly got the good gold price. I will talk you through the operational performance now.

The first slide after the Safe Harbor Act statement is the one titled, Quarterly Highlights. I think we have always been geared to the Rand gold price. I think with all of the South African results out now, I think it was quite clear that the Christmas break impacted on the South African operations of all of the operators – the bottom line, it impacted significantly more on us than perhaps any of those in goldfield simply because we are more South African in our production base.

We are very comfortable with where we are with regard to CONOPS implementation. In the month of March – towards the end, we finally appointed the last few rock drill operators to complete that process on our Masimong mine. I'll talk to you a little bit later about how it is making a contribution.

The Tshepong mine, which is our flagship mine in the Free State holed with Phakisa, after literally years of development. This is a small, but significant milestone in the development of Phakisa, one of our new mines we're building in South Africa.

Our [emong] management program of Hidden Valley was previously accepted by the Government. Now we are authorized. This really just means that all the legal requirements have now been met and could now proceed with constructing the mine. As we dwelt on it a lot last quarter, I am not going to talk a lot about it. We are making good progress despite all of the rain and the difficult terrain, with the road construction. It is still on track to be completed during the month of June, which means our target date for starting the proper mine construction effectively July 1, is still on track.

During the quarter, we closed out 25,000 ounces of the hedge book. I'll deal later with the fact that this coming quarter – in other words, the April to June quarter is really the [trends] quarter for us with regard to our Australia hedge book.

The operations generated – and I do apologize – 229 million, not 292 million of cash. There is a typing error, if you are following this presentation electronically. My last point is TGIO is my joke on TGIF. Thank God it's over. This was a quarter, which we told you was tough because the tough period was behind us when we spoke last three months ago. We can argue that February and March were more in line with normality. But the results were also going to be tough to present. That is why we [background noise] to get it out of the way so that we can move on with our lives.

As per request from the Board and as by undertaking to a lot of shareholders, we've done a proper and detailed operational review of our South African operations. This was necessary because in the aftermath of restructuring, our volumes and therefore our costs simply did not bounce back as we were expecting, or even promising. I will deal for the last time and close the chapter on the promises that we've made in the past and try and put us in a position where we can move forward.

There were significant complexities. There was the skills and complement balancing required in the shafts. What manifest itself in the last year is that cost-per-kilogram under-performance has been sitting in the volume and the grade challenge. Of course, if you've got either a volume or a grade problem in the South African context, it doesn't take a lot to see that you've got a ore-body flexibility problem. The down-scaling gave us initial flexibility. But obviously over the last 12 months, we have managed to get ourselves in a position, in quite a few of our mines, where we simply don't have the flexibility to make or produce the volumes that we want to produce and to produce it in a sustainable way. So some of the variability of our results has stemmed from this flexibility problem.

I personally have spent a significant amount of my time in the last quarter in this review. Today in South Africa I jokingly referred to myself as a shift boss or a miner this year. It was meant to be a joke. I think most of the analysts, with the exception of one, got the joke. I don't think it's quite as bad as I made it sound. We've got good management in place. There is no management problem in South Africa. But by the time we under-perform and we do damage to the credibility of Harmony, which over the years has been one of the companies that delivers, I unashamedly do get involved. What I do present today in terms of an effacement of the problem as well as the steps to fix it, is something that I really believe in because I've come to these conclusions with my team.

Our problem is quite simple. We have in all of the last two years of restructuring, down-scaling, and closing down mines, retrenching thousands of people, and relocating thousands more – we have allowed ourselves to get in a position where we've got an ore-body flexibility problem. Our action steps – because the problem is quite simple, the solution is also simple. It might take a bit of time, but it is truly simple. We will improve our production capacity. We will do that, and have done quite a bit of that, by increasing the number of faces or working places that can be mined. We've also fundamentally re-looked at how we staff our crews, not only for CONOPS, but also for having inexperienced people on the team, having people on the team that for various reasons didn't originally intend to work underground in the mine, but makes a lot of sense for us to have the necessary spare capacity in certain critical job categories. I expect that this will – if it doesn't necessarily make a huge difference in our actual volume, it will at least make the volume more predictable and sustainable.

This is the short-term addressing the day-to-day volume issues. Longer-term, of course, flexibility can be created only through developing and opening up the mines. We've done it. We'll talk about it later. We sit with really good flexibility and I'll highlight a few of those.

While I am highlighting the generic problems from the various mines, this is by no means consistent throughout the Company. These [heads] have been effective because it has made our previous 75,000-Rand of kilograms of way back – dare I say – unachievable. We will now focus on volume improvement, but manifests itself as a cost problem as I've said before. Really, it's the volume and to some extent in some mines, a great problem. It stems from a flexibility problem. That is what we will address.

I'll say for the results, although it is still significantly improved in our most recent past, is showing a deterioration on the year 2005, the previous year. Not such a great surprise if you think that during this year we really had the culmination of our restructuring process. Lots of new people and inexperience were put into underground jobs. That is not an excuse. But we expect the operations to start humming and then safety will definitely also improve.

Turning first to a slide that says, Quarter On Quarter Analysis, you'll see I've got quite a few slides that say that. I am on the first of those. It shows you the Company's performance. Our gold production, as you've all seen by now, is down by 14%. I would say probably about 4% higher than our guidance would have been some time ago. The gold price, as we indicated three months ago, we expect it to be up perhaps in the order of the 110,000 kilograms that we did achieve. Of course, in dollar terms it went up significantly more. But the Rand did strengthen a little and took 6% of the benefit of the dollar gold price away from that. Cash costs, bear with me if I say to you the 92,000, or 12% increase, doesn't reflect a cost problem. I will try and talk you through enough detail so that you can understand. If you drop your volumes and you've got a marginal grade reduction, you've got 14% less gold. A 12% increase in unit costs is almost unavoidable.

Net operating profit. I was, last quarter at this time, putting the expected drop in volume and anticipated grade issues of Evander and Kalgold all of it together and I was indicating that perhaps if we get a gold price in order of 110,000 to 120,000 Rand a kilogram, we may have cash operating profits similar to the 389 of last quarter. Clearly this is the one place where – especially on the grade side – the underperformance was a little beyond our expectation or even guidance. Cash earnings cents per share has also been down by the same 21%.

The next slide deals with the same numbers in ounces and dollars. You can see a 14% reduction in ounces. Of course, the cash cost, because of the stronger Rand, now translates into a much higher jump of 18, almost 19%. Cash operating profit, again because of the stronger Rand, now being down only by 16%. This is translated for ease of understanding for our non South African shareholders.

As you know, we group our assets together under the quality ounces, the growth ounces, and the leverage ounces. As you would expect, the quality ounces was, as a percentage, less impacted upon by the performance of the last quarter. I will get into the detail. The leverage ounces, we saw almost a halving of our working profit in the quarter mainly driven due to lack of flexibility, which manifested itself as lower volumes in the quarter.

Our Australian operations had the possibility to soften the blow. But for us, as bad luck would have it, we did have a [sun streak] event in our Mt Magnet mine resulting in us losing 58 shifts in the [end] when the mine was properly re-agitated and safe for reopening. It is underground and therefore a higher grade contributor. It is almost completely holed. That is the main explanation for why the Australian operations did a little bit less than what we were hoping for.

My next slide shows you a quarter-on-quarter variance analysis. I start off with last quarter's 389. I end up with this quarter's 305. You can see the volume very much as anticipated, a negative impact of 144. You can see, as our volume reduces, because of our ability and our cost focus – the way we've structured our mines, we actually had a very pleasing reduction in working cost. And hence my argument that we don't have a cost problem. When we produce less in volume, we have a reduction in our working cost, there is not a lot more that we can achieve. Then we get to the line that threw the spanner in the work side this quarter. We were anticipating and guiding people to expect a great negative variance last quarter. We were really specific in what we expected or where it came from. We were thus expecting 40 to 60 million. But you can see 150-odd million was higher than what we anticipated. Therefore, the net Rand gold price benefit of 140 million went a long way, but not all the way, to offsetting the other negative variances.

Headline earnings – just a quick reconciliation. You can read for yourself through it. The basic loss of $0.46. Headline loss and improvements from last quarter, $0.75. If these numbers don't make sense to you, just remember that last quarter, we showed a 300-odd million Rand profit on the sale of our remaining Gold Field shares. That is why some of the numbers of last quarter were so out of line with this quarter. This is a much more logical quarter without such an exceptional item.

Capital expenditures. Again, I think it was the right decision. I think it took a lot of guts. I certainly, as an individual and as a professional, continue to believe it was the right decision for us to continue to spend on our mines, on bolding our new mines, our project pipeline over the last couple of years, despite the strength of the Rand, despite us being in a position where we've consumed cash over a couple of years. These projects are all three years-plus into fruition than three years ago. The breakdown is quite easy. The operational CapEx is inclusive of our capitalized development, which last year at this time was in working costs. I would like to reemphasize our project CapEx. You can the way these projects, and you can see the five mines in South Africa and the one in Papua New Guinea, or PNG, as it is labeled there. The increase in some of these projects is just where we happen to be. I think going forward, some of the other projects start to tail off. Of course, PNG we would expect to increase quite significantly from the September quarter onwards in terms of capital expenditure.

A little bit of detail. I am not going to dwell. I think I have covered most of the points. Our Quality Ounces, the next slide. You can see that, if you accept the 8 to 10 % impact on volume due to the Christmas break, which seems to be what happened on South African mines, not only Harmony. You can see that we regained quite a bit of the volume, thanks to the fact that CONOPS has now been implemented and was being implemented during the quarter. We probably went backwards by 8% in volume and regained a good 5%, probably through CONOPS. The underground grade, this is with Evander seven shaft, [fruit-well] saw a breakthrough that knocked six of our highest grade panels out completely some time ago, came into play. We could reconstitute the grade. So [we saw] a little bit of grade under-performance, but truly nothing significant. The net result is a significant reduction of almost 10% kilograms produced. You can see that flowed through to the cost per kilogram. We are of the opinion that as the volumes bounce back, perhaps we start taking steps to the grade coming back to more normalized levels. But our cost-per-kilogram will just reduce the prodeny.

The highlights on the quality ounces I dealt with. Its upon holing that we spoke about. CONOPS, the last line, can be implemented with Masimong mine in the Free State. We are definitely seeing the progress of the teams getting this new [indiscernible] routine down or scheduled and then targeted a nice [down time] quarter-on-quarter. As we indicated the previous quarter, we had very little choice other than to take the maintenance of our trackless equipment. The contractor, whom it was outsourced to, could simply no longer do it. We had unbelievably low maintenance availability levels. His problem, which was the sourcing of the skills – a diesel mechanic. We are also finding it difficult, but we've had a significant improvement since we took it over. Of course, quite a significant reduction as well in cost.

I said that we expected volumes to bounce back. This was a much more normal quarter, many more production shifts. The grade improvements may take a little bit longer than the quarter. We certainly expect some signs of grade improvement as we go forward in the year.

On the growth projects, this is trying to get our Elandsrand mine, which if you look at the two slides together, the numbers and the one that deals with the highlights. I did indicate last quarter that at Elandsrand we will have extra tons, as you can see. But it will be at almost no grade because this is really the development waste. That is exactly what we got. If you struck that out, we still had a less-than-satisfactory grade recovery from Elandsrand. Elandsrand's performance is still problematic. One of the good things of spending a day with each management team and getting close to the operations again, is you leave quite impressed by some of the potential that we have. This mine has got a multitude of levels and reefs that are now ready to be mined. The bolding up – or the moving down, shall I say – from the old mine to the new mine will start to be visible during this year – maybe next quarter. We should have more crews on brand-new reef lines in a higher-grade bay shoot, albeit a little bit deeper than before. We expect improved production volumes from Elandsrand as we go forward.

Project Phoenix, which [indiscernible] to be the first project in South Africa with that name. At and rate, not getting stuck on the name, this is utilizing a spare treatment plant, Saaiplaas plant, which instead of shutting it down permanently and retrenching the operators, the high gold price puts us in a position where we can retreat slimesdams, which were partially treated in the past. The slimes re-treatment links itself perfectly to start/stop depending on what the gold price is. The current gold price is good and we do have gold capacity becoming available. As you can see, we plan to treat 400,000 tons. And although it looked like relatively low grades, with our cost structure and with the recoveries that you can achieve from those sort of grades, this is very, very viable and profitable operation making us 70 kilograms a month and then having a payback of less than a year.

I want to move back onto our leverage operation. I always planned that our all-reserve management system with this different – and dare I say unique to South African underground gold mining – the way we use the more internationally-accepted concept of cutoffs as opposed to pay-limit. It makes it quite easy for us to ensure that we do not mine lower and lower grades. It's a very strict discipline. Therefore you can see that our leverage operations, the lack of flexibility didn't flow through to low grades. Lack of flexibility just aggravated or made worse our volume problem. Christmas-break expense – some of that, and basic lack of available [facing] expense the rest. I'll talk a little bit about this. It's a mixed bag of mines. Some of them are in a good position through work have lost two years. Some of them were back a couple of quarters before we really have regained our flexibility.

On the next slide, I'll talk briefly about Joel North Shaft, which we commissioned as we indicated before. The exciting thing is, the Joel mine since we acquired it, is a mine earmarked for closure a couple years ago – has never had what we have here now. This North Shaft gives us access to two additional levels. This is a shaft that was never equipped and commissioned before. For the first time since we owned the Joel, and for the first time in many, many years the bulk of the mining in Joel will now be done much more conventionally where you drill and blast and scrape down as opposed to up, which has been the practice in the last few years. That has got significant advantages. We believe we will be able to increase the volumes over a period of time and more importantly also, add the practices associated with down-scraping as opposed to upward scraping like efficiencies and logistics and mine co-factor could all improve. So Joel is one of the highlights, not only of my visit, but of where we are as a Company.

Probably after having spoken about Elandsrand and it's potential, Joel and its potential – all of that gets completely eclipsed by the potential I personally think is at Bambanani. A couple of years of hard work since we scaled it back three years ago has now finally resulted in us being in a position where we can harvest the investment of the last couple of years. We've got three new levels each with between four and five reef lines where most of the reef line is above cut-off payable. We can bolt up volumes quite significantly in a much more sustainable way on Bambanani now. Despite all the things I've said and the problem I've identified, there have been places in Harmony where we've been doing the right stuff consistently over the last couple of years and we are very close to harvest time now. Of course, our planning couldn't have been better with the gold price where it is now.

Surface operations. It includes our Kalgold operations with the final cutback will take us another couple of months. As we all know, once you've done your final cutback, then it is extremely profitable mining over the last couple of quarters as we remove the last ore from underground.

Australian operations I've dealt with. You can see that, although we could substitute the tons that we lost from Mt Magnet, to some extent, because we are replacing much higher grades with much lower grades so this reflects as a recovery grade reduction of 17%.

Under Australian Operations Highlights slide, the growing results from the shirl pit last quarter connotes a twinkle in our eyes. This quarter we are very happy with the drill results. That pit will definitely become a reality. We expect to be mining from there probably in three to four months time and starting to get back positively on our quarterly results. We closed out 25,000 ounces. That cost some money. This quarter we are facing the biggest expedition we've seen in some time in Australia of 75,000 ounces.

The detailed quarterly booklet that you will see in some time, you will see that after this, our hedge profile drops for the next year to 143,000 ounces and after that 100,000 ounces. So you can see the 75,000 for the quarter is by far – we're breaking the back of the hedge book in the coming quarter.

We give you the abbreviated cash reconciliation on the next slide. Work through the numbers. There is not a lot to point out other than we spent 2 billion Rands acquiring our investment in Western Areas, partly funded – a billion of that – from our cash resources and partly funded through a loan we raised from R&B here in South Africa.

I am not going to talk again about our world-class growth projects. I put it up there so you can see why we spent the capital. The next slide, which is a graphical depiction of our production profile, you can see the bottom – or if you've got it in color – the red block, which is the bottom larger one. You can see the bounce-back on our existing operations after this quarter, but also after the restructuring and so on performing more to our capacity. You can see, if you go out into the future – say 2010, you can see that probably 50-odd percent of our production already comes from these higher grades quality mines that we've been investing in.

The one point is we've got a really good growth profile ahead of us over the next three years – organic growth. The second point is the line that runs across from the left to the right, indicates our recovery rate from our South African operations. You can see, if you have a rising grade profile, it's a clear indication of a quality upgrade as we go.

Hidden Valley. A restatement of the stuff we've been sharing with you over the last couple of months, the new mining plan has certainly enhanced the ounces produced over the life of the mine. It also extended the life of the mine.

Perhaps we can turn the page to the slide on the – to give you a feel for Hidden Valley parameters. I show you the Hidden Valley model and gold prices of 500 and 550 and the silver prices of 7.50 and 10.50 just to show you why, although it makes sense at [similar] prices – when the price of gold was 450, you can see how great this project could be and would be if anything like the current gold prices are around.

The next slide, which again really excites me, is the slide where I take you back to our Golpu drilling program. Those two holes that we indicated to the right of the slide on their own would enable use to extend the size of the ore body by 10% and probably the grade of the ore body copper line by 10%. That is not bad and is certainly quite unheard of at Harmony to re-drilling exploration. To be able to drill holes in such an exciting area of prospect where you can upgrade both the size and the quality of the ore body by 10%, it really is a very exciting phase of value-adding at Golpu and in Papua New Guinea.

How geared are we? If I talk you through this slide, you'll see I've used gold production of 20,000 kilograms. That's not a full cost necessary. It is a semi-quoted [indiscernible] to date. It's a theoretical leverage. I thought I could see to that even by making the point. 20,000 kilograms or 20 tons of gold is slightly below where we were in December. That is really why I picked the number. I also therefore used our costs as they were in December at 85,000 Rand per kilogram. I make the calculation for you showing you that we can have an operating profit of 500 million Rands at the gold price as it was in the last quarter, if we had a quarter like we had in December.

If we keep everything the same except the gold price and we say, what if we get a gold price like we were getting today or yesterday, you can see how the 500 million operating profit jumps to 900 million. That is a jump of 80% in operating profit level. So we are [leveraged] and we are significantly leveraged. That is really this higher gold price. I am not necessarily talking about 130. But I am certainly talking about this plus 110,000 kilogram gold price. It necessitates us closing the book on the promises of the past, the game plan of the past, which had a huge emphasis from the restructuring period on cost reduction. Our cost base is now where it could be and should be. We now need the volume that will buy the cost-per-unit down.

The next slide, which is also my conclusion slide, therefore I want to try and give you a depiction of how I say the game, the plan as we've played it up to now. You can argue that some of our game plan up to now wasn't that successful. I think the Company detoxed – as I call it. After 25 acquisitions, we owned a portfolio of assets, which was so diverse. Some of the mines, or lack of mines, were very, very short. The labor mix was not consistent with where we wanted to be. The strengthening of the Rand, it forced us, but it also gave us the opportunity to do the major restructuring. We did the retrenchments. The retraining and redeployment took longer than what we would have liked. Probably we didn't completely finish. Not all of our new players are as good as they can be. We've addressed that in the short-term.

At the same time, we have done what the rest of our South African peer do not have the guts to do. That is, we've implemented CONOPS. It is not truly a 24/7 arrangement. It is purely just a daily cycle seven days a week. We've put it in place. We have done what is needed regardless of whether we are at a high gold price or a low gold price.

This phase of introspection – kicking the tire, re-looking at the plan – there is no doubt where the emphasis is. You will see it in this coming quarter and going forward. It's on regaining profitability. Medium, longer-term mining flexibility results in a development focus. Then we will have improved production volumes, but more sustainable, which really says that the variance of the last year or two has contributed significantly to this position of low credibility where I find myself personally, but more importantly I find Harmony and the management team in. We need to get it right through performance. We believe we can do that.

That means that the game plan going forward is the right one, we believe, for a rising gold price. I am not talking rising from $670 to 1,000. I am talking about rising from the 85,000 Rand a kilogram, which we saw when we started the restructuring, to 100,000 to 110,000 Rand a kilogram that I think everybody now accepts as achievable.

I've said that you will make the most of our current assets. The hard work is behind us and subject to delivering on our flexibility. We can do that. The organic growth – we, through thick and thin, had the guts to invest in these projects. Harvest time is getting closer and closer everyday. We have stunning organic growth profile, albeit at this low base where we are now. Of course, I think as we demonstrated, we are taking this back in Western Areas. We still believe that we can do acquisitions wherever we find value.

Harmony remains highly geared, un-hedged. We believe that we have an outstanding project pipeline. We've got a track record of acquisitions. Quite honestly, we will unashamedly going forward, we will play to the strategy that we believe is right for the future and perhaps not continuously find ourselves trapped by, in some cases, some ill-considered benchmarks of the past.

That is all. As I said on my first slide, thank God it's over. I'm talking about the quarter, not this presentation. I will try and take a few questions in the next fifteen minutes. So Dillon, I am going to ask you to facilitate the Q&A please.

Thank you very much Mr. Swanepoel. (OPERATOR INSTRUCTIONS) George Lequime of RBC Capital.

Thanks. Hi, Bernard. Just a question. There have been some media reports about you suggesting you break the Company up in two different investment vehicles. Can you comment on what your thinking in this regard?

I certainly read the Reuters version, which I think was [bolt] under the mining [MX] version. The actual quote, which is of course, ten words, is perfectly correct. As I indicated in that quote something along the lines, we have looked at this in the past. We will certainly continue to look at this. But this is not something that is currently being dealt with at the Board level.

It is fair to say, though, that there have been some early discussions. Obviously Western Areas is looking at what it does with itself going forward. Every time Western Areas, certainly over the years, look at strategy, it is inevitable that – because of the logic of the two ore bodies being so similar – they show an interest in Target. This predates Harmony's involvement in Target. Obviously for us as Harmony, we would support anything Western Areas wants to do that will enhance the value of Western Areas. If they want to convert themselves from a passive investment company with a bad hedge into a company that produces and grows, you could imagine that Harmony would show interest in that. But we have two hands. On the one hand, what is good for Western Areas is good for Harmony. But when it comes to them contemplating buying an asset of Harmony we will unashamedly try and extract maximum value in it through price negotiation.

That is really the start and the first and foremost point. I think if that does proceed, it will proceed soon or not. Clearly this will be something that if Western Areas would take the expression of some level of interest into a process, we will keep everybody informed about that.

I want to ask one more question, then I'll try to come back at the end with a couple more. You spoke a little about your flexibility problems. And [inaudible] you haven't got a cost problem. Your costs are pretty well maintained. It's the volume that is a big problem. You went through a retrenchment exercise over the last 18 month – I think 13,000 or 14,000 employees. You are now carrying seven shafts and care and maintenance as well. Can you explain a little bit what's involved in reversing the spiral of the Transvaal. What is the capacity that you've got to [answer to] to ramp up the volumes without going back and rehiring the workers that you have retrenched?

We are performing below the levels where we want to be. Simplistically, perhaps there is an absence of a few critical guys like rock drill operators we didn't retrench. For CONOPS we actually had to hire. I'm talking about that. If you just talk about the big picture, there is not a labor shortage as such. It really is a case of we've got teams of guys who are ready to play. We have been unable to supply them with fields to play on and with places to drill and blast. That is an issue that can and should be addressed. This is not endemic through all of Harmony. But this is what has really been undermining our performance in the shafts that we have under-performed. I suspect there is – I don't know – 7 to 8% negative impact of the Christmas-break. This is so – that is behind us. I am not going to talk significantly and dramatically more about that. It's an annual event that hits everybody. We are not so unique in that. I see the other companies have had similar sort of impacts on some of their mines.

Even if we had our 7% or 8% volume back, we're not happy with our current volume levels relative to where our staffing levels. So we think there is some upside. If you've got a significant flexibility problem, then you need to put some of the people that you have – they can't [stoke]. They first need to develop and open up before they can move back onto stoking. Some of the mines, as I have indicated – certainly at Elandsrand and Joel and Bambanani – we can make the crews instead of standing for a week or two weeks if they run into [un-pay] or the panel is mined out, they can move onto a new available place much quicker. We can even bring in additional crews in some of the mines.

To answer, I give you a Company perspective. Flexibility is the single biggest challenge we face. It manifests itself as both volume and grade in different mines. In some mines it's volume. In some mines, it's grade. That is the one big factor. The solution is quite simple. We need to produce more tons going forward over the next 12 months than what we've been producing over the last 12 months. That is the balance that would expect anyway after a major restructuring. [Cost] instead of what we done and we've dealt with and apologized. I'm closing the book on it. We have no choice but to put the cost number out. It came out via discussions and negotiations with the union. Instead of driving towards a certain cost, which in its own way results in some level of confusion at management and mine level, we will now optimize our volumes. If we optimize our volumes and I argue we don't have a cost problem, then at the right grades cost-per-kilogram is a product not a target. That is the way in which I think we need to regain our credibility in our ability to – if we surprise, it may be on the upside going forward.

You have gone through this. Even with the implementation of CONOPS, which arguably you get more hours spent utilizing your capital, it still hasn't translated to either better volumes or improved operating performance.

That's all fair comment. It's a very difficult position for me to argue from in a quarter, which anyway, is seasonally the worst. We've taken 25% of our capacity out if you think of people as capacity. And at this date our volumes are still down by that level and a bit higher. We need to get volume back up. Then you get that virtuous benefit if you get more volume on a reduced people base. That what this restructuring – we still have to deliver on that.

Thanks Bernard. I'll let somebody else ask a question.

Simon Kendall of UBS.

Just a couple of issues. Firstly, in terms of the debts, the terms of the R&B debt. I think it features a short-term debt. Is there a re-payment schedule on it? Also, the corporate bond debt, which is in June, are there plans to redeem this?

Thank you Simon. Yes, both of those are the numbers that is in that category of long-term debt. How do we call it long-term debt----

It is shorter portion of long-term.

Exactly, thank you. That is the verbiage I was looking for. It's a summation of those two. The R&B facility was just a one-year short-term acquisition facility. Of course, we may roll it into long-term debt, depending on whether we need to or not. I think to some extent, you can see some of our views on our ability to generate cash featuring on how we commit ourselves longer term to debt or not.

The corporate bond, certainly that specific bond will be redeemed. We had a long discussion today about what that does with regards to our balance sheet. That is due to be redeemed in the middle of June. Our cash balance can comfortably absorb that. That will leave us only with the convertible bond of 1.8 billion, which arguably may take us back into the domain of a lazy balance sheet. If we are really cash generative , then we will say it's not lazy, it's conservative. We may also, over the next couple of quarters, we may look at whether it's the optimum capital set. We don't have any short-term plans with regards to this.

Another quick question just to harp on the flexibility issue. Does this imply lack of investment in development that you don't have the flexibility availability? If it does, does this imply a rise in capital developments?

If we developed more, then we would have had less flexibility. If you look at our current level of expenditure on development on that 160 million – of course, we spent a little bit more than 160 million, but only 160 million that gets capitalized per quarter. Remember that this 160 million is now on a significantly reduced volume base. So I don't think it needs to cost us a ton more. I don't think it needs to cost us a fortune more. I think probably somewhere between 20-to-40-million range a quarter more will put us in a very good position. I say that because on some of our mines, we come from a period where we spent a lot of development and we haven't seen the benefits yet like – and I'll repeat the same old story of Elandsrand and Joel and Bambanani. There we are now in a position of surplus flexibility or spare flexibility, if that's the concept.

So no, I don't think it's going to cost a fortune. It's a matter of the right plane between [footfall] development and on-reef development. In a lot of our shafts, there is actually no development. It is opening up those existing blocks of ground. So there is a cost. The cost and the mining takes place in the same quarter and never gets capitalized. I don't want to oversell the flexibility problem. That is the one consistent thing throughout the Company. It is not going to cost a fortune to fix it. It takes more time than what it takes money.

Okay. Thanks very much.

(OPERATOR INSTRUCTIONS) Andrew O'Connor of Wells Capital Management.

Good afternoon. Hello Bernard. I am wondering. We are five weeks into the June quarter or thereabouts. Can you offer us any more specific production and cost guidance for the June quarter or perhaps a range of guidance again for the June quarter. Thanks so much.

I do suffer severely from having over-promised and under-delivered. Therefore a lot of people are really annoyed with my guidance. I give it as good as I see it and live with the consequences. I think the best I could do is, in South Africa the period second-most impacted upon by public holidays is April. We've lived through an April, which gives me good hope. CONOPS results in a schedule that negates most of these new standing days, workers days, freedom day. All of that gets absorbed into a CONOPS schedule, which helps us quite significantly to have a normalized April. The Christmas-break was just the Christmas-break. That is why I try to comfortably indicate that I think we will see a down spec in the tonnages, this under-performance of the Christmas-break. Those tonnages will only come back to us.

Some of the great things somewhere between a third and a half of what manifests as a growth problem are longer-term issues like the issues at Evander, the issues at Kalgold. Therefore the solution of them lie six to nine months in the future. Our realistic expectation right now is that our grades will be somewhere en route between the March quarter and where it was in December quarter. My overall expectation is the margin – improved grade, and a reasonable improvement in volumes. Then it is two positives as opposed to two negatives. The key thing for us in this quarter will be, are we going to average 130,000 Rand a kilograms for the rest of the quarter? Or are we going to go back to 110,000? I dare say, almost regardless, we will probably do better gold price wise than what we did before. This is all at cash operating profit level. To run the Company doesn't cost a fortune. We've got a low overhead cost structure. We spend money, but not a lot on exploration. All those other costs are at a much more normalized level now than what it has been in the past. We've undone some of the cash outflows for the [after- tax] gold [gates] and so on.

The single biggest number that will impact on our June quarter, will be the consolidation of a quarter's worth of exposure to 29% of Western Areas. We are shareholders. We have to consolidate that 29.2% effectively. That is a paper entry. In terms of current accounting rules, we will have to do a fair value assessment. Gold companies, even if you buy them relatively cheap, like we said we invested in Western Areas, we'll probably come with an impairment of goodwill. I don't have the numbers. My expectation would be its our view, if the valuation on an NPV basis of Western Areas was correct, then it traded at a multiple of 1.6 to 1.8 or thereabouts. Therefore you would simplistically think that somewhere between 600 million to 800 million Rands of the 2 billion Rands we paid for Western Areas will be treated as goodwill and therefore needed to be impaired.

This is the nature of the beast and the nature of the accounting. Once we've got a firm number, we will share that. As we will also – because people could calculate the mark-to-market of the hedge book, I think we will certainly over-communicate rather than under-communicate, not only how we deal with the 75,000 ounces of the quarter, but as importantly on quarter eight, there is an exact mark-to-market of the hedge book. Nobody should ever be surprised by it because we all know what the gold price is in the last quarter. The disclosure of our hedge would be such that anybody can, with a little bit of trouble, calculate the mark-to-market. It is the big non-cash accounting numbers that cause the huge swings and make people mis-forecast earnings. We'll try and work harder to take some of that confusion away.

Operationally, which is really where your question goes, we are confident in the rebound in volumes. We think our grades will [picatate] up, not necessarily getting right back to where we were before Evander growth issues, but somewhere towards that.

That's all we have. Thanks for your answer, Bernard.

George Lequime from RBC Capital Markets.

Thanks. Just a couple of quick questions. Do you have any details about the reports about a skip falling down the shaft at South Eight [indiscernible] ?

I have been informed that by the time the message comes via me, via the directors of Western Areas, I don't have detail. I do know that there have been absolutely no injuries associated with it. I do know that it will involve reverting back to the tramming and hoisting via the old infrastructure whilst they remove the rope from the new shaft. I don't have a lot more than that.

By the sound of it, there isn't infrastructure damage. There is just a couple of kilometers of winding rope in the shaft, which needs to be removed. That could be a sizable job. In the meantime, they are making the plans to revert back to hoisting through the old infrastructure.

The other question is on Target. The volumes were 67,000 tons a month, so anyway a key operation. I think the plant [indiscernible] , if I am not mistaken, around 120. What – it's an improvement on last quarter. Where – I know you are hesitant to put any targets out there. What can be achieved in the short-term at Target? I see the grade is holding up pretty steady?

It's a trade-off. If we would let go of the grade, we could probably move closer to improving the volumes. The combination of us needing to get ahead of ourselves with the maintenance of the equipment – not that we – the contractor didn't have the people to do it. The current mining the right grade, we are still in a reasonably tight spot – shorter than, flexibility-wise. I wouldn't like to promise a lot more on Target. I think right now if we repeat what we are doing at Target for a quarter or two, I would much rather us bolding up a bit of flexibility than us living hand-to-mouth as that mine has done for five years. At Target I need to caution or beg for patience. We are doing the right stuff. As you can see, it does make money even at 60% of the volumes where we want it to be. We will bolt it up once we've established ore body flexibility.

Thanks Bernard.

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

I would just like to thank everybody as always, including yourself Dillon. Thank you very much.

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