Harmony Gold Mining Company Ltd (HMY) 2008 Q4 法說會逐字稿

Good afternoon, and welcome to Harmony Gold's year-end financial results for 2008. All participants are now in listen-only mode and there will be an opportunity for you to ask questions at the end of today's presentation. (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, and welcome to you all, ladies and gentlemen, wherever you may be. I am going to take you through the presentation, that's probably the best way to do this call. Hopefully you've downloaded or you can see that the presentation was on our website, if you weren't given it in any other way.

I'd like to take you to slide -- the third slide, which is titled, Delivering on strategy, which has a large red arrow. And in essence, what I'd like to talk about here is that I've been in the position now for a year, and we certainly started this strategy with back to basics. We've done a lot of things and a lot of events that have happened during this year. And we've delivered on most of our strategy.

During October, you will remember that we had a big event at Elandsrand where 3,200 people were underground. This led to a great deal of focus on safety in both the South African mining industry, but especially in Harmony, and we've done and I will show you that safety performance has been improved.

We did a great number of restructuring operations on each of the operations and some of them got closed, some of them were restructured. Did some decentralization as well. And many people left Harmony in a voluntary retrenchment.

I do talk about closing and selling of non-core operations. Some of the operations were sold from the US and Australian assets. In total we did about 11 different transactions during the last year.

We've continued to focus on building our mines. We've continued to spend a lot of capital on our mine building. During this coming year, we go through further quite large amount of capital spend, and after that it trails down. But these projects are within two years, two and a half years of actually producing some good, solid results from the ore bodies.

The phase we're in now is, a lot of morale and team building is happening. We are spending quite a bit of effort on training, but once people start being a little bit more successful and put some scores up on the -- on their board, then they become a little bit happier and more excited about their jobs.

We have some productivity targets, and hopefully you can associate with these productivity targets. 30 tonnes per total employee costed, that's what TEC is. This is our underground target. Right now we're not there, and we need to do probably about a 20% improvement to get there, as well the quality targets of grams per TEC.

We have concluded the transaction in PNG where Newcrest is our partner. The phase one -- stage one of that transaction is complete, and we have the $229 million in our bank account. That will continue with stage two, which is Newcrest building up to 50% by spending another $300 million on the projects and the assets in PNG.

We have an exciting exploration pipeline, as well as some projects. Two of the areas worth noting are in the Evander area, some underground potential there. And tailing especially in the Free State, we have about a billion tonnes of tailings which we've drilled up during the year, and from our work that we've done in Project Phoenix, we know that this has got huge potential. In essence, we really have the assets, and we're building the balance sheet, and we're gearing for growth into the future.

Moving onto the next slide, which is the financial year 2008 highlights. Cash operating profit was up by 26%. We did get the first production from Phakisa. Phakisa will have fluctuating growth going forward, most of that -- all tonnage will be from development, but that will be expected the fluctuating grades.

Tshepong Sub 66 Decline was completed in June, end of June. A little bit more money to be spent there, but it's really going ahead with development and production there.

Restructuring of operations, I've mentioned this and they were all completed successfully. We also improved safety performance in year 2008, and I've talked about the Newcrest stage 1 partnership.

The next graph is on the safety performance. You can see there's a pleasing decline in the numbers there, which is an improvement. And there's some highlights of some improvements below that and good records. We continue to give this a higher profile on all our operations. Safety is becoming incredibly important. It's always been important, but I guess it's much more of a focus these days than it has been before.

On the Group operating results for the year, gold is down from the previous year. Revenues up at nearly ZAR191 thousand a kilogram from the previous year to ZAR148 thousand a kilogram. Exchange rate has remained fairly static, and cash cost is a big difference, up year-on-year. Cash operating profit up at 26% to ZAR2.5 billion. And operating margin also up.

The next slide has the breakdown between underground operations and surface operations. You'll see that surface operations had a leap of improvements of 246%.

Over the page is the Group operating results and in US and Imperial. You'll see that the figures are really in ounces and dollars. In cash costs, $591 an ounce there.

Next slide is just a summary of our mineral resources and reserves. I saw some press releases on this and there were some mixing up of reserves and resources. The reserves are 50.5 million ounces, depletion of two million ounces and a decrease of 5.6 million ounces. Mainly due to corporate activity, but also because of the restructuring and various geological changes. And an addition of 4.5 million ounces from surface, and that was mainly in the Free State.

The quarter highlights for June 2008. Cash operating profit up by 22%, underground tonnage pleasingly up 18%, gold up nearly 12%, underground grades down a bit. It wasn't a huge concern for us, it's a bit disappointing, but not a huge concern because we did really focus on trying to get the productivity up and the teams motivated. And there were improvements quarter-on-quarter in safety.

From the operating results, you'll see that 11,694 kilograms produced from the previous quarter of 10,347 kilograms. Exchange rate slightly up, but the rand per kilogram virtually flat at ZAR224 thousand a kilogram. The cash cost down to nearly -- just below ZAR139 thousand a kilogram. Cash operating profit just below ZAR1 billion at ZAR995 million, and the operating margin at 38%.

Cash operating profit, the breakdown between underground and surface. Underground operations improved by 19%, surface at 36% and the total at 22%, getting back to that ZAR995 million figure.

The next slide is on US and Imperial, and the only pleasing one there that I should maybe highlight, it's identical to the previous one except for the dollars and Imperial, is the cash costs at $556 an ounce, down from the previous quarter at $609.

The graph on cash and capital costs, the red bar is the cash costs in rand per kilogram. The yellow on top of that is the operational CapEx, that's the CapEx that goes into development and major CapEx on maintenance as well. And then on top of that, in the green, is the growth capital in rand per kilogram.

You'll see that a year ago, this time we were continuing to spend capital even though the gold price, which is the black line, was down in comparison to actual operating. The recent rise in the gold price, of course, has opened up a nice gap in that [we are]. Total cost is below ZAR200 thousand a kilogram, and the gold price has been somewhere in the region of ZAR224 a kilogram.

Quarter-on-quarter cash operating profit, the variance analysis, the volume increase, of course, has led to that nearly 500 -- sorry, ZAR360 million rand positive variance. Working costs went up and this is mainly because of both the volume, obviously more tonnes you produce, the cost does go up slightly, but also electricity charges are at winter rates and there were also increases in that, as well as some variances on salaries and bonuses.

Recovery grade reduction was ZAR51 million, and that's with the grade that went down from the previous quarter 5.81 g/t -- sorry 4.81 g/t to 4.55 g/t. A slight reduction in gold price led to the ZAR22 million variance.

On the specifics of underground operations, the next slide has that detail. Rand per tonne, a nice decrease of just over 9% to ZAR664 a tonne. But I guess what is really pleasing on this one is that the production unit certainly has produced more. What we need to do in this coming quarter obviously is to get the grades that we've been planning.

Some explanations of some of the highlights and lowlights if you like. We did lose some production for public holidays. There was electricity cost increase which affected all operations.

Bambanani is now resized into a 50,000 tonne a month operation operation with much higher grade. It does take some doing, changing the (inaudible) from a bigger mine into a more profitable and lower tonnage mine. Joel and Masimong had excellent performances. Masimong went through quite a severe restructuring, and it's certainly looking in very well, in good condition, and thanks to management for that. Phakisa has had an increase in production. I said earlier that we will expect some changes and variations in the grade there, but they're really starting to kick in with the developments.

Tshepong had the biggest grade variance, down by 19%. (inaudible) operation that came out of ConOps, and we really tried to get extra [faces] going with the people, and the tonnage you'll see from the detailed figures is up, but we had the grade sacrifice. I won't go through all the points, but there's some highlights and lowlights, carrying on to the end where we talk about Evander, which had really consistent delivery.

In the surface operations, clearly the increase in grade is really attributable to the other surface sources, they returned better grades, and these are opportunistic areas where we find better grades from either dumps or clean up-areas, we put it through the mill, so that is a slightly -- a much improved quarter.

In the discontinued operations, really, this is Randfontein. The Rand uranium operations, the deal hasn't taken place yet, and it's a combination of between underground and the surface grades, working cost ZAR125,650, a good improvement, but in general, the Randfontein underground grade. This has some negative effects as well.

I'd like to hand over to Frank Abbott to take us through some of the financials.

Thank you, Graham. If we can move to slide 21, extracts from our income statement, this is the 2008 financial year compared to the 2007 financial year. You can see that our cash operating profit level, we had an increase of 26%.

If we go down the line, we will see impairment of assets, ZAR316 million, at year end, so we looked at all our assets, and we had an impairment of some of our shafts, with the Evander (inaudible), of ZAR316 million. During the year we had our destruction costs for the terminated employment of a number of our employees, and that was ZAR212 million. We had impairment of investment in our associate, ZAR95 million. Loss on listed investments, the ZAR459 million, was when we sold the (inaudible) shares which we had in the beginning of the year. Our finance costs were ZAR500 million (sic - see presentation) for the year. If we (inaudible) money we've been receiving from PNG (inaudible), we will be reducing that finance cost by ZAR200 million this coming year. Our taxation was ZAR465 million, and then we made a profit from discontinued operations of ZAR551 million. That leaves us with a net loss for the year of ZAR245 million. The headline earnings per share was positive, ZAR0.19, and if we look at our total headline earnings, which include the discontinued operations, it was ZAR1.27.

If we move to the next slide, that's slide number 22, again, extracts from our income statement. Here we're comparing the June quarter with the March quarter, and if you look at your cash operating profit, that went up nicely at 22%. Again, we see impairment of assets of ZAR316 million, which I explained in the year-to-date of the annual income statement. Employment termination expenditure for the quarter of ZAR50 million, and that's now concluded. Losses from associate, ZAR68 million. Impairment of investment in associates of ZAR95 million, and our finance cost for the quarter was ZAR130 million (sic - see presentation). We had tax of ZAR246 million during the quarter, and this was all deferred tax. We made a profit from discontinued operations of ZAR170 million. That leaves us with a net loss of ZAR71 million for the quarter, a headline earnings of ZAR0.38, and total headline earnings of ZAR0.65.

We page over to page 23, slide 23, these are just a few features on the balance sheet. I just want to indicate to you on our property plant and equipment, increased by ZAR3 billion. The total capital expended in the year was ZAR4 billion, less the amortization for the year, and the impairment gave us a net gain in property plant and equipment of ZAR3 billion. If we look at the borrowings, we see that the current borrowings have increased, and that's because we're now reflecting the bond, which (inaudible) redeem in May next year. Also current, that's included in the ZAR3.8 billion, and we will apply the money that we've received for the PNG assets we sold in UK to buy back (inaudible) current date.

If we move to the next slide, that's slide 24, and this shows you the capital expenditure for the fourth quarter. And our capital expenditure is very high. As you can see, the South African operations CapEx -- total operational CapEx increased by ZAR130 million, and then if you look at the other project CapEx, you see that the big capital during the quarter was ZAR668 million at Hidden Valley in PNG. Now, that capital expenditure will now stop going forward, (inaudible) will be funding the capital going forward for the rest of the financial year.

Thank you, Graham.

Thanks, Frank. If you go to the slide which is labeled Corporate Feedback, Frank has mentioned proceeds from transactions. The Rand Uranium deal and the Randfontein assets and one of the other ones that we'll use to repay debt. If we have any further transactions, they are likely to be in the project growth area. I did mention that we've got several projects, and that the only area that we're likely to have some transactions on within the company.

Joint ventures and partnerships, we've had some new experiences with this. We like -- Newcrest was a joint venture partner in PNG. They bring a huge amount of credibility and also skills to the project. Some of the Rand Uranium, which is going to be a bit of a future on us getting to know something on the uranium business, I think we've got some potential there. So we like the joint ventures, in these things where it brings skills together.

In offshore, here, we are looking at exploration and project areas in Southeast Asia. (inaudible) has done a brilliant job in PNG, and they need to continue to explore and look in other areas in that region. We have been looking at potential acquisitions. We'll continually evaluate these. They will by nature be opportunistic, but very likely, if we do anything in that time period, it's going to be friendly.

The feedback on the transactions, Mt. Magnet, this is one that we sold. The market since we sold it has really changed. We had (inaudible) in Australia, able to raise money. This is not necessarily true any more. The assets on care and maintenance, we continue to do some exploration, and keep everything in good standing, and we've reviewed the whole process. As far as the Orkney transaction, we own 32% equity in Pamodzi Gold. Talked about the Randfontein Uranium. Those two conditions precedent, I am led to believe, are going to happen shortly, within the next couple of weeks. The deal finalization date is, hopefully, September 12. That's when we've extended it to. I've also talked about the Newcrest/PNG deal.

The outlook for financial 2009, and this is the penultimate slide before the questions, increasing production anticipated from Harmony's new mines, as they build up in production. There'll be a lot of focus on development. Exploration of PNG will continue, (inaudible) got several comparable things which we're looking at there, and we're likely to have a resource declaration on Nambonga during this year. In Evander South we'll be doing more exploration, and similarly, we'll be doing some environmental impact studies on that area. And as you know, we have adjacent Poplar and Rolspruit areas to look at as well.

I guess -- this was written yesterday, so maybe the gold price is not that strong in rand terms. It's somewhere in the region of ZAR200,000/kg. That 1 billion tons of surface tailings in the Free State certainly presents us with an opportunity, and we have to look at the potential of doing 1 million tons a month though the St. Helena plant. It's a project that hasn't been released, and we haven't taken it to the board yet, but certainly that has potential. And then Hidden Valley will definitely come into production towards the end of this financial year.

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

Thank you very much, sir.

(OPERATOR INSTRUCTIONS).

Our first question comes from (inaudible) of Nomura. Please go ahead.

Hi, then. I'm just -- perhaps you can give a little bit more information on Bambanani, with it having been resized to a low-volume, high-grade mine, because it looks like, versus some guidance you're giving in February, we were looking at, probably, around just over 200,000 oz coming from Bambanani in 2008. And can you maybe just give us some idea as to the volumes that you're looking to be processing at Bambanani on a forward-looking basis?

Sure. We -- Bambanani, we're planning -- we're looking at (inaudible) would be a little over 15,000 tons per month. Grade is slowly coming up. I think (inaudible) quarter (inaudible) grade of something around about grade [30.6], and we would expect slightly improved grade going forward, but probably in the high 7g, towards 8g per ton. This is a shaft where we have a considerable shaft pillar in the future, and preparations are underway. That shaft pillar, in fact, has a much higher grade, and is probably in the region of about 12g per ton, so it's going to have a quite peculiar grade profile, if you like, in its life, which is probably six or seven years, that order.

Okay. And then after those six to seven years, do you know roughly what the mine should be coming in at, in terms of grades?

No, after six or seven, that'll be the end of the life of the (inaudible) Bambanani, yes.

Okay. All right. And then, with regard to the Randfontein assets, which are in the discontinued assets, assuming that September 12 is the date that the deal is completed, thereafter, will those be equity accounted, 40% (inaudible)?

Yes, Frank says yes.

Thank you.

(OPERATOR INSTRUCTIONS)

Our next question comes from Victor Flores of the HSBC. Please go ahead, sir.

Yes, thanks, good morning. I have a question about, first, two assets. First of all, Tshepong, which is a key asset for Harmony, and seemed to have a wobble in the June quarter, and if you could perhaps spend a couple more minutes talking about why that happened, and hopefully why it won't happen again?

And then the other asset that I think, Graham, you said at one point in time was a bit neglected, Target, which did better, but I'd like to hear that hopefully, that that better track record is set to continue.

Victor, yes, thank you. Tshepong came out of its (inaudible) the previous quarter, and when you change something from ConOps into non-ConOps, it does cause quite a bit of disruption in people. However, we did our best not to put any people on the street in that operation, so, we in fact created more crews. So, the production level, you see, went from 320,000 something tonnes for the quarter up to nearly 400,000 tonnes for the quarter. So there was a good production increase. However, in doing all these sort of things, you don't always get everything right, and some of it was a little bit deliberate, get the guys producing first, and maybe sacrifice a little bit on the quality. So the quality, we suffered on, and I think the grade was just below 5g per ton. We will see improvements going forward on that grade. So, a little bit of a wobble on the grade, but good production results from Tshepong.

(inaudible) and the area of the decline will be coming into production (inaudible) doing quite a bit of development, but not a huge amount of stoping in that area. Target's wobble really goes a lot around mine planning, equipment scheduling, maintenance of equipment. Those are the issues that we've been fighting with for the last year. We are in a much better [staging] target now than we have been before. We -- once you start blasting in a stope that's been poorly planned, the drilling pattern is wrong, you get overbreak, you have all sorts of issues coming out of it, and to a great extent, we've been doing a lot of work on that planning of the mine. So, while it's not perfect yet, it's in much better shape going forward.

Great. Thank you. And then just, your comment about better production for 2009 from your new assets, does that include the new mine, or the new shaft at Elandsrand, or which assets specifically are you talking about? (inaudible) fiscal year?

Yes, really, the new production mines really only get into better production, not during this coming year, but during the next year after this, but there will be some new production coming from the Elandsrand. [Joel] (inaudible) is building up a little bit in production, as is Phakisa. So we'll see improvements, but they'll be relatively marginal improvements during this next year, and better improvements the year after that.

Thank you very much, Graham.

Our next question comes from Paul Durham, also of the HSBC. Please go ahead, sir.

Thank you. Good afternoon, gentlemen. Two general questions. Can you -- safety record, obviously improvements in the safety record have obviously been very admirable, and there to see for everybody. What have you been doing differently, or more consistently, to get that from gradual to progressive reduction in the rate? That's the first part of the question.

And the second one, can you put a bit more skin on the bones with regard to those tailings in the Free State? I think you mentioned 1 billion tons, but are there any parameters that you could put on it at the minute? I know you're still (inaudible) scoping, doing all the scoping studies, etc., but can you give us some idea of your thoughts on that, using the current rand gold price?

Good, Paul, yes. Let me try and get to the [safety] one first. This is an area where there's no magic solution to the (inaudible) requires a huge amount of effort from general managers down on operations. Really, every operation has got their own identity, and their own problems in safety, but once you have a history of cutting corners or doing things an easy way, it takes a lot of cultural changes to get that out of the system. So there's a lot of walk the talk, if you like, practice what you preach, happening on operations. We've had several safety summits internally, where we've involved union, and we've involved the leadership on all fronts, so it's a continual drive. We continue to spend a fair amount of our money on maintenance in various things, like rolling stock, and the like. Our biggest area of fatal is still falls of ground or seismic activity. That's the biggest area, but we've had unnecessary areas of danger in the rolling stock, trucks and [trains], locomotives, and the like. So it's really been a huge effort from a number of areas.

We're also spending a lot of time and effort on training teams, and getting back to the implementation of the right procedures. These efforts do take a long time. I know, for instance, at Masimong to get through the whole shaft and train team by team, it actually takes 15 months to get through the whole shop. There is a renewed effort on safety, and I certainly see that in the figures coming through, but we haven't arrived in this area.

In the tailings in the Free State, especially in the Free State, we (inaudible), because clearly, a billion tons of tailings is a great deal. We believe we can produce a tailings operation there through the old St. Helena plant, where we could convert that into a million tons of tailings a month. That would be producing similarly to the Project Phoenix grade or somewhere around 0.14g per ton. They're incredibly low grades. In general, the grades on those tailings are in the order of 0.26g per ton to 0.32g per ton, they're very low grade. But it's a big (inaudible) operation, and we -- the cost of production will be somewhere in the order of ZAR100,000 per kg. So even at ZAR200,000 per kg, where it is today, there's still a nice margin on those tailings.

To move and to change that plant into a tailings operation, we have an estimate of about ZAR500 million to be put into that, and that would produce an operation for something like about seven years. If we wait for a 20-year operation, it would cost a bit more, and the big difference in the cost is really the dumping capacity. One has to spend quite a bit of effort and time and obviously money on dumping, and the estimate there is something closer to just over ZAR800 million.

There are other opportunities of increasing capacity through Project Phoenix at the old (inaudible) plant, as well as looking at the central plants in the Free State. But all in the -- none of these projects have been released on the tailings yet. But they certainly look quite exciting.

All right. Thanks so much indeed. I appreciate the answers to the questions.

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

Thank you very much, (inaudible). Ladies and gentlemen, thank you very much. I think I've highlighted a little bit about where we are and what we're doing. As far as the questions that we've been asked elsewhere today, obviously there's been a lot of focus on short-term gold price, and so on. We remain focused on our strategies. We have to hunker down some of these things and picture our strategy, and really focus on our operations and improving them. Productivity is obviously (inaudible) one of our main drivers. But thank you very much for listening to us, and a very good day.

Thank you very much, sir. 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.