Harmony Gold Mining Company Ltd (HMY) 2009 Q2 法說會逐字稿

Good afternoon and welcome to the Harmony Gold second quarter results conference. 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, [Dylan]. Good afternoon, ladies and gentlemen, and thank you for joining us on this conference call, the second quarter result for the financial year 2009.

Hopefully, I will demonstrate to you that during this quarter we are reaffirming on our strategy of where we set out to go some 18 months ago, and take you through some of those results. With me is Frank Abbott, the Interim Financial Director. The presentation is on the website, so hopefully you've either got a print or you've got that on the website.

And let us go to slide three. Slide three really focused on the strategic journey that we set out in August 2007. The first period, a lot of restructuring and planning for the future, recognizing that we had big capital plans and we had to be able to fund those capital plans. We're now in the second stage, which was the organic growth stage, getting our capital projects where they should be and developing those projects, because they are going to be the future of Harmony. The other plan was really to get the financial state of Harmony into a good position and to be debt-free by June 2009.

The quarter at a glance, on slide four. Safety has really been a priority for us. We have got increased performance. Our net debt has been reduced during the quarter by ZAR1.1b. The total headline earnings at ZAR492m. Cash operating profit of ZAR1.1b. And the operating margin of 35%. During the quarter, the Rand Uranium transaction was concluded and there was a profit from that. Also, there was a decline in gold production of 8% and because of the gold production decline there was an increase in cash operating costs, the unit cost of rand per kilogram. And I'll take you through a little bit of detail of those.

On safety, and slide five. Our goal is obviously to have zero fatals. Unfortunately, there were three fatals during the quarter. But in general, our frequency rates, both fatality injury frequency rate, lost time frequency rate, have increased dramatically in a positive sense and we're now at levels where we haven't seen them before at Harmony. And the management teams need to be congratulated on the efforts they're going into on safety.

Let's go through some of the operating results and I'm on slide six -- sorry, slide seven, is it, or six? Sorry. The Group operating results. Gold produced, inventory and gold sold, I'd like to take you through those three lines.

What happened during the Christmas break is a lot of the operations ceased operating around about December 23. During the period December 23 to December 28, the mills continue to turn and gold gets produced and then the gold gets sold, dispatched to Rand Refinery, in this case, and sold. So, 11,000 -- sorry, 11.2 tonnes were produced, with inventory of 1.1 tonnes and nearly 12.5 tonnes of gold sold.

The gold price in dollars per ounce dropped quite dramatically during this quarter. Quarter on quarter it was 9% lower and for this last quarter at $794 an ounce. The exchange rates changed quite a lot, 28% deterioration, or improvement if you look at the gold price in rand per kilogram terms. And we achieved ZAR253,441 a kilogram.

Cash operating costs higher because of the less gold produced. And to do the maths on the cash operating costs level, you need to look at the gold-produced level and not the gold-sold level. And a cash operating profit of ZAR1,113m.

The next slide is on the same information but US and imperial, and you'll see that gold sold almost at 400,000 ounces. Again, the gold price, the exchange rate, cash operating costs at $527 an ounce, compared to over $600 for the previous quarter.

There's a quarter-on-quarter variance, profit variance, starting with last quarter, which was at ZAR808m. The volume decrease accounted for ZAR169m. Working costs decreased slightly, mainly because of savings in the electricity bill. The recovery grade was slightly poorer and that reflected a ZAR53m negative variance. Gold price had a positive variance and also the inventory had a positive variance. The net variance is ZAR305m, giving the grand total of ZAR1,113m.

On the operations, I've got separate slides on some of these, on Bambanani. Doornkop had a good quarter, improved volumes. Elandsrand, I've got a separate slide on that one. Evander had good production, relatively flat. It's had -- seen good production for the last few quarters. Joel, very good safety and production performance. Masimong had a good performance. Not as good as the previous quarter. However, much better than before it was restructured, so quite happy with the way things have been happening at Masimong.

Phakisa had increase in gold production. This was one of our new mines, slowly building up, and had an excellent safety performance. Again, management have done wonders there. Target, we've had a new management team on Target, recovering well, doing a lot more work, and I've got a separate slide on that. Tshepong slightly decreased volumes. Tshepong hasn't been performing where it should be. Last quarter it had some fires, recovering from that. There were a few other little issues but, again, we have got our attention on the detail there.

Virginia, one of our lowest grade units but it does produce the most gold. It produces probably about 18% or 19% of the gold at Harmony. Low grade operation, in the order of 3.65 grams a tonne. The Cooke operation's quarter-on-quarter comparison is not relevant here, because on the 21st is when the Rand Uranium deal -- November 21, Rand Uranium deal happened and therefore only two months was ready for Harmony's accounts.

Next slide is the South African underground operations. You can see the detail there, with tonnes milled slightly negative. Grade was down at 4.65 and I will take you through some of the reasons for that, mainly because of a bit of -- Bambanani dropped quite a lot in grade but there were some other grade variances. And operating costs were slightly higher at ZAR169,000 versus the ZAR161,000 a kilogram, and mainly, again, due to the lower kilograms produced.

On Bambanani, the lower gold production really happened as a result of three fires. These fires happened in the higher-grade areas. There's all-out drive to really get it going again and to get back into some of the areas. They did fairly well at getting only 14% less tonnage and you'll see that the grade is at 7.6 grams a tonne, but really trying to get this back into better territory, closer to 8 grams a tonne.

On Elandsrand, we did make the decision in October to dedicate one of our Chief Operating Officers' time solely to this operation, to get it right. The focus has really been on safety. We have paid for that because we have stopped high-risk areas and fixed everything up before we've allowed people to continue. The drive has been on a culture -- improving the culture of safety. So we are certainly looking at better safety graphs there now than we were and I'm sure that we'll see the production being positive in the future as a result of this.

So, lower production. Slightly higher grade but the loss of kilograms probably amounted to about 300 kilograms that we lost out of there, because of what we were doing in getting it right.

On Phakisa, a good quarter for Phakisa, 24% increase in gold production, admittedly off a very low base. A lot of development happening there now, more than 1,000 meters per month, and they actually turned a ZAR12m cash profit. Ice plant has been commissioned. The second railway is commissioned. Most of the shafts' infrastructure is now well on the way to completion and now most of the capital will be on development, and you'll see steady increases in tonnages coming out of that operation.

On Target, recovering well, higher gold production. One of the areas that we've been spending a lot of time is on the ore body and the planning. And because we have better information on Block 4, we've decided to target that instead of the Block 3. Block 3 is actually a bigger block but we have less understanding of exactly the detail there, so we will have a look at that during the next few months. Expecting that a lot of this ore body information will be done probably not in this quarter that we're in now but in the fourth quarter, and hopefully we'll be able to give everyone feedback on that.

On the surface operations, Hidden Valley is still on target for first production mid this year. Phoenix had a decrease in gold production. Two issues there. We had less throughput from -- in the plant and that was due to some contractor strike and the contractors do the monitoring of the tailing slime. And there was a slight decrease in grade and this is really a character of swapping from one dump to another. We're right near the end of what we call the H1 Dump. Kalgold had lower volume throughput because of a mill issue. And the lower grade is a planned lower grade because we're now near the end of the main pit, which is the D Zone, and we are starting to mine satellite pits so that grade is as expected.

In PNG, just a little bit of detail on Hidden Valley. The joint venture is working very well between Newcrest and ourselves. We've obviously had issues to resolve and there always are in building a mine. But they're working very well together, the two management teams, on that. Target, as I said, is still for mid this year. A lot of operational readiness and recruitment of people happening up on site.

The next slide is a slide of Hidden Valley and you can see that there's now some vertical construction happening on Hidden Valley. We've moved away from all the concrete pouring and the like, and now the steelwork is going up.

On surface operations, again, it captures all the surface operations at Phoenix, some rock dump material in the Free State, as well as Kalgold. And you can see that kilograms produced there was down considerably from the previous quarter.

On exploration, the one thing that I owe everybody is some more information on Evander South. There are four rigs on Evander South and they are busy drilling. We've got some reef intersections there. But we really haven't got enough information to share yet, and I will certainly bring that to your attention during the next quarter.

And then, on the Morobe joint venture in the Wafi-Golpu area, this is really the district around Wafi-Golpu. Those that are ringed in black are the areas that we've been focusing on of late. Areas on green are potential ore bodies. And we've now been drilling Kesiago, which is producing some good results of drill core but no results to share with you yet.

I'd like to hand over to Frank Abbott, to do the financial review.

Thank you, Graham.

If we turn to slide 24, extracts from our income statement, the September quarter versus December quarter, we can see revenue went up by ZAR460m and that was mainly due to a higher gold price. If we look at cash operating costs, that was slightly lower, ZAR36m, and it was lower electricity during the quarter. The inventory movement of ZAR137m is the cost associated with the gold inventory that we sold.

If we look at exploration expenditure, that went up from ZAR45m to ZAR75m, ZAR12m of exploration in South Africa and ZAR63m of that in Papua New Guinea. The other income and expenditure, the ZAR505m of the previous quarter includes ZAR534m from Hidden Valley, which is the profit we booked for it in the sale of 30% of Hidden Valley in the September quarter.

The mark-to-market loss of ZAR116m is a write-down of the value of Dioro in our books because of the lower market price. The profit and loss from discontinued operations increased to ZAR984m, if you include ZAR900m profit to be made on the sale of our Cooke assets to Rand Uranium. And this gets us to a net profit (inaudible) to ZAR1.3b.

If we look at our headline earnings, the continuing operations went up to ZAR1.01, discontinued operations ZAR0.20. That gives us a total headline earnings of ZAR1.21 per share.

If you turn to slide 25, during the quarter we strengthened our balance sheet. We did a capital raising of ZAR979m. We issued 10.5m shares and that is 2.6% of our issued shares. We've repaid ZAR1.25m (sic - see presentation slide) on the Nedbank loan. We're left with a balance of ZAR750m, which is due in December 2009.

If you can turn to slide number 26, the Rand Uranium transaction. We received $40m in our first tranche. The $169m, the second tranche, is payable by April 2009. And as I said earlier, we made a profit of ZAR900m after tax.

If we turn to slide 27, this shows our net debt position. The left-hand top graph, the bar graph, shows our total borrowings over the last three quarters. In June we started with ZAR4.6b and we're down to ZAR2.8b in September 2008. The graph on the right-hand side at the top shows our total cash balances over the same period, from ZAR490m to ZAR1.6b. And then the graph at the bottom shows the results of the two top slides. It shows the net debt position in June of ZAR4.1b and December we've got ZAR1.2b net debt. And we're forecasting that, by June 2009, we will have zero debt.

Turn over to slide 28. This is our capital expenditure in the quarter. You'll see our total CapEx going up from ZAR993m to ZAR1.2b. The largest increase was for Hidden Valley, which went up from ZAR400m to ZAR533m. Now, the ZAR533m was spent by Newcrest -- funded by Newcrest, the terms of the farm-in agreement that we've got with them. If we look at the increase in operational CapEx on South African operations, that went up from ZAR374m to ZAR450m and that was largely due to the replacement of vehicles at Target.

Thank you, Graham.

Thanks, Frank.

In conclusion, I'd like to talk about the graph that's got improved margin on it. You can see that we're certainly improving the margin, thanks to the gold price. We need to continue to do some work on our cash costs and get the gold out. On that graph, I've also got two horizontal lines, ZAR290,000 a kilogram and that's roughly $900 an ounce, and the ZAR320,000 a kilogram or roughly $1,000 an ounce. You can see what sort of margin that we can possibly look forward to, depending on your view of gold prices in 2009.

Gold is a safe haven. Certainly, as gold miners, we're very optimistic and bullish on the gold price. We think there's evidence that there's lots of support for gold and [the store] as well. Fewer production coming onto the market, with juniors not being able to explore and projects not getting built due to financial constraints. So we do remain bullish on gold and we're certainly looking at opportunities and we'll see what we can do about opportunities in the market.

I do have a share performance graph and I'm sure most of you are aware of that, and these are versus the JSE Gold Index and the All Share Index.

On the outlook, our expectation is that it's still going to be volatile in the gold market, both the gold price as well as exchange rates. But we, as management, are focused on delivering improvements. Safety is a big drive and it continues to be a big drive, with the grades and tonnage, keeping the development up and especially with our new projects. There's going to be a lot of focus on development.

Costs; we still haven't seen decrease in commodity prices coming through into our costs. We're doing a lot of work there in trying to get some of those benefits coming through back to us. And really on target for producing 2.2m ounces in 2012.

Thank you very much and I'll take some questions.

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

Yes. Thank you. Good morning. Graham, could you spend a couple of minutes talking in more detail about both Elandsrand and Target? It's great that safety is now the key driver at Eland, but I'm trying to understand what the practical implication is of that on the ramp-up that you're trying to achieve there.

Thanks, Victor. Yes, I think having Alwyn there for -- since October, and there have been some other changes, is really getting the whole culture of things happening right. And once you start getting in a bit of a deep mine, one has to get the right sequence of mining. If you don't get the right sequence, then you do get yourselves into trouble. So, there's an immediate effect on productivity. Having the right sequence of mining creates a safer environment from a seismic point of view and it's much better from a productivity point of view.

So, we can look forward to a return to probably better levels during this quarter and probably considerably better during the next quarter. So, I think we said to ourselves, we put a target of about six months to turn it around. I think we're on track for that. So, although we'll probably see some good production, probably during March month, not March quarter, we'll certainly see much better production during the fourth quarter of Harmony.

Target, we've gone through a lot of pain in understanding this operation. And right from looking at everything, or even the worst-case scenario, should we stop and put it on care and maintenance? That ore body, we're still very happy with the ore body. It's looking good. We've got new management there, new (inaudible) manager. We've had consultants' time and efforts looking at all sorts of things, right from re-logging boreholes to looking at values and how we mine it.

So, we have shifted from one block to the other during the quarter. It will have an effect of saving a bit of capital, or rather delaying a bit of capital from now till a bit later. But this is a mine with 20 years' life and therefore we are going to hopefully see consistent improvement as we go forward.

So you're happy that you can deliver some sequential improvement at Target?

Yes, Victor, we are.

Great. Thank you. Thank you very much.

Our next question comes from Matthew Hill of the Financial Mail. Please go ahead.

Hi. Graham, could you just speak about -- a bit about what the current rand gold pricing is for Harmony? In 2009, we've seen it sitting just under ZAR300,000 a kilogram. Surely this is exactly what Harmony's designed for?

I've got another question on the process of your sale of Mount Magnet. Have you made any progress there? Are there any potential -- people that are interested in buying it?

And then, lastly, I know you've spoken about making acquisitions once you are debt-free by June. Will you be strictly looking at gold assets or gold-containing assets, or is it a possibility that Harmony might be looking at snapping up cheap assets in other commodities, not necessarily any gold involved in them, that other companies won't be financed to carry through to production?

Matthew, thanks for your questions. You give me the opportunity of starting all sorts of rumors, but I won't.

I think, on the rand gold price, ZAR300,000 a kilogram is a fantastic gold price, but we've only been there once or twice in the last week or so. So we obviously need to see where these things are going to settle. Everything is unsettled. But at ZAR300,000 a kilogram, there are a huge number of opportunities. Certainly, doing -- producing gold from all our dumps, our tailing dumps in the Free State, why didn't we start it yesterday type of question we'll be asking ourselves.

But certainly, I think a lot of hard work has been put into Harmony. We are positioning ourselves exactly right for this. And we've become -- I guess we've got a bit of luck from the gold price. We need to spend -- during our planning process in the next five months or so, we will spend some time on looking at what this rand gold price actually means in opportunities for us. Certainly, a lot of our input costs are in rand, so that's why you see our gold price -- sorry, our production costs in dollar terms go down to $527 an ounce from $629 of the last quarter.

You're absolutely right. We're exactly positioned there and we need to spend a lot more time. But one can't react quickly in the mining industry, just on a sudden increase in the gold price. One has to see it slightly more sustainable.

On Mount Magnet, Mount Magnet is still earmarked for sale. That operation is on care and maintenance. We continue to do some exploration there. We will be keeping everything in good standing. At the present Aussie gold price, of course the Aussie dollar has gone down. Two months ago, it was almost parity with the dollar and now I believe it's somewhere around 64 cents. So, there's an Aussie dollar that's on their side. I think they're probably up at 12 or 13, $1,200, $1,300 an ounce there. So this is still up for sale and we'll see what happens, but it depends on people actually putting a good proposal in front of us.

Have you had any proposals since the last one was cancelled?

We really haven't been pursuing it as a matter of course, Matthew. We've really been focusing our attention -- we employ about 10 people there, I suppose, geologists and so on, keeping the place in good standing, and that's really our focus. It's not -- we've been fairly busy doing a lot of other things, so it really hasn't been our focus for a while.

On acquisitions, yes, we're a gold company and we're going to focus our acquisitions purely onto gold. We're not going to buy any platinum mines or anything like that, right now. No, we're a gold company and I think that's what our investors want of us, to stay gold-focused.

All right. Are there any opportunities that are particularly attractive that we might expect you to move quite quickly on, come June?

Matthew, there are lots of opportunities right now. There are companies who have good projects but don't have the money to develop the projects. And maybe that's an area where we'll look at possibly joint venturing or the like, some way of partnership. Our preference, right now, is to get something that doesn't take too long to get into a cash flow situation. So, we don't want to be dragged with a very long process of lots of capital going forward.

But we are doing a few (inaudible) look into, getting onto sites in rare cases, mostly desktop stuff. But really, we're trying to fill in all our information boxes at the moment. We're in no hurry to do this quickly. We need to make sure that we actually do the right thing.

All right. Thanks.

Thank you.

Our next question comes from Shane Hunter of BJM. Please go ahead.

Hello again. Just two questions on grade. And I made a mistake about this a little bit earlier with Bob, but just to follow up. From Evander, you described that you might expect a little bit of an increase in the grade, the improvement in the ventilation, and I'm just wondering if you could give us a number or what you might be expecting from that.

Shane, you've caught me on that one. I'm afraid I can't give it to you. And the improvement in grade will really come from eight shafts, where we're mining the edge of the payshoot at the moment. I should imagine that we should be moving closer to 6 grams a tonne, as opposed to -- and I'm not sure what their grade was this last quarter, in fact.

It was just over 5.

Yes. No, it should be moving closer to 6 grams a tonne, because of the improvement in looking at that one, yes.

Okay. And then, also a similar question on Doornkop. You described you've made some improvement to the (inaudible) handling of the waste and I think you're going to be taking up some more ore as well from the South Reef. And I just wondered, the grade at the moment here is about 2.3, could you see that going up, maybe to 2.5 or so, in the next quarter or two?

Yes. The situation of the waste will immediately impact on improvements, because all the waste was being [trained] with the ore coming out the shaft and that was negatively impacting on the grade. So, there will be an immediate improvement. Our mining on the South Reef is showing some good values. We're mining in the region of 7 grams - and I'm talking base grades at the moment - 7 grams a tonne at the moment. So, we're certainly looking forward to seeing the impact of that coming through.

The Kimberly mining, although that was planned to phase out, at these gold prices and the cost of that mining, it's quite cheap mining and we'll continue to mine at Kimberley Reef. And that's a generally fairly low grade and it's probably in the region of about 2.7, 2.8 grams a tonne. So there'll still be a mixture of that coming through. But there will certainly be grade improvements in Doornkop as we go forward. And I would suspect probably for this coming quarter slightly lower tonnages but better grades, and then better -- and better gold.

Okay. Good. Thanks. And just a final one, either for yourself, Graham, or for Frank. Have you decided on what is the future of Frank staying with the Company as the IFD, or not?

Frank says I must answer this question. I think, Shane, that Frank has dedicated 100% of his time to Harmony in the last while. There's commitment from everyone to certainly continue through this financial year, and therefore some decision will be made come the end of the financial year into the beginning of next financial year. So, I think we can expect that we will have some sort of announcement to make some time in July to September. But Frank continues to dedicate 100% of his time to Harmony.

Okay. Great. Thank you, Graham.

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

Hello there. I just wonder if Frank could just give us a bit more in-depth breakdown of these charges and other incomes and profits and losses from discontinued operations in terms of what's what there, Frank. We can see them on the slide, but if you can give us a bit more depth there, that would be appreciated.

Tell me, have you got the actual income statement or are you using the slides?

No, I haven't. I'm just looking at the webcast. I apologize.

Okay, fine. No problem. Let me just go back there. Okay. If we start at the top. Okay. We put the amortization, which has been much in line with what we had in the previous quarter. Then we've got our corporate expenditure, which is also in line with the last quarter, ZAR92m. And then we've got the exploration expenditure, which I explained earlier.

You mentioned, yes.

Then you've got other income. And what I've said to the other income, that's a bit of solid income and it -- and the previous quarter we had a [little bit of] a positive thing that was Hidden Valley profit that we booked there. If we go below that, we've got a loss from associates, which you don't see here. It's ZAR52m. And that consists of a loss from our interest -- our 40% interest in Rand Uranium of about ZAR18m. And then the balance is the portion that we still had in Pamodzi Gold that was ZAR34m, which was also wrote off in this quarter.

Okay.

Okay? And then we've got this mark-to-market of listed investments, ZAR116m, and that is really written down Dioro to the market -- the current market value. We still show about ZAR24m of our investment for Dioro but the ZAR116m we've written off through the income statement. Then we've got investment income of ZAR107m and the increase is because of our larger cash balances. Our finance costs have also reduced and that's also because of a lower debt level during the quarter. Then we've got the tax charge of ZAR220m.

And then we've got the profit from discontinued operations, of ZAR984m. ZAR901m of that is the profit that we made when we sold the Cooke shaft to Rand Uranium, and that's after tax. And ZAR80m comes from the profit we made on the Cooke shaft in that period, when it still belonged to us, before we sold it to Rand Uranium. And that leaves us, then, with a ZAR1.3b net profit.

Okay. Great. Thank you.

Okay?

Thanks very much indeed for the detail.

No problem.

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

Thank you very much, yes. Ladies and gentlemen, I think from the figures you can see that Harmony is in a good state. We had our net debt come down from ZAR4.1b down to ZAR1.2b. We've continued to spend approximately 300 -- sorry, ZAR3b on our capital projects and capital expenditure during the year. And we've done a considerable amount of restructuring. Harmony's in a good shape to tackle the future and we're looking forward to 2009, especially with the buoyant gold price, to be able to really show more improvement going further forward.

Thank you very much for your attention.

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