Harmony Gold Mining Company Ltd (HMY) 2008 Q2 法說會逐字稿

Good afternoon and welcome to the Harmony Gold second quarter results. All participants are now in listen-only mode. There will be an opportunity for you to ask your questions at the end of today's presentation. (OPERATOR INSTRUCTIONS). Please also note that this conference is being recorded. I would now like to hand the conference over to Graham Briggs. Please go ahead, sir.

Thank you very much and welcome, ladies and gentlemen.

Going through the financial results for the second quarter that ended in December 2007, going straight on through the Safe Harbor statement to slide three, which has got the highlights for the second quarter. Total cash operating costs were down by just over 8%, cash operating profit up by 43%.

Elandsrand, which had the accident in October, is repaired and back in production. It only had about a third of its production for the quarter, just under a third of the production. We did have a press release out on the agreement signed for the uranium company, the Randfontein assets. Our financial results for the six-month period were reviewed by auditors. We have selected partners as a shortlist for the PNG process. And all our mining rights are now new order mining rights and they've been granted.

On slide four, we have a digression of safety graph. It wasn't a very good quarter for us safety-wise. It certainly has raised a lot of issues with the Elandsrand issue and also we had a one-day strike from NUM during the quarter. Hopefully, that has raised the profile and the employees of Harmony are a lot more safety-conscious. We certainly have got our work cut out in that area.

On slide five, it's the Group operating results. You will note the fine print just below December Q, it's the continuing operations. A comparison there of September, but the previous quarter was December. The gold produced is down to 12,403kg and the cash costs achieving steady state, even despite the gold's down, to roughly the same as it was last quarter at ZAR133,000 a kilogram. The profit up at ZAR450m compared to ZAR314m in the previous quarter.

By segment, in the underground and surface operations, again, continuing operations on slide six. The surface operations contributed ZAR104m and the underground operation ZAR345m, giving a total of ZAR450m.

I've got a slide, on slide seven, which is the U.S. dollars and imperial. Really everything is very similar there, but you will see that there was a strengthening of the rand during the quarter that we are reporting on, for this quarter, the December quarter, to ZAR6.77 per U.S. dollar. And hence the cash costs changed from $582 to $613.

On slide eight, the quarter-on-quarter variance. Top is the September 2007 quarter at ZAR315m. A negative variance, and I'll take you through some of the reasons for that, but it's mainly due to the Elandsrand issue. Working costs improving, at ZAR145m less than the previous quarter. Slightly down on the recovery grade and the gold price a pleasing increase at ZAR165m. The net variance there is ZAR135m, bringing us back into the total of ZAR450m.

I'd like to go through some of the operations. We have changed our reporting format slightly. Previously it was on quality, growth and leverage international. We are now looking at SA Underground, SA Surface and International Operations. And the reason for this really is that the projects are now part of the Company's organic growth and there are now coming the mines in construction and building up in production. The new mines, together with our long-life mines, make up the bulk of our Harmony reserves. And also the operations that are earmarked for sale are classified as discontinued operations.

Turning to the Underground Operation results on slide 11, you can see that there's a slight negative on some of the factors, again, mainly due to Elandsrand there. Phakisa produced its first gold. It's now getting its crew starting to mine, very slow start-up. Of course, this was only 18kg, but at least it's a start. Elandsrand was repaired and now delivered, one month's full production out of the quarter. Target, Bambanani and Joel showed improved performance.

We have, as you know, been reviewing Conops. We stopped Conops during the quarter at Masimong. We continue to review Conops and some of the other operations. Conops does work on some of our operations in Evander and Target, to name two of them, but we will continue to review at Japong and Elandsrand.

Slide 12 is the South African Surface Operation results. And really, just Kalgold and Phoenix here, both of them had pleasing performances. And some of our best cost producers will be surface and you can see the cost per kilogram there at ZAR85,000 a kilogram.

Slide 13 is just a reminder for me to talk about Hidden Valley. This was a slide taken with my back to the open bit of Hidden Valley, which is being pre-stripped, looking towards the tailing dam and the plant sites. The distance is about 4.5km, 5km from the camera. And this is progressing well and the first gold should be in March 2009.

Slide 14 is the discontinued operations, including the Cooke operations and Cooke plants. That's the Randfontein which are earmarked in Newco as this new company, where we will own 40% of the company going forward. Orkney is managed by Pamodzi Gold and the St. Helena operations were put under care and maintenance. They had their last blast in November.

Australia, that's slide 15, also discontinued operations. Australia had a very pleasing last quarter and produced some good gold and did it safely as well. The final conditions of precedence for South Kal were met during this quarter. And Mount Magnet is going through the process of -- the sale process. It will have its last ore that will be milled during January, or has been milled during January. The last production was actually towards the end of December.

On slide 16, just give you a snapshot of some of the exploration that's happening in Papua New Guinea, some very pleasing and exciting results coming out of this porphyry. Nambonga North, it's about 2km from Golpu, it remains in a very exciting area for exploration.

I'd like to now hand over to Frank Abbott and take us through some of the financial slides.

Thank you, Graham.

If we turn to slide 18, we see our income statement. This is the September quarter versus the December quarter. The second line shows our cash operating costs for the quarter that are reduced by ZAR150m. And we had a cash operating profit of ZAR450m. Our interest paid increased to ZAR138m. We made a profit from discontinued operations of ZAR175m. And we also made a profit on the reversal of an impairment we made the previous quarter (inaudible) asset of ZAR66m, leaving us with a net profit of ZAR46m.

If we turn to slide 19, this is our balance sheet at the end of December 2007. We see that our cash balance is reduced from ZAR1.5b to ZAR400m and the reason for that is the capital expenditure for the quarter of ZAR800m. And we've reduced our accounts payable by ZAR570m in the quarter. Our other current assets increased by ZAR600m, and that's because we include our fixed assets from Randfontein in that line, because they're all assets now available for sale.

If we go lower down, we show long-term borrowings reduced by ZAR2b, to ZAR1.878m (sic - see presentation), but it is because we moved ZAR2b down to short-term borrowings because the ZAR2b is repayable at the end of December. If we look at the last line there, that's other current liabilities. That's reduced by ZAR600m and that's because we paid down on our accounts payable with ZAR570m.

Thank you, Graham.

Slide 20 is really a recap of the capital expenditure and you will see that the capital has gone up from ZAR675m to ZAR808m. The main variance there is Hidden Valley, which has gone up to ZAR275m for the quarter.

The journey in the quarter, to take you to slide 22, the press release covered most of the detail of the Randfontein uranium. The conditions precedent, or going through that process, $252m to be paid to Harmony for the 60%. The directors have been identified and a Chairman identified as well. One would expect that we would be getting the money in during the forthcoming five months or so, or four and half months.

Slide 23 is just a reminder to us that the Cooke dump is where it started and that dump contains about [40m] pounds of uranium oxide. So although there's quite a lot of potential in the uranium reserves underground, a lot of the reserve is in fact in that Cooke dump.

Slide 24 is a recap on some of our restructuring that's progressed during this quarter. We did some changes in the mining structure. We were basically looking at coaches which had fixed salaries and only small bonuses, annual bonuses. We've now changed that to a more traditional mine captain/shiftboss mining structure. The services personnel were decentralized and the accountability is now hopefully at the correct level. There's probably a little bit more work to be done during that quarter. I have talked about the Conops at Masimong. We continue to evaluate the Conops on the other operations as well. St. Helena operations put on care and maintenance. And Evander 7, this was a shaft where there was a sill breakthrough on the reef and it's more extensive than we previously believed, and we've downscaled that.

Slide 25 takes you through the detail of the complement reduction, the reduction of just over 2,000 employees. Those were for voluntary retrenchments as well as natural attrition. There was a reduction of 2,800 contractors. Total reduction of employees nearly 5,000 people. On top of that, we transferred from one operation to the other, from decentralized or from the poorer operations into better places, 4,800 people. Decentralization reduced about 700 people. Closing St. Helena was moving 650. And Masimong termination of Conops was 1,400 people. Fortunately for us, Phakisa and Doornkop are building up in employees. The timing is not quite ideal, but those two will continue to build up during the months to come.

Slide 26 is on the Papua New Guinean partnership. That's across the whole of the Papua New Guinean assets. We have shortlisted suitable partners and we're hoping to be able to announce partners in April. I was earlier hoping it would be March, but it looks more like April. They are partners that are developing sites and doing their due diligence as we speak.

Slide 27 is just to emphasize that we believe that gold is an exciting place to be right now. In the last six months our cash cost was ZAR133,000 a kilogram. We have really done a lot of cost work during the quarter. We are hoping that we will do some more during this coming quarter. But there's a lot of emphasis on reducing costs.

The new operations that were being developed are going to be more efficient and they have high quality and better grades. However, the gold price in the last six months was ZAR163,000 a kilogram. For the next six months we're guesstimating at ZAR223,000, which is what it is today. That changes Harmony's dramatically from a margin of ZAR30,000 a kilogram to ZAR90,000 a kilogram. So we think there's a lot of potential in the Harmony operations and we are quite excited about that.

As far as future strategy goes, and I'm on slide 28, we are certainly looking at improvement of safety performance. We are definitely going to focus on these long-life operations and profitability. We have to investigate ways of recapitalizing the short-life assets. Some of our short-life assets have got good potential at this gold price. And what we haven't been doing is spending any capital on them. However, if capital were to be spent on them, we think that there's a lot of life left in those operations.

We are certainly going to be focusing on our mining projects and expand the pipeline going forward. This year is a big capital spend and it will be reducing in the next year, especially with the Papua New Guinean partnership, as well as most of our operations have gone through their peak capital. And we still have some projects in the pipeline. We are also looking at this partnering process to enhance growth and looking at it as an international way of growing.

Thank you, ladies and gentlemen. We'd like to open up for questions.

Thank you very much, sir. (OPERATOR INSTRUCTIONS). Our first question comes from Victor Flores of the HSBC. Please go ahead, sir.

Yes, thank you. Good afternoon, Graham. A couple of questions, first just on the operations and staffing. It looks like a lot of the people that are being moved out of one operation are going to another, in some cases because you're building up. But where do you end up net? Are you just sort of shuffling people around or is there a longer-term plan to right-size the operations relative to the number of people that work there?

Thanks, Victor. Yes, the whole staffing situation, there's a plan behind it. The net result for the quarter is a loss of, if you like, 5,000 jobs from previous quarter to the end of December. And that consisted of the 2,800 contractors and then the 2,000-odd employees. Out of the 2,000-odd employees, it was about 1,100 retrenchments. We have got a voluntary retrenchment process going. We've had agreement since November with the unions. A lot of those retrenchments obviously were focused on the services side. And then we do have natural attrition. We're managing that natural attrition. We have approximately 250 people a month that leave Harmony for various reasons. That's the figure. Obviously, it changes depending on what the level is, but that's what it is at the moment. So we've gone down from 54,000 people that are employees/contractors. We have been replacing contractors with employees as well. So there's a net loss of jobs.

Okay. Could you tell us, if you have the figure at hand, what your production in tonnage was per total employee cost for the quarter? And I think you have a goal, correct me if I'm wrong, of getting to 30 tons per employee. When do you think that might be achieved?

Victor, our goal is certainly 30 tons per employee costed. And we are looking at total employee costs, there is no funnies in the figures, including contractors and the like. We have operations that are -- and there's quite a big range around that, going from the below 20s up into the 33s. But our aim is certainly to get to that and that's not only an issue of cutting jobs, but it's also getting productivity up, in other words looking at all the mining things that we do look at, including environmental conditions underground as well as the mining structure. So there's certainly a plan there. I'm reluctant to -- these are processes and we need to get buy-in from employees and so on, so it's certainly something we're working on and we're hoping that this is more like a six-month process to a year process.

Fair enough. If I may, if you'll allow me to ask a financial question. Cash down to just under ZAR500m at the end of the quarter, still heavy capital expenditure going on, better gold price but also some debt coming due towards year-end. What is the plan for managing the balance sheet over the next year or 18 months? And how much of that depends on getting the deal done on the PNG assets?

I'm going to hand you over to Frank, if you don't mind, Victor.

Fine. Thank you.

I think the first thing I would like to say is that we've got about ZAR600m in the bank right now. If we look at the better gold price and in May we would be receiving about ZAR1.9b from the sale of 40 -- 60% of our Randfontein assets, so that could go a long way to, the last two, actually pay that ZAR2b loan at the end of the year. So, with the better gold price and the PNG joint venture, I don't see that we would need to raise any more money or need to go to the market.

Good, that is what I was after. Thank you so much.

Thank you.

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

Thank you very much. Thanks, ladies and gentlemen, for taking the time out to listen to us. I think both from my side, the Board side and certainly the executive management, we think this is going to be another interesting quarter and exciting times. But we're bullish about what we are doing and we are certainly going to do our best to improve the results. Thank you very much.

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