Harmony Gold Mining Company Ltd (HMY) 2009 Q1 法說會逐字稿

Good afternoon and welcome to the Harmony Gold results conference call for the first quarter for the financial year ended 2009. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). Please note that this conference is being recorded.

At this time, I'd like to hand the conference over to Graham Briggs. Please go ahead sir.

Thank you very much and good afternoon from South Africa, or good morning if you're somewhere in another time zone.

I'd like to go to the second slide, which is the safe harbor statements. You will notice that this has June 30, 2008 on it and our annual report, as well as the form 20-F are available from the website.

On slide three, a little bit about our strategy. I think during the first five months from August, we went through a real back to basics, and that has continued and will continue through. But really we're focusing more on our growth projects right now and making sure that they deliver what they should be delivering.

At the end of the financial year, June 2009, we are certainly hoping to have less debt, and Frank will take us through that issue. But then we'll be in a position to not only follow some more and further organic growth, but also possibly look at acquisitions.

On slide four, a few bullet points which just takes us through the quarter at a glance. Total gold production was up by 6%, grade improved by 4%, good signs of operational improvements, and I'll take you through a few examples of that.

Management has remained focus on restructuring and really focusing a lot on the safety and productivity improvements. Good progress with projects, both here in South Africa, as well as in Papua New Guinea on the Morobe joint venture with Newcrest.

The rand/gold price during this quarter was marginally down. Again, we are bullish on the gold and we believe it's been quite robust even under the present circumstances.

Debt levels have been reduced, despite our significant capital expenditure during the last year. That capital expenditure continues for a while, but decreases into next year.

Negatives for the quarter; we had seven fatalities. The operational costs were up in rand per kilogram terms, [both] because of the rand per kilogram being up due to electricity and labor is the two main issues there, the cost increases due to electricity and labor. And the cash operating profits are down because of the cost increases as well as the rand/gold price being down.

The safety slides, we have a zero fatality goal. We're not near that, but we've had an improvement in the lost time injuries. The frequency rate has decreased, as a bit of a leading indicator, but there is a lot of work going into safety, and I can assure you that we focus the safety as being number one.

On this slide, which has got two graphs on it, it's a fairly busy slide. The top one is the Elandsrand and the bottom one is the Masimong. This is just to show you some of the examples of our productivity drive.

It has tonnes both as a budget and actual, and grams as a budget and actual, and these are tonnes and grams per employee in service. The only employees that it excludes are those that are on leave at the time. And you will see that Elandsrand's performance is relatively poor under these circumstances. It has got just around about 100 grams in the last month, that's the monthly graph; the last month, it was down to 87 grams. And I will take you through a little bit later on the steps that we've implemented at the Elandsrand.

The bottom one of those two graphs, the Masimong, same type of graph. You will see that there's a very good improvement both in the tonnes on budget as well as the grams, in fact, the grams actually overachieving, up to 144 grams per employee. This is a great performance from Masimong and I will take you through a little bit of detail of that. But this is the type of measure that we have in place to monitor the operational performance.

If we go to slide eight, which is a pie chart of production in kilograms showing the different contributions from the different operations. Virginia is the top producer there at 18% of our gold; Phakisa is the lowest at 1%. But it gives you an idea of the percentage contributions from the different operations.

The Group operating results; gold produced 12.3% tonnes of gold, up 6% on the previous quarter. The revenue is slightly down at ZAR217,000 a kilogram. The exchange rate virtually flat, and cash costs at ZAR151,800. Frank will take us through a bit of an explanation on some of the costs there.

Cash operating profits really in the segments of underground and surface; total is ZAR808 million, down from ZAR995 million on the previous quarter.

Continuing operations on the Imperial, and I'm on slide 11, gold produced just short of 400,000 ounces. Gold price down, exchange rate flat, and the cash costs at $607 per ounce.

Operation by operation on slide 12, Masimong, as I've said, had an excellent performance, as did Bambanani. Bambanani has made the change from a bigger tonnage producer into much smaller tonnes and higher grade.

Joel had a difficult quarter, but saw a good result from it. It had a few stops due to a hoist and also the previous quarter lost some of its high grade stopes in a seismic event. However, we're recovering from that.

Phakisa; the volumes improved, as I indicated during the [last], while the grades will be variable there and that doesn't concern us as we build up in tonnage. Target had a poor quarter, again I'll take you through that detail.

Tshepong had a fire as well as fatal and there was although improvement in grade, there was a slight decrease in volume. We're expecting a better performance going through this coming quarter.

Virginia Operations, they had an excellent quarter both with grade and volume higher. A good sterling effort from those short-life assets in Virginia. Evander Operations, a good steady performance from them.

Doornkop again trying to maximize the project-related work as well as getting into production; a little bit of jostling for position there on hoisting. Randfontein had a fairly flat quarter, no dramatics from Randfontein. And again, Elandsrand, as I said, I will take you through some issues there and that is in intensive care.

The underground operations, you'll see that on slide 13 the tonnage was up by 2%. Recovery grade up by 5% to 4.79 our aim being in the six month period was to get to [4,88] so we're a little bit shy of that. But there are some good signs of improving mine core factor and the like there.

On Masimong, as I said, you've seen the productivity graph there. Disciplined ore reserve management, good safety record, showing the production figures, some good quality mining on the Basal Reef as well as some good grades in the B Reef.

And the result ultimately is 45% improvement in the kilograms produced there. This is the sort of magic we would like to wield on all of our operations and you can see in the cash costs, despite increases in electricity, stores and labor, they managed to get their cash costs down in fact to nearly ZAR133,000 a kilogram.

Bambanani, similarly had a good performance. It's now into a tonnage just below somewhere between 45,000 tonnes and 50,000 tonnes a month and 8 grams plus. And obviously it shows in the rand per kilogram there, ZAR144,000 a kilogram.

Elandsrand, as I said, in intensive care. Our decision there was, following a poor safety performance, we have put Alwyn Pretorius one of our Chief Operating Officers there. And this is 100% of his time he's going to dedicate to Elandsrand, and the focus is really going to be on safety and the discipline of mining to improve that. I'm sure that improvement to morale when he gets to (inaudible) that this operation will improve. Elandsrand has got a top class infrastructure, a good ore body; we just needs to get all the people onside there.

Target had a poor quarter, despite what looks like the tonnage going up. In fact, it's a bit of dilution and that's why the grade went down. It also had a poor quarter. We've made some management changes there, both from internal as well as from external.

We have commenced a review on that ore body with [complete] looking at the ore body as well as the planning and how we mine that. This process will probably take beyond this quarter to actually get to some resolution there, but we're determined to take a final analysis on that ore body.

On surface operations, Hidden Valley sought planning to get its first production in June 2009. Things are going well there. Kalgold, good tonnage and higher grades, had a good quarter. The Phoenix Project, slight decrease in volume there, due to some water-jetting contractor strike, but otherwise, steady performance. The other surface, which is really rock dumps and clean-up material, last quarter, that had a good grade from planting up. This quarter, it's more in line with what is normal for rock dumps.

The surface operations, the detail on slide 19 there. And you'll see that there's cost increases, mainly because of, well flat volumes but lower grade certainly from the other surface operations.

Slide 20, the photograph there shows Hidden Valley Pit in the foreground; the camera is actually within the Hidden Valley Pit. They had a good period. They've been doing well in their stripping, in fact, they're on budget. Tailings dam construction's gone well, the Hamata Pit is going well, and so is the processing facility in the build. They stockpiled a further 200,000 tonnes of ore this quarter, at about a grade of 2.2 grams a tonne, which is right on target.

Slide 21 is a photograph of what's happening on Hidden Valley on the Plant site as well as slide 22.

Discontinued operations, this is a combination of the [Randfontein] underground, the Cooke shafts, as well as the Cooke plant which is the sand treatment, so it's a combination of those two.

On exploration, geologists continue to have good [fun] in Papua New Guinea, and the slide 25 is really a bit of a pictorial showing you the different ore bodies in close proximity; Golpu, Wafi as well as Western Zone and Nambonga which we're hoping will have a resource on soon. So there has been some drilling in Western Zone as well as Nambonga.

Slide 26 shows -- on the magnetics there it shows Wafi the gold deposits, in blue is the Golpu. Nambonga North and other deposits, you can see on that. It also gives you some of the results on the right-hand side.

Slide 27 we have been doing some exploration in the Hidden Valley area, some trenches very close to the Hidden Valley Pit in fact, within 1.5 kilometers, giving some interesting values. The increase in values as high as 19 grams a tonne.

I'd like to hand over to Frank to give us a bit of a financial overview for the quarter.

Thank you Graham. If we look at slide number 29, these are extracts from our income statement. The first column is the current quarter, September, and June is the previous quarter.

If we look at revenue, there's been increase in the revenue and this is due to the 6% increase in our gold production, which was offset by lower gold price. The production costs went up by ZAR250 million and this is a 15% increase. And the reason for that was that our salary increases came through on July 1, and that our salary increases increased by 13%, that's ZAR107 million. And there's also the once-off (inaudible) provision of ZAR30 million which we'll not see in the next quarter.

Electricity costs went up by 43%, that is worth ZAR66 million. There was a 20% tariff increase on July 1, and also the winter tariffs of ZAR40 million. And that ZAR40 million we will also not see in the next quarter.

Stores increased by 22%; 4% was because of higher volumes and 18% was because of price increase. With the current reduction in prices of commodities, we are going to go back to our suppliers and ask for lower prices.

If we look at the amortization and depreciation, that went up by ZAR80 million, this is due to volume increases and the cumulative effect of our capital expenditure over the last few years. This is also the first quarter after restating our reserves and our new business plans.

At Bambanani the reserves were reduced due to closure of certain level, and at Evander 7 the life was shortened.

Corporate and administration expenditure went up by ZAR50 million. This was just because of a reclassification of our central services to corporate and administration costs, and these of our project team that look after projects, the IT and also finance support. Exploration expenditure reduced and from now most of the exploration expenditure is actually paid by Newcrest in Papua New Guinea and we're not picking up the expenditure.

Other income increased by ZAR500 million. Included in this ZAR500 million is a profit on the sale of Hidden Valley of ZAR523 million. The impairment of investment and associate is a impairment of our investment in Pamodzi Gold to the share price at the end of the quarter.

The loss on discontinued operations is the profit we made on the Cooke shaft, that's about ZAR90 million offset by a impairment to the assets of [Pamodzi Gold]. Then we have a net profit of ZAR402 million, and you'll see that our headline earnings, including discontinued operations, reduced to ZAR0.24.

[If we page] over to the next slide, that's slide 30, this shows our net debt position, our total borrowings. And in the top line, you see that our total borrowings have come down in this quarter by ZAR500 million. Our total cash has also increased. And if we look at the net debt situation, you'll see that our net debt situation improved by ZAR1.5 million.

We're also forecasting that by June, we would be almost debt free with a net debt position of ZAR200 million. And this assumes a gold price of ZAR220,000 per kilogram, and the rand uranium disposal proceeds at exchange rate of ZAR10 to the dollar.

Turn to slide number 31, this is our capital expenditure. If we look at the bottom line, we see our capital expenditure reduced from ZAR1.3 billion to ZAR993 million. Now this reduction was mainly because of the reduction in capital expenditure at Hidden Valley.

At Hidden Valley, we still spend the capital in July, but from August the capital expenditure is paid by Newcrest. So in the following quarter, the December quarter, we would see a further reduction in our capital expenditure. So our total capital expenditure would be about ZAR600 million in the coming quarter.

If we look at the top there, you will see that our operational CapEx has also reduced from ZAR429 million to ZAR374 million per quarter. We changed our policy of the way we capitalize our abnormal expenditure. It used to be all expenditure above ZAR50,000; we moved that up now to ZAR250,000.

Turn to the next slide, that's slide number 32, and that graphs shows our total cost per kilogram. The red line there is the rand per kilogram revenue that we're receiving, the blue is the cash cost, the yellow is the operational capital, and then the green is the growth capital. And you can see that currently the red line is above the green line, and we are therefore producing cash and our expenditure is lower than the revenue line. This is for the South African operations.

Thank you. Graham.

Thanks Frank. We'd just like to conclude on the last three slides.

Really, I think despite the average gold price has dropped in the last quarter, we're still quite bullish. We believe that gold is still a mainstay; it's a store of wealth and a safe haven. New gold supplies continue to shrink and decrease; there are fewer big discoveries. Funding for juniors and explorers is obviously under huge pressure. So in conclusion there, I think we're very bullish on the gold both for the medium and the longer term.

Slide 35 is really to show you the JSE Gold Index versus Harmony, Harmony in the orangey color.

And then slide 36, just an outlook on the future. I think the gold market volatility will continue, but we look forward to sustained increases in the gold.

Management restructuring; and we continue to tweak but focus really on safety, tonnages and grades both with productivity as well as looking at the fundamentals. Development is still very important in our operations, and as Frank pointed out, costs continue to be critical in the way we operate.

Our projects on track both in South Africa as well in PNG and we're on target to produce the 2.2 million ounces by 2012. As you can see on the graph there, it'll be a combination of both grade and volume.

Thank you very much, and I'd like to open myself and Frank up for questions.

Thank you Mr. Briggs. (Operator Instructions). Our first question is from Victor Flores of HSBC. Please go ahead sir.

Yes, thank you. Good afternoon. First question goes to a comment that Frank made going through the financials, and Frank, did I understand you correctly in saying that there was some amounts booked in the September quarter for the sale of the Cooke shafts?

No. No, I didn't say that. That transaction is not concluded. What we do say in that line on the income statement where we talk about discontinued operations, we showed a loss of ZAR72 million. And that is the difference between the profit we made on the Cooke shafts, net operational profit, and the impairment of Mount Magnet of ZAR152 million. So that's the net loss between the operational profit from Cooke less the impairment of Mount Magnet.

Apologies, I thought I heard you say profit on sale, rather than operating profit. Okay. So that means you expect that sale to get booked in the December quarter?

The December quarter, yes, that's quite right.

Okay, thank you.

Victor, the transaction on the [Randfontein] has on November 21, ZAR40 million coming in. And at obviously exchange rate of $10, that's somewhere around ZAR400 million. And then the rest of the transaction gets paid in April, April 23 next year, so it comes in two tranches.

Great, thank you. The second question goes to Elandsrand and what you described as intensive care there. The result didn't seem that bad. I guess that implies that you expect a lot better from Elandsrand, and I was hoping you could give us a sense of what you think that'll be going forward?

Yes Victor, we do expect a lot more from Elandsrand. One of the triggers for really putting it into this intensive care period was a safety issue as well as production. Generally we've seen where we've had good safety, we've had better production. Elandsrand had a total of three fatals during the quarter, which was a real poor performance, and this is an operation with a great infrastructure and lots of potential.

Certainly the time that Alwyn's going to be there is going to be probably six months plus, so we don't expect a magic quick turnaround. But we want to get that into a sustained good production level. No, certainly I'd like to give you an estimate of when exactly it will start performing, but it's going to take a little bit of time.

Okay, great. And similarly, could you comment on Target because that's also been a troubling operation?

Victor, I think that the process of really reviewing the ore body, it's started; it's been going on now for the last month or so. I would expect that it will continue for probably the next three months, and management have got a plan in place there.

It's a plan, which really is aimed at a good turnaround in six months' time. So it's going to be just over the two quarters probably before it starts performing as it should. And this is really all dependent on the planning and the ore body work that we're doing at the moment.

Great, thanks. And then if I could just ask one last question? Could you give us a sense of what you expect for the December quarter?

Victor, we're known for not giving any estimates, but I --

I know, that's why I ask.

Yes, 12.5 tonnes of gold for this quarter coming, ZAR150 a kilogram.

ZAR150,000.

Sorry, ZAR150,000 a kilogram, that's our estimate. And Frank has given an estimate of the capital of just around ZAR600 million; it may just be a little bit above ZAR600 million.

Great. Thank you so much.

Thank you Mr. Flores. Our next question is from Paul Durham of HSBC. Please go ahead.

I didn't realize we were going to monopolize the conversation here, but anyway, good afternoon gentlemen. Just following on Victor's question a bit, sustainability of some of these grades, we've obviously had some good moves up in grade at Bambanani; obviously Target was an issue because of the ground issues or whatever. How can you see the grade trends going out from here?

Can we extrapolate Bambanani grades going out at this sort of level? Or if you could give us an individual operation by operational your best guesses of grades going forward for the next 18 months?

Sure, Paul, I can try and give it to you. Off the cuff, Bambanani at the levels it's at now is probably slightly better than we would have predicted, so it's a little bit better. So the 8 grams a tonne it's where we've been planning it, so that's Bambanani.

Let's just go through -- let's do Tshepong. Tshepong is underperforming right now even though it's got to 5,38 grams it should be probably about between 5.6 grams and 5.8 grams.

Phakisa is going to be a varied grade as I've indicated because of its development time. So it looks like [grade] to around probably the 3.5 grams to maybe the 4.2 grams in the next 12 months or so.

Doornkop is going to fluctuate depending on how well their project goes. We've been getting some good results from the South Reef, but unfortunately during this last quarter, most of the hoisting was actually from the Kimberley Reef. But the South Reef is certainly performing better, so that should have an increase in grades trending up over the year to probably four just over 4 grams a tonne.

Elandsrand still under performing at 5,3 grams; we expect much better there. Target, as I say, the jury is out on Target. Masimong performed well at 5.4 grams a tonne. I would expect that it can probably continue at the low five gram a tonne range.

Evander Operations, in the region of 5.3 grams, 5.4 grams is okay for Evander. And that's remember a mixture of [edge] shaft which is slightly higher grade than the 2 and 5 shaft area, the (inaudible) area.

Joel underperformed this last quarter. It should be performing closer to the 4.5 grams a tonne. And Virginia Operations, overdid their grades if you like this quarter, probably closer to the 3.5 grams, 3.6 grams a tonne. Total underground operations, we planned probably for the next quarter should be somewhere round about 4.8 grams a tonne.

Kalgold is mining the last part of the D-zone now, so it's going through some sweet spots in the grade. We have commenced on some of the satellite deposits and those grades are very much lower. So it will go through a period where probably for this quarter it continues at the 1.6 gram a tonne, and then it drops down to probably 1 gram and even down to about 0.9 gram, 0.85 gram. At good gold prices, it's going to be very profitable, but obviously if gold prices will go below ZAR200,000 a kilogram, it will be under threat.

Okay, great.

Yes, I think the others are pretty well self-explanatory.

No, great. Thank you. And I've got one small follow-up question. I might have missed with Frank's explanation for it. The corporate admin and other expenditure was basically double what it was in the previous quarter. Was any of that winter tariffs or anything like that included in that, or what was the reason for the -- I suspect it wasn't, but what was the reason for the jump up, doubling of the corporate and admin?

If I can answer that. No, it's not because of winter tariffs; all the electricity costs are really in the operational costs.

That's what I thought, so what's the difference?

What we've been doing is, in the past we've been allocating all our central costs to the operations. And I'm referring to like our central projects that look at different projects, we've been allocating our corporate finance department, the tax department, certain of the IT departments, all of that costs have been allocated directly to the operations. We've decided to centralize that and to actually allocate that to corporate and admin.

Okay.

Paul, if I can just emphasize, what we've really been trying to do is make sure that the responsibility of those that spend the money is in the right place. So operationally, if operational guys haven't had influence over those costs then, we've taken that away, but we've likewise given them full responsibility over all the areas that they have control over their costs for.

It's a great idea, I just wish my wife could be educated to that same philosophy too. But anyway, thank you very much gentlemen.

(Inaudible) Paul.

Thanks a lot guys.

Thank you.

(Operator Instructions). Our next question is from [Charlotte Matthews] of The Business Day. Please go ahead.

Hello Frank, I've come back to ask another question, also related to your corporate costs that's been put to you by one of the analysts. If we moved that increase in corporate costs, the ZAR48 million, back to operations, your costs per kilogram increase would be about 12%, rather than 9%, which is comparable to AngloGold. Is that correct?

You know, just to offset that, I think we've mentioned earlier that when we looked at our capital costs, we've changed our policy. So we are allocating costs below ZAR250,000 we are allocating directly to the operations.

Now that would probably have offset that ZAR40 million, so our operational costs increased with the amount that we've directly allocated to the operations. So I don't think that it's correct to say that it would be in line with it.

Okay. Thank you.

(Operator Instructions). Mr. Briggs, we'll just pause for a moment to see if there any questions. There are no further questions at this time. Would you like to make any concluding remarks?

Thank you very much, and ladies and gentlemen, thank you very much for your time.

It's certainly been a very interesting quarter. The one we're in is promising to be even more interesting with the volatility of the markets. However, I think the guys on the operations have certainly wielded some magic in some of the operations as are demonstrated to you in Masimong. And our intention is to try and get this magic through to all the operations.

So we are having some good times and some fun in trying to turn a lot of these operations around and hope to speak to you next quarter. Thank you very much.

Thank you. On behalf of Harmony Gold, that concludes today's call. Thank you for joining us, you may now disconnect your lines.