Harmony Gold Mining Company Ltd (HMY) 2007 Q4 法說會逐字稿

Good afternoon and welcome to the Harmony Gold second-quarter earnings results. (OPERATOR INSTRUCTIONS). Please also note that this conference is being recorded. I would now like to turn the conference over to Graham Briggs. Please go ahead, sir.

Thank you very much. Good afternoon, ladies and gentlemen. This is the first time I am doing this. It is a little bit new to me. So if I need a little bit of cajoling, I will get it from my able companion here, [Nazel], and Frank Abbott is sitting with me.

So I'm on slide one, really a nice picture of a headgear. Slide two is the Safe Harbor statement, which we should all know and have read. Slides three and four are really a bit of my pedigree, all the good points from my past and not the bad points, of course. My pedigree -- I am a geologist backed by training and, therefore, an optimist.

I'm on page -- sorry, on slide five, which is the 2007 highlights. Headline earnings for the year were ZAR0.43 per share compared to a loss of ZAR269 for the financial year 2006. We were first net profit for three years of ZAR341 million.

The development, of which a great deal has been talked about in the last while, has improved by 35% year on year, and this has obviously created flexibility in the operations. There has been very good progress on projects, and we have quite a good pipeline of projects both from exploration PNG, Wafi/Golpu in pre-feasibility state, and building mines of (inaudible), Hidden Valley, Phakisa and Tshepong Sub 66. There is also improved safety for the year.

The next slide is a development graph, and it shows really the development with both the old development as well as the waste development. You will notice that there's an increase ratio of ore to waste development and that the development grades are fairly reasonable and have been fairly consistent over the period of the last 12 months or so.

The next graph is a safety graph showing fatality rates. There is a next decline in that graph, but safety remains one of the issues that we need to continue to give keep our eye on and do more work on.

Now on slide eight, showing the group operating results for the year 2007, the first column is 2006 and the second year is 2007. The growth produced is slightly down on the previous year. The revenue is up because of both the gold price and the exchange rates. However, the cash cost in Rand per kilogram are dramatically up from 88,600 to ZAR112,400 per kilogram.

Slide nine is the segment analysis of the operations divided into quality growth, leverage, surface and obviously the Australian with the subtotals. The quality assets performed better in the year, but I guess all of these operations could have performed better, and we had less cost during the year. Leverage assets show a dramatic improvement from ZAR155 to ZAR441 million, and I guess that displays the name explains the name, leverage assets.

I am now on slide 10. We are looking at the March quarter and the June quarter. Gold produced dramatically down in the June quarter, and I will take you through some of the detail in the following slides, but at 16.4 times from the March quarter of 18 tons for the quarter. Revenue virtually flat at just over ZAR151,000 per kilogram. Exchange rate slightly down.

Cash costs, and I will talk you through the costs as well, up horribly from the ZAR103,600 per kilogram to ZAR149 a kilogram, and of course, the financial figures follow that.

By segment quarter on quarter, virtually the only one that does not show the poor cost performance are the growth projects, and that is because a lot of the growth projects have a lot of capital spend to them. But all the other projects have operating costs, and that was part of our operating cost program, and I will take you through detail as promised.

Graph 12 is the group operating results for the financial year 2007, but it is in US dollars and Imperial and basically gives the same picture with cash cost dollars per ounce at $4.86.

Slide 13 is the quarter on quarter US and Imperial, showing that we produced 527,000 ounces and at a cash cost of $655 per ounce. The graph, which is slide 14, shows the last few quarters from March 2006 quarter through to June 2007 quarter. The June 2007 quarter, of course, is the anomaly with the cost, and the March 2007 was understated, June 2007 overstated and in the last bar for June 2007, sort of excluding the Bambanani effect, which is one of the major production hiccups that we had. But you will see that there is still an upward trend in that graph, and there is a poorer trend in Rand per kilogram terms.

Talking about the quarterly cost problem, we introduced a new accounting system. The system went live basically in December and live in stand-alone as from January 2007. That has been going for just over seven months, well, eight months now. The March quarter, not all the stores, and that's about 250 million was reflected in that March quarter. This discrepancy was discovered in July 2007 towards the end of that month, and immediately we started internal review and conducted various undertakings to try and understand the shortcoming and understand the underlying issues.

Continuing on slide 16, the implementation, of course, of a new system like this was fairly aggressive and probably optimistic. One of the big issues is that employees need to be trained properly to be able to use the system. We have got external consultants to do a comprehensive order to the system. It will take them probably four or five weeks to do that. The system should take about six months to stabilize is our anticipation as we go forward.

Simultaneous to it, we're doing some manual checks, and after the December quarter, we will do an external audit. The quarter-on-quarter cash operating profit analysis shows the working cost very high. Remember that is because of the understated March quarter, and therefore, all the current costs in the June quarter, but it also shows that volume and grade were down.

Going to an operational review and on slide 19, we're looking at the quality assets. You will see that both Tshepong had lower grade, and Target reported a lower grade. The tonnages were virtually flat, the grade reduced from 5.5 to 5.1 gram a ton and hence kilograms were lower.

Compound this with the cost problem and the underground working costs went from ZAR91,000 a kilogram to nearly ZAR142,000 a kilogram.

The Rand per ton at the bottom of the page, in the six-month period of December '06, was 89 -- you call it ZAR90,000 a kilogram, but in the six-month period to the end of June is nearly ZAR116,000 a kilogram.

Slide 20, leveraged assets. Underground tons were down, and this was Bambanani and Joel. Bambanani tons down about 56 (inaudible) and was due to an ore parts blockage. So the grade was slightly down as well. Rand per kilogram for the December six-month period up to the end of December was ZAR113,400 and six months to the end of June was ZAR142,300.

Now on slide 21, growth projects. Tonnage was virtually flat and grades improved. Elandsrand grade improved from 5.8 to 6.44, and Doornkop's grade was 14.8% higher as well. So this led actually to underground working costs slightly lower, and the cost problem does not really get reflected in the graph projects because a lot of the development and so forth is capitalized. Rand per kilogram costs for the six months of December '06 was ZAR114, and for the six months of June 2007 was ZAR120.

Surface operations. Tonnage has improved dramatically, and that is because there is quite a lot of surface tonnages, both lime and rock going through plants in Randfontein, as well as in the free states. So those tonnages went up nearly 32%, and Kalgold had good grades. Kalgold is an open pit operation, and that improved to 1.57 for the working cost in Rand per kilogram terms are quite good in the surface operations.

The Australian efforts had a disappointing quarter, and that was mainly due to there were several issues. But the main problem there was the Mt. Magnet operation. Hill 50 had a seismic event that delayed production from underground, the higher grade portion. It, of course, was compounded in that we had to rehabilitate the area. Mt. Magnet we have decided to stop the decline, and really that is going to be closed and is up for sale.

The other operation in Australia, South Kalgold, there was an agreement signed with Dioro Exploration for the sale of South Kal mine. That is about AUD45 million, AUD25 million in cash and 160 million Dioro shares worth about AUD20 million. We also sold two packages of nickel tenements, and that totaled amount of about AUD23 million.

I am on slide 25, which is the financial review, and Frank Abbott is going to take it from here.

Now we are looking at slide 26 now. This is extracted from our income statement where we're comparing the financial year '06 versus financial year '07. Financial year '07 is on the right-hand column. If we look at the bottom of that table, we will see that our headline earnings is ZAR172 million compared to a loss of ZAR1033 million the year before. Our net profit ZAR341 million positive compared to a loss the previous year.

If we look higher up in the table, we see that there has been a significant increase in our revenue, and that was mainly due to an increase in the gold price in Rand terms and our cash operating profit almost doubled to ZAR2.2 billion.

I'm going to the next slide, slide 27. Okay. This is extracted from our income statement where we compare the March quarter versus the June quarter. On the right-hand side, we have got the June quarter. We can see that the revenue came down significantly because of the lower gold produced as Graham Briggs indicated, and then we have the substantial increase in our cash operating costs, which led to a much reduced cash operating profit of 39 million.

If we go down the table, we see in payment of assets of 268 million, which was mainly the impairment of assets in Australia which we are selling. And we made a net loss of 650 million and a headline loss of 528 million.

If we go to the next slide, this is our balance sheet, we show our position at the end of June '07 versus our position at the end of June last year. We see that our current assets have increased to more than 1 billion. That is mainly due to the declassification of our assets that are up for sale. The discontinued operations where the noncurrent assets are now classified as current assets.

If we look at the liability side of the balance sheet, we see that we don't have deferred financial instruments anymore because last year we did pay down -- we closed out all our interests. Our current liabilities is 4.1 billion, and the reason for the increase is that we have repaid our long-term loans, and that has to be declassified as current liabilities. I will explain that on the next slide.

If we go over to the next slide, that shows our borrowings. It shows our borrowings as at the end of June 2007 really consist of our converted bond of 1 -- convertible bond, ZAR1.7 billion, a long-term loan of ZAR200 million, short-term loan of 500, and then there was a long-term loan of 1.3, giving us a subtotal of ZAR3.7 billion. And then we've got this ARM Empowerment trust, which is really a guarantee of ZAR1 billion. That total is ZAR4.7 billion. The position right now is that we have repaid the long-term loan. So at the end of August, you find that the total of our debt is ZAR2.4 billion, and the ARM Empowerment trust with this guarantee. To a trust we are currently negotiating that with our bank, and we believe that within the next few weeks we would be relieved from that obligation to guarantee that trust or the loans in those trusts, and we will be left with an outstanding loan of ZAR2.4 billion.

If I move over to the next slide, this is exploding our finding options. The cash flow from our operations are sufficient to fund operations and ongoing capital expenditure.

If we look at our current financial year, which has just passed, we find that our cash operating profits were ZAR2.5 billion, which was more than enough to cover and to pay for our ongoing capital expenditure. However, we have been very ambiguous -- (multiple speakers) very ambitious, and we have got a number of capital projects going. We have currently got five major projects, and we need to evaluate those projects so that we can plan the expenditure and the timing of that expenditure.

We have also got to evaluate the finding options, and we are looking at debt, and there is also a possibility of disposals of our uranium assets, Mt. Magnet in Australia and then also the possibility of a partnership for Wafi/Golpu.

We turn to the next slide common that is called CapEx, and that actually shows our capital expenditure in the current quarter. You see that on project CapEx -- on operational CapEx we spent ZAR400 million, and then on project CapEx we spent ZAR450 million, which gives us a total capital expenditure for the quarter of ZAR880 million.

Going to slide 33, some nice shots of the present executive team, really giving a little bit of the background and what they do. There may be some new faces here which people have not met before. Hopefully you have all met Frank Abbott and myself at some stage. Alwyn Pretorius is the Chief Operating Officer, so looking after the mining. Bob Atkinson looking after projects. Marian keeps us legally compliant and is also the Company Secretary. Mashego Mashego is an ex-General Manager from Evander which has only recently joined the executive team in the last two weeks. He has got a human resources background. He replaces Abre van Vuuren who has taken over the services role. Jackie Mathebula is the Executive of Corporate Affairs working hard to try and get us obtaining our mining license at the moment. Johannes van Heerden is the accountant, Chief Financial Officer in Australia, and has been helping us here certainly in the last few weeks greatly, but will be taking over me in acting as MD in Australia. And then Jaco Boshoff has got some ore reserve management skills, which he brings to the executive team. I foresee that this executive team will be boosted hopefully by a further financial skill, as well as a mining skill in the future.

Looking at the way forward, and I am on slide 35, I guess the last three weeks have created a lot of thought and discussion certainly amongst the executives about what we should be doing. We need to restructure the Company in such a way that we have buy into budgets and new targets, and we actually achieve that performance. There has been this underperformance of a lot of our assets.

We need to reduce some of the operation costs by cutting overheads, cutting the unnecessarily expenditure and services, and also cutting the floor that we have. We need to review all of these [omni] finances. Frank alluded to the capital that we will be looking at, but I guessed all the finances we really need to review.

A lot has been said about the incentive schemes in Harmony, and one of the areas that has been identified as potentially a problem is the sort of middle management in the production areas of bonuses. These people get a fixed salary, and we probably need to reintroduce bonuses as opposed to fixed salaries. Reassessment of information system in parallel with the issue on the accounting. Obviously we need to get the right information to make proper business decisions.

I guess in sort of summary I believe we've got a high-caliber management that there may have been some underperformance and confused management in the past. I think I have had good support from the executive team. They are certainly getting the message down and get some good messages from the operations. We have got excellent ore bodies, and we have got some great projects which are well advanced, and some of them are coming into production shortly.

We used to be very cost competitive and drive costs greatly, and we used to be a globally competitive company, and we need to regain that.

One area that a lot has been read about in the press and I guess in Company's life when things go poorly, then the vultures so-called and this is a message really to everyone, that the South African operations are not for sale. Frank has alluded to those operations that are for sale, and we may sell closed operations or operations on care of maintenance. But the current operations we are certainly going to focus on, and at this stage we really need to get the teams behind us. So the last thing we want to hear about is retrenchments. And we are fairly confidant of Harmony's future.

So with that, I think I would like to open it up for questions.

(OPERATOR INSTRUCTIONS). [Shane Hunter], BJM.

Just a question regarding your capital projects. You have got in your slides and you have also mentioned that you're going to review those projects. Does that mean that you're going to maybe have some potential holdbacks there, or as far as delay, there is some load production ounces, or if you could just maybe explain a bit more what you mean there on this point?

Sure. I guess our expenditure does not match our income, and really we're going to have to look at all our costs. In our capital costs, we have already started looking at -- it is easy to cut away the stuff that really does not change the project schedule at all. So that is what we have been looking at in the last few weeks.

We will, however, have to look at our projects further, and that parallels obviously looking at our funding options that Frank mentioned. So we would very much like to continue all our projects, all our growth projects, and really focus on those and hopefully bring them into production. However, if we don't have the funding for it, we will have to seriously review those projects.

Okay. Would there be a date that you would be able to come out with an update as to what would be happening with each of those projects?

Certainly we would like to try and do it as soon as possible, but we're going to take a little bit of time and try and make the right decision here. The biggest capital hunt that we have in this year is the Hidden Valley mine. That is about ZAR1.8 billion. So we will look at the capital expenditure. We will look at trying to push those projects ahead. And if we need to slow them down, we will try and give that information back to the market as soon as possible.

Heather Douglas, BJM.

I am not from BJM. I am from BMO Capital Markets. Just a couple of questions. Following up on what Shane was asking, I notice that for several of the growth projects -- Doornkop, Phakisa, Elandsrand -- you show higher CapEx and higher costs projecting that you have reviewed them recently. Are you pretty confident with these new forecasts, or should we also expect some review of what the actual capital forecast may be?

I guess in line with a lot of capital projects throughout the world, we have been -- there have been increases in costs and capital. You know, commodity prices have been increasing. Prices of steel, etc. has been increasing. We have -- we continuously look at these projects. There are quite a few projects which are nearing completion and certainly Sub 66 at Tshepong is just starting to get into production. Doornkop have got several steps on the new project already. So these are projects that are well advanced.

Those that are still in the early stages may have some capital increases. But most of the capital increases in South Africa where it involves sort of commodities of steel prices and the like are behind us. And most of the capital in South African projects is really hidden labor and development to actually establish the infrastructure underground.

The Hidden Valley one is still very much exposed to the commodity increases. But we will continue to look at those, and again I can just undertake to try and give you feedback as and when they happen as we review these projects.

Okay. Great. And just you make reference to a pre-feasibility done at Wafi/Golpu, but can you give us a little idea of -- I haven't found where it says what the scoping CapEx is or the costs are expected to be.

Sure. The project is really a combination of ore bodies, both gold and gold and copper. So the gold copper ore body is Golpu, and that has really been finished as far as pre-feasibility goes. But the gold deposits, the Wafi deposits in the region have not been completed yet, and they will be completed towards the end of October, early November. So the consolidated pre-feasibility report will probably be out in November.

Now as far as costs go and operation costs, we have not gotten a clear completion yet because of the synergies that we have not got between those two. Capital for that project, however, indications are quite high in the region of $1 billion, and we have talked about this as a good time to actually go out and look for partners for that project. Because it will also help us sort of share the technical risk as well as the financial risk of getting that mine into operation.

And that was a $1 billion US rather than Australian?

$1 billion US.

[Erica Braley], HSBC.

Can you please clarify what the plans are for the marginal assets? Is Harmony capital going to actively pursue its mandate, or is it going to be put on hold for now?

Thank you for the question. At the moment there is a lot been said in the press, especially the South African press about what is going to happen to Harmony's assets, and that is not good for morale. Really what I have done is I have sort of taken everything off the for sale lists and said we need to get back into operations and produce what we should be doing.

Now that also comes with the proviso that we will be doing due diligence on all our operations. There is some that have not been performing very well and have not been performing for quite some time. So we need to make some decisions on those.

Now I think there are several operations which are possibly up for sale, but those are really the closed shafts or those shafts that are on carrying maintenance. And we will proceed with the strategy with those.

[Esra Cin], Equinox.

A question that I have about your stock ownership of other companies, how strategic is it? How much would you consider selling to finance your capital requirements? And also just following up on the Wafi/Golpu project, the CapEx of $1 billion that you mentioned, how much production was that supposed to generate?

Let me try and answer the last question first if you don't mind. The Wafi/Golpu project, Wafi really will be an open pit operation with oxide ore for gold, and there is about 15 million tons at nearly 2 grams a ton there. And then an underground operation also purely gold, and there's about 5 million tons at 8.4 grams a ton.

So together those would make an operation which could be sort of a six-year operation producing somewhere close to 250,000 ounces a year. The Golpu operation would be a [Block A], and it would have a mine life -- at the moment it looks like a mine life of somewhere around 13 years. However, in our feasibility study, we have deliberately avoided mining any arsenic. So there's still a fair amount of ore with arsenic, and that arsenic can be leached, and therefore, there's potential for upside on that mine life. And that would probably produce probably 75, 80 tons of copper per annum. Sorry, that is 1000 tons.

So I hope that answers your question on Wafi/Golpu. As far as your first question goes, could you just repeat it, and I am not sure what you mean about what Company assets we own.

This would be the ownership of stocks of shares of other companies, how much of that would you be willing to sacrifice for capitalizing your operations?

Thank you. If I can answer that question, we have only listed stocks that we hold or those of goldfields, and we have actually sold those shares yesterday, and we have been able to buy back long-term loans to the value of ZAR1.3 billion. So we do not have any other listed stock that we could actually dispose of the financing of our projects.

[Matthew Starrick], Citadel.

Just one last quick question about reserves and how you will review those going forward. Given that costs I think given when you adjust them in the last quarter for the one-off were in the mid $500 US range and what your gold price that you're using currently to assess reserves is? And just how -- what the stage of reserve recalculation is at right now?

The gold price that we have used for our reserve segment was $520 US, and I cannot remember the exact conversion in the Rand terms. Sorry, I'm just getting the information here. 688 was the exchange rate, which takes us to around ZAR115 per kilogram. That was what we used for our reserve statement.

Now I mean as you rightly point out, if we've got a new cost level, then we should incorporate that into our cutoffs. However, this quarter's costs were extraordinary and, therefore, not representative of the sort of ongoing costs. We need to further reduce those, but it is a six-month cost basis is probably more representative. And that is what we need to use. So we would not restate our reserves using this quarter's cost base, but rather the longer-term cost base that we normally use as around about an 18-month history.

So we do use that in our calculations. As far as our reserves go, we have got probably close to 40 million ounces in sort of current areas, South African underground, and that includes some of the ongoing projects. But there is about 12 million ounces in project areas where we have got feasibility studies or pre-feasibility studies.

Okay. Thanks very much for that. So you are not expecting any changes going forward all things being equal?

All things being equal, no, Matthew, but obviously on revising all these instruments, if, for instance, there are operations which we need to make some harsh decisions on, then we will give that feedback as and when it happens.

Okay. Thank you.

That is not an expectation as we are looking at it now.

(OPERATOR INSTRUCTIONS). We have no further questions. Would you like to make some closing comments?

Thank you very much, everybody, for listening to us, and thank you for being with us in this time. I think that here in Johannesburg we have got good support from our people, from management. I have certainly had a lot of support from the directors in this time. The meeting that we had this morning just was introduced by Patrice, and he went into some discussion -- a little bit of discussion rather about the resignations. But generally we have good support from management and from the board, and we hope to really turn some things around and get the graph trending in the right direction. Thank you very much for being here.

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