Harmony Gold Mining Company Ltd (HMY) 2008 Q1 法說會逐字稿

Good afternoon and welcome to the Harmony Gold quarterly 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 from South Africa for those who are abroad, and I welcome you to the September quarterly results. I have with me Frank Abbott, who will be answering during the section on the financials. And then we will make ourselves available for any questions. I'm hoping that you have got the presentation, and I will move onto the page -- sorry, presentation slide three.

The highlights for quarter one financial year 2008, total cash operating costs were down by 12.5%. Underground grades improved to 5.14 grams a ton. Gold production was, therefore, up at just over 12%. We have finished our due diligence of all our assets and that I will give a little bit more detail on later on.

Our progress, we have made some progress on uranium, on understanding our uranium assets and the strategy around that. And we have also got some significant exploration results in Papua New Guinea.

Slide number four is our fatality rates. It has been a quarter with a lot more emphasis on safety, and there is a trend downwards on that graph, which is very pleasing indeed. But safety has certainly been one of the highlights of the due diligence and understating safety, and there has been a fair amount of emphasis on safety this quarter.

Slide five is the group operating results. Increase in gold production is shown there, and the cash costs from 148, nearly ZAR149,000 last quarter, a very dismal performance last quarter, and (inaudible) for lower base, we have got ZAR134.16 this quarter with the cash operating profits at ZAR411 million.

Slide number six is by segment. Harmony in the quality growth, leverage and surface operations. The detail adding up big into ZAR14.6 or nearly ZAR411 million for the September quarter from ZAR33.8 in the previous quarter.

Slide seven is the US dollar and Imperial equivalents of 512.480 thousand ounces and a cash cost of $572 per ounce.

Slide number eight is the quarter-on-quarter profit variance from the previous quarter of ZAR33.8 at the top of the slide. All elements volume working cost recovery grade and gold price were positive giving the net gains of ZAR376.8 and the cash operating profit of ZAR14.6.

Going onto the operational review of each of the operations, starting with quality assets on slide 10, tonnage is marginally down, recovery grade did not do much better, and due to the Tshepong grade, Evander, as well as Randfontein grade, all up. The downtrend, the disappointing trend targets both from a tonnage point of view and a grade point of view.

Slide 11 leverage assets. An improvement in tonnage there mainly due to Bambanani now back in full production. It was early in production, however, for two months of this quarter. For the overall performance, all our assets are better. Orkney is now reported as discontinued operations. It is not included in these figures.

Slide number 12, which is the growth projects, Elandsrand is improving in kilograms. Doornkop has a grade which is improving as more and more production comes out of the South Reef, which is the lower reef, and the whole project is a Doornkop shaft.

The surface operations on slide 13, they are now at maximum surplus tonnage at where we are with our plant capacity at the moment, although we are evaluating others. The Phoenix project, which is really the Saaiplaas plant in free stage, is now processing 500,000 tons of slime per month. So that is now at an excellent capacity, so 2.5 million tons of material was processed. That figure includes Kalgold, which had a better performance mainly due to the availability of water from some new boreholes. The working cost virtually flat at ZAR96,000.

The Australian assets, we have sold the South Kal assets. The Mt. Magnet is going through a process, but we have decided to close those operations, and loss production will, in fact, be in January 2008.

Slide 15 is just a recap on the Elandsrand mine and the effect of that. There will be a loss of production from the December quarter. (inaudible) shaft have been progressing well. People are now coming back from their leave, and they will be going through safety checks, and we will get that mine back into production during November. Total loss of gold in the region of 1000 kilograms.

And last I would like to hand over to Frank Abbott and talk about the financials.

Thank you. If we look at slide 17, that is an extract from our income slide group. You see in the September quarter we made a cash operating profit of ZAR411 million compared to the ZAR34 million in the previous quarter. A big item of expense was the loss we incurred on selling our Gold Fields shares; we made also ZAR459 million during the quarter.

If we look at the bottom, we see we made a net loss of ZAR557 million compared to ZAR653 million the previous quarter, and that was largely due to the loss we made on the sale of the Gold Fields shares. You can see our headline loss for the quarter was ZAR176 million compared to ZAR553 million the previous quarter.

If we then turn to slide 18 on our balance sheet, the slightest changes to our balance sheet was that all the Gold Fields shares were sold, and we were released from our guarantee to the [old track], and we rose ZAR2 billion from Nedbank with which we paid back some shorter term loans.

If I take you through the balance sheet, you will see that under current assets investment in financial assets of ZAR2.4 billion. Of the previous quarter, it is (inaudible) now. That will leave at ZAR1.4 billion of Gold Fields shares the previous quarter and also ZAR1 billion of the [old track] that we consolidated.

Just below this, you see our cash position now. We have got ZAR1.5 billion in the bank. It is geared under noncurrent liabilities. You will see our borrowings have gone up to ZAR3.8 billion, and that includes the ZAR2 billion from the Nedbank line.

If I go down to my current liabilities, you will see that the borrowings for the last quarter was 2.8 billion, and that has been the spike in this quarter.

If we turn to the next slide -- that is slide 19 -- that shows the capital expenditure for the quarter. You see that our expenditure of operational CapEx in South Africa was ZAR366 million, and our total CapEx was ZAR721 million. While our CapEx expenditure is lower than the previous quarter, in Hidden Valley we detailed some space to the value of 20 million (inaudible) dollars. So that would (inaudible) our capital expenditure for the current quarter with ZAR120 million to ZAR840 million, which compares with the last quarter.

If we turn to slide 20, that is the Nedbank loan. We have got a loan from Nedbank for the value of ZAR2 billion. We have repaid our December 2008, and the terms are Jibar plus 2.75%.

We turn over to the next slide; that is slide 21. In accounting systems we completed our IT audit on our accounting systems, and the funds say that the implementation was done with insufficient funds. We're planning an ineffective trend, and we are working on that right now. It will take another five to six months to fix, and then we will be getting all the synergies from the system which we initially envisage.

As we annually reported, we do a proper stock [tag] so that we can manually insure that the numbers are correct, and we are confident that our currencies are accurate. Thank you.

Thank you, Frank. Slide 22 is an interesting photograph of a monorail and a conveyor belt. I think that is on Tshepong. If we go over to slide 23, and this is really just to talk about where we're going and what we have done. But we have completed due diligence on all our operations. That due diligence was done by several teams. We have got now two Chief Operating Officers as opposed to one. Each has got a team, and we have been doing extensive due diligence and replanning on all our operations.

We have strength in management both at executive level, and also there have been some changes at the general manager level. We have reviewed Conops with fairly mixed results, and we intend to really focus on that and see if we can get the benefits out of Conops. But we will be dealing with that in the quarter. There may be some harsh decisions which we have to make on that.

Our capital expenditure is marginally reduced. The biggest reduction really has come out of Hidden Valley where there has been a reduction because of the delay in a move, a move in the production pipeline. Before us in the production line had some royalty issues, and there's a delay of four months, which is very suitable for us because it reduces our capital hump in this year. So the capital will be delayed until the next financial year, and that amounts to about ZAR400 million. And then Frank has given you a bit of information about the accounting system.

On slide 24, which is the pictorial to show you that we are really focusing on the core of what our business is. It revolves around planning and really looking at every aspect of the production units. Also, looking at services and the non-core issues and dealing with those, we are now in the process of detailed reviews, monthly details to ensure that we get the best out of our assets. This has all been done with a safety hedge on it, as well as looking at the profitability of each operation. It is really getting down to the detail of each operation from every aspect.

On slide 25 just to update you on the Randfontein uranium. We have made some progress. We have got advisors reviewing the information. We have got several parties that are making us offers. However, we are reviewing sort of strategic options that we have in taking this forward. We have converted the nearly 40 million pounds of uranium oxide in the (inaudible) to probable reserve status, and we have got a declaration of nearly 41 million pounds of uranium in Cooke 3 underground operations.

So I think we've got a bit of a deeper understanding of all the information now, and we will talk about some flexibility on the way forward.

Slide 26 is a nice photograph of the Cooke dump. Slide 27, again looking at the sort of Cooke dump and the processing routes around that, and there's certainly a strategic link between the surface of the Cooke dump, as well as underground. And really looking at some sort of joint (inaudible) with respect to gold and uranium would increase the life and the profitability of those Randfontein operations.

Slide 28, our vision for international operations. We are really looking at in some way growing the offshore production, and we see of a key the partnering process that we've starting with respect to the PNG assets. And this will allow us to divest the parts on the risks, but really a focus on that Southeast Asian region.

On slide 29 just to recap on our resources there. We have a polymetallic resource there, gold. We have reserve cycles of just over 4 million ounces and resources of 15 million ounces. The copper figure is there. The silver as well, and that (inaudible) is contained within the Hidden Valley of 41.7 million ounces and 89.6 million ounces. And then the molybdenum within the copper gold field deposits is substantial. Those amounts are using the gold and copper molybdenum and silver prices. They amount to almost 50 million ounces of equivalent gold resources.

The next slide is an exploration slide. This was a project about (inaudible) of Northwest of Gold Fields. It is where our exploration manager, Mike Humphries, has been having some fun. And the whole WR258:74m at 5.6 gold, gram a ton gold, 4.3% zinc, 34 grams of silver, and 1.2% lead. The second hole that is drilled, has drilled what looks very similar to the gold porphyry we saw awaiting results for that.

The PNG partnership process on slide 31. We have initiated that process. Initially we were talking about just looking at Wafi/Golpu. It now makes sense to look at the whole seat of assets. It is a good pipeline of assets with Hidden Valley being constructed, Wafi/Golpu going into feasibility stage, and lots of exploration potential. Our key goals are really to accelerate development of that asset and to achieve associating of the capital and development costs. We're really looking for partners that bring complementary expertise to that.

Our preferred approach is really a partner across the whole suite of assets, and we're looking at returning 50%. We're hoping that we will be able to establish the partnership in the first half of 2008.

As far as the next six months, our focus is really going to be on further cost reductions and achieving our plans, and these plans are both improving gold production, as well as the cost reduction. So we're hoping that you will measure us on our Rand per kilogram costs, the declining cash costs. Our Randfontein uranium gold, we need to progress that and crystallize some value there. Progressing the PNG partnering process and really looking at all our operations with a strategic hat on and make sure we get the best out of those assets as well.

Thank you very much, ladies and gentlemen. I would now like to open us up for questions.

(OPERATOR INSTRUCTIONS). Victor Flores, HSBC.

I was hoping you could perhaps go into a bit more detail into what the results of the strategic review revealed as far as the asset base. It sounds like you're looking for a partner in PNG. You're looking to monetize the uranium assets. But I was hoping you could give us a bit more color on what the outlook is for the gold assets specifically.

Yes, Victor, thanks and good morning to you. You know we at Harmony have a fairly mixed bunch of assets in the group. We have several operations which are fairly short life operations, and then we have got obviously some excellent assets, which are either mining or being developed right now which are much longer assets, long life assets.

We've got a fair geographic spread, and then we also have this mixture of sort of fairly older infrastructure (inaudible) mining and then the newer mines with much, much different sort of management skills required. I guess now that we have actually got all the information on our assets and understand them better, some of the asset needs, even some of the bigger better operations need a lot of improvement, and really we're going to be focusing on operational issues and improving those.

But now that we have that information we probably need to open up ourselves up to a little bit of a sort of helicopter vision, if you like, look at all the assets and see where we are taking these assets. But this is really early discussion, but I guess that is the sort of thing that we will be doing during the quarter.

So I guess you're not ready yet at this point to provide some more specific forecast for the assets for this year or next?

Not yet, Victor. At the moment it is really getting down to basics and getting those production units, getting the best out of those production units.

Could you give us a bit more color on what happened at Target? Because I'm not sure what it means, an incorrect mix for massive stoke. That sounds like you took in a lot of waste, but at the same time, tonnage milled came down pretty dramatically. So I was hoping for an explanation of what is happening there and if it has been corrected?

The biggest issue at Target has really been machine availability, and I'm talking about the [ledge D's] mainly, but underground [rover tide] equipments is fairly old and tired. It has had very poor availability. We have got some more engineering expertise there to get the availability up. We have ordered some new equipments, but the pipeline of that equipment is fairly difficult. So there is a long waiting list.

The first new LHD only comes in February, so we are going to continue struggling a little bit with equipment availability. And, of course, that is exacerbated by some of the development issues that have happened in Target and where we are mining. It will improve coming forward, but it is going to be a fairly difficult quarter going from here on. But really core of the problem is the equipment availability.

Okay. And then finally, if I could just ask a financial question. What plans are being implemented to repay this Nedbank loan? Because it is actually pretty short-term debt payable at the end of next year.

I think the purpose of the loan was to give us some bridging so that we see where we get to the disposal strategy, and as soon as we know that, we will have to address that repayment.

[Paul Durham], HSBC.

Just a minor follow-on question to a couple of Victor's. Just on the Elandsrand situation, you're not quite finished there. You have quantified what you think your lost production may be. Can you -- are you in a position to tell us how much it actually physically cost you to repair the shaft and whether that is a substantial amount of money, if it is, and whether it is covered by insurance or not, please?

There is a figure that we have estimated for repairs, and I will let Frank answer the insurance part. But the figure that we have estimated for repairs is probably around about ZAR20 million that is.

And we are insured for the incident, and we're insured for our standing cost and also profits. We do not not know what that figure is yet. We will only be able to determine that when we got back to full production, and we have made no provision for that in our results. We would not until we have received the insurance claim.

(OPERATOR INSTRUCTIONS). [Mandy LaGrange], Nomura.

I was just wondering also with regards to your strategic review and specifically focusing on the leveraged assets, when I was looking at your shaft quarterlies, I noticed that even if we exclude the Orkney assets, basically only three of the eight other assets are making a small profit. Can you just give us any direction in terms of the potential for the other five lossmaking shafts whether they are, in fact, where you're going to be able to make cost savings? Is it purely a function of volumes and grades, or is it actually costs that you're going to be able to bring down? Can you give us some more information on that?

Sure. Let me try and step through some of the detail. Hopefully I will not bore you with too much, but it sounds like to go through some fair detail.

Let me just give you as an example some of the shafts. [Fantalena] pretty well looks like it should be closed. We have commenced discussions with the union in order to do that. We have stopped the capital project, and some of the people have already been located to other growth shafts. As you know, Phakisa is developing in that area. So we have been able to transfer some people.

Several of the Harmony shafts -- that is Merriespruit 1 and 3, Harmony two shafts are pretty marginal types of shafts, fairly low-grade. The Merriespruit 3 actually gives good productivity but just has not got the grade. So each shaft has its issues. But in our review, we have obviously looked at everything. Merriespruit 3 is one of those shafts which gets the tons per man is substantial compared to a lot of our other operations.

A good sort of benchmark on our operations is any operation that gets lower than 30 tons per man needs some serious attention. In that particular shaft, Merriespruit 3 gets quite good (inaudible).

On Evander 7 -- sorry, I'm skipping around -- Evander 7 some time ago it was reported on that sole breakthrough there was a project going for the sort of extension of that. So we have, in fact, stopped that project, and we are busy undertaking a full drilling program from a [hang ore] development that went out. And so at the moment, the present shaft is busy mining in more of the [puller] areas. But if we don't find anything, then that is a shaft certainly in the 3.

But I guess each of the shafts have different sort of problems, and what we're doing is trying to see what we can do about the individual issues and make the right decisions on each of them. The sort of mandate that we have been using for all of those operations is that they should make profit after the operating CapEx. So project CapEx aside, the operating CapEx, which is really the development, should make profits before that number, that line item.

So that is really the sort of mandate we're using. I guess we now understand a lot of the detail, and it is really a case of seeing if we can get the benefits and turn them around. And we need to be more (inaudible) producers from the shaft I suppose to up and down each quarter.

(OPERATOR INSTRUCTIONS). [David Fallon], [Report].

Just two questions I would like to ask. You mentioned that you would be looking at Conops. I was wondering if you can give us any indication, you said some more decisions might be needed. Any indication of what the future might hold there? And then the second question is, do you anticipate a net profit in the second -- in the next quarter?

David, yes, thanks. I will attempt to answer the Conops question again. Similar to the answer I gave Mandy, we have -- Conops is not everywhere, implemented everywhere on Harmony. It has mixed results on Tshepong. It has got some benefits on Tshepong. We need to improve those benefits.

On Masimong it has been I guess it is more (inaudible) implementation, and we're not getting the benefits. What we see in the forthcoming quarter is see if we can get the benefit out of there before we actually make a harsh decision and either go back to normal type of 11 day fortnights.

It requires us really to understand the detail of that decision because there is considerable labor. If you undo labor, even on Masimong, you would immediately put 700 people out of jobs, and although that is not a shareholder's consideration, it is certainly a consideration in our discussions with unions and taking the whole situation forward.

So we aim to try and get the best out of Conops, and then from there on, if we cannot get the benefit out of Conops, we will make that decision during the quarter on that type of operation, the Masimong.

Your next question was really, what is next quarter going to look like? We sort of deliberately are not giving too many promises on next quarter. I think that the cost is certainly something that we're really focusing on very hard, so we will definitely see a reduction in costs in this coming quarter. But I am reluctant -- I don't know if Frank is prepared to dangle out there with a better --

No, I -- what we will not see in the coming quarters is the abnormal costs we had with the loss we made on the Gold Fields shares. I think that our total costs would be lower in the coming quarter. But we will not have 1000 kilograms from Elandsrand during this quarter, but I don't think we can make a better forecast than that.

[Alan Seagram], Miningmx.

I wondered if you can tell me, the Papua New Guinea plans that you have, looking for partners, is this an issue of capital requirements, or is it the lack of skills within Harmony to bring those projects into production?

Good question. It is actually several things. Obviously if we did find a partner, it would reduce our capital requirements going forward. The Wafi/Golpu assets in our prefeasibility has a capital of about $1 billion. Now to bring that to the board right now, obviously you know what they would tell me to do. So it is a large capital hump going forward to develop that mine.

The skills in that particular asset are different to our skillset. It would be an underground block cave operation. We're also talking copper and molybdenum and, therefore, marketing and dealing with smelters and so on.

So really what we see is the benefit of having somebody that is involved in that type of operation either technically or in the copper business and obviously the financial ability to bring those projects forward.

Are you looking for one partner for all those assets, or are you looking for individual partners for each of those assets?

The way that we see it at the moment is we will probably get one partner. There has been a fair amount of interest for one partner with us going forward. But we have really got all the information together. We have a bank advising us in Australia and running with the process, but really seeing it is one partner.

Muneer Ismail, Deutsche Bank.

Sorry to trouble you again. I should have asked this in the first call, but having worked through the numbers a little bit more in detail just forget the upgrades from the quality operations, I mean grades look much better, 12% up quarter on quarter on the total quality ops grouping. I'm just trying to understand. You have got very good -- I think it's like a 25% increase in the Randfontein grade, and of course, Tshepong has come through with a 12% increase on their grades. I just want to understand how sustainable this is.

We have seen volume slow, so I am not sure if you guys were pushing this or if it is a sustainable effort on the grade side. At 5.7 grams per ton, the quality is currently setting. This is the kind of level that we would like to see grades at. I am just trying to understand how sustainable that is?

I think, as I told you, due diligence process that we're in through, it was really a case of looking at where the guys are mining as well. So there was some relocation and re-mining of -- sorry, not re-mining but mining in better grade areas.

As you know, I have been critical of the sort of mining discipline, the sweepings and the sort of -- also the quality issues around mining. So there has been a lot of focus on that. So although we have not seen all the benefits, we will see the benefits coming, going through in the operations.

If your question is, are we high grading? The question is no. The Cooke shafts, both 1 and 2 are fairly short blast shafts really focusing on the higher grade pillars that are remaining in those operations. And there were some better grades in Cooke 3, but most of the higher grades actually came out of Cooke 1 and 2.

So no, not high grading, and I guess the one figure that always distorts some of the figures is the waste in Evander. We were separating waste, and (inaudible) up all those belts, it just does not make sense. So the [ores] figure and the grade that we give out there is distorted because we now put the waste with the reef. So generally the sort of reserved grade is lower, but 8 shaft had a very good grade run. And really the best grade came out of the sort of clean mining campaign that they had in cleaning up all the sort of dirty, dirty areas and so on.

So if we strip out Cooke 1 and Cooke 2 and you see that Target starts to come into play through better mining there, we could possibly keep grades at these levels on quality operations? Without putting words in your mouth.

I'm sort of having a quick look here. I think so. I think so. You know, Target was a real big underperformer. Evander (inaudible) a little bit better than expected. Yes, I think so.

[Alan Seagram], Miningmx.

I'm not sure if you have answered this in the past or what. But can you express finalization of when the CEO position is going to be finalized?

I can do that. There is a process going on at the moment. The Chairman has said to the Board that he would like to make this appointment early in December. Give the market a sort of final appointment and name whoever that may be. I had certainly saw in that range as you know.

And how many other contenders are there? Do you know?

And I had the misfortune of actually interviewing one of the contenders by mistake. I don't know that. But there was a mistake, and I actually interview one guys. He was not good enough for the job I know that.

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

Thank you very much, everybody, for joining the quarterly results. It was good to have you on board and good for the questions. If you have anymore questions, I'm sure you have got some numbers of our cellphone numbers or Amelia's and Lizelle's number.

Thank you very much and have a good day.

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