Harmony Gold Mining Company Ltd (HMY) 2008 Q3 法說會逐字稿

Good afternoon, and welcome to the Harmony Gold third quarter earnings results. (OPERATOR INSTRUCTIONS). Please 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 good afternoon, ladies and gentlemen. With me is Frank, who is more than capable of answering lots of financial questions should you have them. And we've also got Amelia with us and Amelia will be jotting down some notes if you have some further questions, especially ones which we can't answer at the moment.

I would like to take you through the slide presentation. Apologies for my voice. It's not because I've been shouting at anybody.

Slide two is obviously an important slide these days with the Safe Harbor statement. And I'd recommend that you read it.

On slide three, the highlights for the third quarter. Headline earnings of ZAR0.42 per share for continuing operations. We had a very sound improvement in our cash operating profit to ZAR828m. The South African underground grade is steady, slightly down with 4.87 of the previous quarter, 4.81 this quarter. Total cash operating costs are down by nearly 9%. And news which you're well aware of is the Newcrest Mining is our partner in PNG.

Slide number four is the fatality rate. Safety remains a huge focus on our mines. We have done a fair amount of work on the safety. We continue to have workshops and implement safety campaigns. And our graphs are generally trending in the right direction. We still need to continue to work harder on that side of things though.

Slide five, the Group operating results. Again, continuing operations. Gold produced at 10.3 tons [Sic. see presentation] versus 12.4 [Sic. see presentation] on the previous quarter. Mainly as I'll show you is down to lack of volume from underground operations and at this lower tonnage.

Revenue, a dramatic beat up from nearly 170,000 rand a kilogram to 225,521 rand [Sic. see presentation] a kilogram for this quarter.

Big change in the exchange rates and when we look at the imperial you'll see what effect that has on our cash costs. On this page cash costs at 145,500 versus 133,000 of the previous quarter.

Slide six shows you the segments of our operations. You'll note that all our gold from continuing operations is now coming from South Africa and none from any international operations.

Slide number seven is the imperial. It gives you it in ounces and dollars. You'll notice dollars an ounce dropped from $613 to $609 an ounce. And that's just mainly of course an exchange rate effect.

Slide number eight is the quarter on quarter operating profit variance analysis. You'll see that we lost the ZAR269m worth on the volume. Working costs, a very pleasing figure there. We reduced working costs by ZAR147m, so that's a positive figure. Recovery grade marginal down. The big difference there ZAR579m on the gold price, all positive. And that gives you a net variance of ZAR378m and it takes the quarter cash operating profit to ZAR828m.

If we go to slide number 10, this is the South African Underground operations. There's quite a lot of detail on the website in the booklet which gives the details of operation by operation. But just in summary, lost production, because of the Christmas break, the Christmas break because of the way it measures the drop rating in the pipeline is actually in the January quarter and obviously we had five days of power disruptions. And then five days at 80% getting back to 90% power.

We terminated Conops at Elandsrand and Tshepong. That affected tonnages, but you'll notice further down that Masimong delivered impressive cost reduction and Masimong of course cut out Conops on the previous quarter. So Elandsrand and Tshepong will get back into the swing of things during this quarter.

During the power outages we took an issue with Doornkop's capital there. And because of the disruptions we decided to spend 18 days on trying to catch up on capital. So we lost 18 days of production there.

Bambanani had a very dramatic quarter in that we restructured it completely and it's changed now from an operation that was producing around 110,000 tons a month to just below now 50,000 tons a month but at a much higher grade.

On slide 11 this is the Surface operations. Surface operations affected mainly by the grade at Phoenix to down 0.13 from the previous quarter of 0.17. These are small figures, but of course with the volume that they push through it had quite a large effect.

Kalgold, until last weekend, was affected by power outages, or power cuts because Kalgold is actually on the domestic grid.

On slide 12, the discontinued operations. There are obviously huge differences here. If I could take you all and just look at the line with the kilograms produced, last quarter 4,689 and this quarter at 1,985. The big swing factor there is Australia. In last quarter I think Australia produced about 1,900 kilograms, so that was the biggest swing factor.

Orkney was only reported until February 27, so effectively only two-thirds of the quarter reported in Orkney. And that's when the conditions precedent were met.

And then the remaining tonnage is really mainly Randfontein and that had a slight decrease in tonnage again due to the seasonal factors, Eskom, but also slightly poorer grade at Randfontein.

I'd like to hand over to Frank just to talk and commenting on slide 14.

Thank you, Graham. If we turn to slide 14, extracts from our income statement comparing the last quarter to the December quarter. On the cash operating cost line we can see that we've had a savings of ZAR150m. The Exploration expenditure in PNG has gone up to ZAR55m for the quarter. Profit from discontinued operations of ZAR181m includes ZAR100m net profit on the sale of the Orkney shafts just a month ago. Our net profit was ZAR345m and our headline profit per share is ZAR0.42.

I'll turn to slide 15, our balance sheet as at the end of March 2008. Our assets increased with our capital expenditure during the quarter. Our cash at the end of the quarter was ZAR346m. Our other current assets reduced with the sale of the Pamodzi, assets or the Orkney assets.

If we go down we look at non-current liabilities, borrowings. The ZAR1.9b includes the bond of ZAR1.7b. And under current liabilities borrowings ZAR2b is the bank loan that we have for ZAR2b.

Other current liabilities increased to ZAR2b and that's really with our provision for taxes for the quarter.

We can turn to page 16, our capital expenditure. If we look at the March quarter versus December quarter our capital expenditure increased to ZAR845m. And you'll see the biggest increase was at Hidden Valley where the capital was stepped up from ZAR275m to ZAR324m for the quarter.

Turn to slide 17. This is a report back on our IT financial systems. There's been good progress with the reimplementation of the ERP system. All our employees are being trained to do the job right. We have performed the necessary checks, balances and controls. And we are very confident that we'll have a clean bill of health at the end of financial '08. Thank you, Graham.

Thanks, Frank. Slide 18, we've got three bullet points there just on the U.S. class action. We obviously got to know about this through the Internet. We have retained some U.S. lawyers for advice but first there are some preliminary matters that need resolving. We haven't actually been served yet but the lawyers will prepare a motion to dismiss.

If you can go to slide 20, 20, you've seen this slide on the Newcrest partnership. Essentially, it values the PNG assets at 600m as at January 1, this year that is. And therefore Newcrest obtained 30.01% $180m.

The reimbursement there is on the assumption that we would have spent $150m between January 1 and June 30, and therefore 30% of that is $45m. And then Newcrest earn in to 50% and that would then take the total assets value when Hidden Valley commences mining at $1,050m and essentially puts a maximum at $525m that Newcrest will allocate. We're very excited about that particular one. Newcrest are certainly well qualified and that's why we chose them as partners.

On slide 21 we have a bit of a profile of Harmony subdivided into the different operations. Some of the discontinued operations have been taken out. The only discontinued operations pulled in that is Randfontein, including SS which is sand and slime. And you'll see that's been phased out in currently. But there's certainly a growth profile there and we'll also talk a little bit about other projects going forward.

Slide 22 is a slide in response to some questions which I was getting and the development you'll see in the left hand diagram top left. A decreasing meterage going for the last three months. The last two, sorry, last two quarters. There are various reasons for that spelt out below. Obviously Bambanani, the closure of the southern portion of the subshaft, that'll affect the meterage to the extent of about 2,100 meters in the quarter.

Evander 7, continued scaling down of that in the project area.

Doornkop, that was stopped during this quarter for the 18 shifts.

Tshepong, that would be a slight hiccup just in this quarter because of the termination of Conops but it will rebuild back up in during this quarter.

Elandsrand is really just taking a long time to get back into proper operation since the incident in October.

And then obviously Orkney has come out from these figures during September.

On the right hand diagram on that thing you can check out your square meters per meter. Essentially, that ratio is pretty healthy, so we have committed to improving our development, as well.

On slide 23 a recap of Rand Uranium Company. This the company of Randfontein, the uranium Company where Pamodzi Resources Fund have bought 60% and Harmony retains 40%. And for that we should receive ZAR1.9b on the fulfillment of the conditions which we are hoping to get by the end of June.

John Munro has been appointed as Chief Executive Officer and he's been in that job just now for a couple of days commencing May 1.

To give you a bit of an update on restructuring, again we reduced our complement during this quarter. However, we now have got to the end of that. Further reductions are extremely unlikely. In fact with some of our projects, Phakisa, as an example, is actually building up in tonnage so it's likely to increase in labor. We have completed our shedding and closing of the high cost operational areas. And we're really getting our operations back into profitability here after their own capital, getting the morale and getting the productivity figures in the right quadrant.

Looking at our short life assets, we have several of those mainly in the free states. Looking at ways of extending the life of those operations by probably investing some more capital in developments. That's certainly capital that we can either switch on and off depending on the gold price.

And we're looking at our projects both Surface and Underground. And if I take you to slide 25 just to indicate a couple of them or a few of them there. Evander South, the drilling tenders are out. That was a prospecting area which we didn't have environmental approvals to service. We now have that and we will commence drilling probably during this quarter.

St. Helena, the plant retreatment of tailings. We've drawn all our tailings in the free states. About 1b tons of tailings, so this could be a good project treating about 1m tons a month.

Phoenix, we're looking at a possible expansion of that plant as well.

Also looking at uranium potential in the free states, there's the possibility of streaming the Tshepong, Phakisa and Masimong run-of-mine gold for uranium.

A bit of an outlook on slide 36. Increasing developments, I've already mentioned that. Certainly our balance sheet is going to look different with the strengthening from the Newcrest partnership, as well as the Pamodzi Resources Fund partnership. There's still going to be a continuing cost focus. You've seen that in this quarter. It will continue, but we'll move more towards a productivity focus.

I think that a company with plus ZAR200,000 a kilogram gold, it's got a large resource in this and great growth options still in Harmony. Both the Evander underground, as well lots of Surface projects. And I guess a cheeky comment, but soon shareholders will be asking about dividends.

Thank you very much, ladies and gentlemen. We are open to questions.

Thank you very much, sir. (OPERATOR INSTRUCTIONS) Thank you. Our first question comes from David Leffel of Deutsche Bank. Please go ahead.

Yes, thanks, gentlemen. Congratulations on getting through this result. You know there's been quite a bit of change in the organization certainly over the last 12 months and refocusing the organization. Could you give us maybe some guidance in the financial '09 year? I can see what sort of gold production you're targeting with your slide 21 but what sort of costs and what sort of grades are you aiming for out in '09, maybe some key metrics?

Hi, David. Yes, we're obviously going through the process of looking at all our planning. At the same time replanning a lot of our operations. Underground grade we should be looking at just around about just below five grams a ton. We've been a little lower than that of late. That's really what we should be doing. Probably from continuing operations I guess looking at 12.5 tons a quarter.

Now the Surface tonnage issues and whether we increase that or not because some of those things can be increased fairly quickly, we'll certainly going to look at those. There it's really a case of a volume business. It really depends on how much tonnage we can get through on Surface. But slime, typically we're recovering in the order of 0.13 to about 0.18 in that figure.

So I think that's the sort of area. I don't know if you want to look at capital around about ZAR2.4b dropping off from I think this quarter. This year's plan was about ZAR4b, so quite a lot less capital. I guess the figure that you'd like to know is more about costs. I think going forward for this next quarter we're obviously looking at a rand per kilogram cost somewhere about ZAR125,000 to ZAR130,000 a kilogram.

Yes, it gets very difficult to factor in all the definitive costs. You know we're in the hands of some spiraling inflation numbers and so on so that is a little bit difficult to predict longer term. But we are in the process of doing a lot of our planning right now. During this quarter is actually the time when we're doing our strategic planning.

Okay. Just one follow on question, maybe you can tell us how you think about these things. You mentioned looking at some of the free state shafts that are short life, March unfortunately is probably not the best quarter to look at but some of these operations appear to barely wash their face still after maintenance CapEx. What sort of sustainable returns do you actually want to try to generate from some of these older shafts and when do you throw in the towel? Because clearly if you just get in a circle and make ZAR5m or ZAR10m in a quarter and spend ZAR5m or ZAR10m on the capital does that get us any further ahead?

David, yes, interesting question. I guess it depends on your view of the gold price. I think when it comes to planning I think we're a little bit more conservative on the gold price. We're looking at ZAR180,000 a kilogram on our gold price. So if a project doesn't -- or rather if a shaft doesn't wash its face after some capital at ZAR180,000 we'll certainly think very hard about spending any money on capital. But if it is making money at less than ZAR180,000 then we'll certainly look at those.

You know if you're a raging bull gold person and you think that the gold is going to go up to $1,000 again and the rand is going to weaken, then there's some very quick wins you can do in those operations even though they are high cost operations.

Okay, thanks.

Our next question comes from Paul Durham of HSBC.

A quick question on the costs that you are likely to incur on your staff reductions and shaft closures, high cost operation areas closures. Can you give us some order of magnitude for that? I guess it's going to be taken in your fourth quarter. Thanks.

Yes, Paul, as far as the staff reductions you'll see in the financial figures I think 70. Let Frank help me right here. I think about ZAR73m retrenchment costs went through in the December quarter. In this quarter about ZAR85m went through. So in March it's going to be very much -- there may be a couple of million there. It's not something we really believe it'll be a big figure there in the last quarter of the year.

In the restructuring you'll also notice that there is a figure of about ZAR24m which went under --

Care and maintenance.

Care and maintenance, yes. Now some of that is nonrecurring. Frank, would you like to talk quickly about how much maybe --

ZAR10m of the ZAR24m is nonrecurring. It's costs that we incurred when we closed sections of Bambanani and that will be nonrecurring. So going forward our care and maintenance cost is going to be between ZAR10m and ZAR14m per quarter.

Okay, great. Thanks very much indeed. That's all for now.

Thanks, Paul.

Thank you very much. Our next question comes from Victor Flores of the HSBC.

Hi, Victor.

Hi, how are you.

Very good, thanks. Very good.

You acquired the royalty on Hidden Valley from Rio Tinto. Does that get rolled into the joint venture or is that something that Harmony owns exclusively?

Very good question, Victor. Can we get back to you on that one?

Yes.

Because it was actually bought by Harmony in South Africa and not by Harmony as in PNG.

Okay.

We'll get back to you on that one if you don't mind, Victor.

No, no problem. A couple of operating questions. You've shifted Bambanani to less tonnage, higher grade. But if I look at the detailed results, the costs are higher, which is not supposed to be the end result of that exercise. Are you happy that grades are going to go up or costs come down so that the decision to operate at a lower tonnage rate at Bambanani actually makes sense?

Yes. Happy on both those fronts, Victor that both costs will come down and be in control during this coming quarter. And grades will improve. I think when you make these decisions in a quarter you get a bit of mixed results. And there's obviously costs that's still in that quarter. But I think the example of that would be Masimong. Masimong went through a dramatic restructuring in the previous quarter and this quarter it's come out very well. It got well control of its costs and both the tonnage and the grade is coming right. So there's a bit of disruption when you do these things and I'm certainly hopeful that this quarter we'll actually see the real figures.

Great, thanks. And then on to another problem, operation target. You've described this as being perhaps somewhat neglected and the results this quarter certainly show that. Is there any light at the end of the tunnel on target?

Yes, there's light on the end of the tunnel. I think we've seen the light with respect to equipment. But unfortunately what has happened is that we dropped the ball on the selection of the scope and understanding the grade in the scope and then ended up mining incredibly poor grades during the quarter. There's light at the end of the tunnel but it's a bit of a longer turnaround issue. I guess it's also partially a people issue. This is one of our operations we didn't wake up when we all woke up so there's a few issues there but we're certainly working hard at them.

Okay, great. And then if I can just ask one quick final question. Are you under any obligation if you choose to develop your uranium resources in the free state to offer those to your uranium joint venture?

No obligation at all, Victor. We obviously want to develop this uranium company into a viable operation. If it makes sense to put some more assets into it we may contemplate it. But there's nothing written into that agreement of that nature.

Great. Thank you very much.

Thank you, Victor.

Thank you very much. (OPERATOR INSTRUCTIONS) Our next question comes from David Haughton of BMO Capital Markets. Please go ahead, sir.

Well good afternoon, Graham.

Hello.

I've got a question for you about Hidden Valley. The requirement for Newcrest to spend up to $300m for the extra 20%, does that suggest that there's some additional CapEx beyond what you've indicated in the report?

David, the agreement with Newcrest is on the entire PNG. So it includes in fact exploration Wafi-Golpu, any feasibility studies, metallurgical studies and the like, as well as Hidden Valley capital.

The agreement has got obviously some detail which we haven't shown all the detail to everyone. But if that amount of money is not spent on the various assets then there's a recalculation where the money is actually split between Newcrest and ourselves for us to be able to get up to 50% each. But it really implies the whole of PNG and therefore it doesn't -- you can't do the calculation just for Hidden Valley on the capital.

We continue to reevaluate the capital on Hidden Valley. We're busy doing another reevaluation of it right now but we haven't actually got final figures.

Okay. So Newcrest will be sole funding now until completion of Hidden Valley as part of their buy in obligation?

Yes.

These numbers that you're suggesting in your quarterly shows something just short of AUD200m for 2009. So Newcrest would then have further expenditure before they could get their 20% and it could be on Wafi-Golpu, is that what you're saying?

That is correct. On Wafi-Golpu exploration and the like. Yes, and that expenditure really takes place as from July 1. So until June 30, [2008], that's when the calculation calculates 30% of the money. Now it goes back to January 1, $600m worth of assets. That's a 180. Then 30% of the expenditure between January 1 and June 30, that's where we get the 45. But if we don't spend 150 there's still 30% of whatever we spend. And then they're in for 50%. So when Hidden Valley comes into production then there'll be a recalculation because that's the time when Newcrest will want to be at 50%.

Okay. And you're still comfortable with the early 2009 start up?

Yes. Well it's sort of March 2009 first ore and then getting to full production mid 2009.

Okay. Just changing back to South Africa, Doornkop ramp up, I see that there's a change of geological model. What should we expect on a go forward basis for that operation?

It's a little bit early for me to talk about the geological model because I really haven't got all the detail. We've obviously got some indicators because we've, as you know, that resource was developed and has been developed. It was a large resource that we sunk a shaft on and it wasn't a reserve, as such, so we got some more information. And that's information been doing with respect to our ore declaration which we'll do in the next couple of months.

Okay.

I just can't give you any information and not because I don't have it. It's just that it hasn't been done yet so we're busy doing it.

All right. And finally on Rand Uranium, will you intend to equity account that going forward?

Yes, because we will be owing 40% we will be equity accounting it and we'll be showing it on a line like we're doing now for our interest in (inaudible) Gold, similar.

Okay. Thank you very much.

Thank you.

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

Thank you very much, ladies and gents, for listening to us. I think it's been a good quarter for us. We've achieved a lot of our objectives that we set out to do. We've been through a fair amount of pain this quarter. We really set up to get the productivity and get the spirit of the Company going again. So I'm looking forward to a good final quarter of 2008. And thank you very much.

If there are any further questions please you have our email addresses or you can send them through Amelia. Thank you very much.

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