Harmony Gold Mining Company Ltd (HMY) 2009 Q3 法說會逐字稿

Good afternoon and welcome to the Harmony Gold Third Quarter Earnings Results Conference Call. All participants will be in listen-only mode. There'll 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 with me I have Frank Abbott, our Interim Financial Director. I hope everybody has got the document which was on our -- first on our website this morning. And I would like to go directly to page number three, which is a slide on safety. Interesting enough that from Doornkop mine, a little bit of a play on our various safety movements using the big five game in South Africa's safety.

On slide four, some detail on our safety. It's really behavioral based, management leading by example, improved communication, really elevating safety as number one. On slide five, it continues and we do reward safety achievements. Likewise, there's also the stake for poor safety. We involve all and this is across the Company. Employees are well involved in this process as are our unions. And as you can see from the various things on these slides, safety is quite well branded at the operations.

The safety results for the quarter. Unfortunately, there were three fatals on Tshepong, Masimong, and Elandsrand. In essence, we've had a very good safety quarter on other measurements. Our lost times, improvements, reportables improvements and we also had a DME safety flag awarded. This was for the most improved mine on the medium and deep level gold and platinum mines and part of Evander got that.

To move onto slide number eight, it's really a little bit of trying to capture our strategy. We've been in that position of the sort of recovery phase. We've got this coming quarter to go in this recovery phase. We were going to focus on our organic growth on our projects and really getting the mines into a steady state of production and therefore getting these growth projects to perform better in the future. And that's the period we're in. June 2009 was -- the objective there was also to get debt free by that date and we'll talk a little bit later on that.

Slide nine, we believe we're well positioned to take full advantage of what's happening, both with respect to the gold price, but especially internally. Very focused managements, both on safety as well as operations. We have free cash flow after all our costs. We've got a great pipeline. And there are lots of growth opportunities within the Company at this rand gold price. Dividend is something we've been talking about and the Board will no doubt spend more time on dividend and look towards putting some sort of document together where we can tell you more about what our dividend policy will be in the future.

Slide 10 is simply a tremendous slide showing what our borrowings have done over the last few quarters, up to April month, what our total cash is and the balancing figure there, the net cash position. So March 2009, debt free, net debt free and in April, ZAR1.6 billion in the bank.

Slide number 11 is on our ore reserve grades versus development. Three bars per operations there. The black bar is the grades, the ore reserve grades. The red bar is the rolling four-quarter average. And the gray bar is really the last quarter. It gives you a bit of an idea of development results versus the ore grades of those operations.

In the quarterly documents, we've got full explanation of what's happening here and why there are variances. We've also changed our quarterly development reporting so that it's more relevant in per operation. Prior to this, it was reported per tax entity, which doesn't really give a huge amount of useful information. But development, obviously, is a good sign of what the future is going to hold in these operations.

Slide number 12, a little bit about our asset base. Looking into the future, ore bodies are key. We've got some great ore bodies. We've got lots of clear development strategies and we are achieving our rates of developments. So, we look forward, in 2012, really, to getting Phakisa, Doornkop, and Elandsrand to reach full production. Targets, we've -- we have said in the past that we've re-looked to that ore body. We're hoping to give some new objectives during this coming quarter and we'll certainly -- the management team is very focused on achieving those objectives. Higher values from Tshepong Decline and Bambanani shaft pillar in the future as well as in Evander 8 shaft. And I've talked a little bit about project pipeline.

The focus in the futures is really throughput. That's more tons, better grade and therefore more ounces as these new mines ramp up. We've been doing something on productivity. We haven't arrived on this. We've set ourselves some harsh targets on improving productivity. With respect to operating costs, the OSM costs that have come down of late, not a huge number in Harmony's case. There have been some lower steel prices and the like. But we also are influenced by increasing electricity and labor costs.

Very cost-conscious culture and trying to get the best out of the money we spend. Productivity initiatives have been implemented. The new projects are quite important because not only are they new, but the logistics are new, the working places are closer to the shaft, so that should also help with productivity.

A bit of an overview of the quarter and we're now on slide 15. Really, a quarter-on-quarter score card, checks being better and crosses being worse. In safety, there are three crosses there. Those are the fatals that occurred on those operations. Gold production -- this is kilograms of production up in the checks. And rand per kilogram costs improved in those areas of checks. Pleasing to see, of course, that Elandsrand, Target, Masimong were amongst those where quite a lot of restructuring happened during the last while.

Turning over to page 16, our slide 16, the production quarter-on-quarter was 3.4% lower. There was a slight startup in the sort of post-Christmas break and a 4.1% decrease in tonnage from underground operations. Surface operations had increase of 17.4% and the underground grade was consistent with the previous quarter. Costs, a slight decrease in costs and -- but the lower gold production in it will increase in rand-kilogram costs.

Capital -- we predicted lower capital coming forward and we had ZAR72.5 million worth of capital less this quarter than the previous quarter. Gold price pleasingly and if you go into page -- slide 17, you can see that. The gold price in this quarter was ZAR293,000 to kilogram and the previous quarter was ZAR253,000 to kilogram. The exchange rate virtually flat, so the increase was in the gold prices. Gold produced 3.4% at the 10,880 kilograms there. Cash operating profit -- sorry, cash operating costs, rand per kilogram, slightly up from the previous quarter, 1.8%, again due to the low gold production at ZAR171,000 to kilogram.

Slide 18 is the same figures in imperial numbers. So 350,000 ounces produced and the cash operating cost at $537 an ounce. Cash operating profits at $118 million. The detail of the operations targets, certainly a more acceptable production level. Looking forward to slightly better production going forward. Phakisa starting build-up. There were two as longs commission during this quarter. So, it's looking better and should have better conditions so that they can get more developments.

Elandsrand, both safety and production performance is recovering gradually. Masimong, marginal improvements, but Masimong is actually the second best gold price in rand per kilogram in terms of performance. Tshepong, of course, is our number one producer. Doornkop is also achieving its commissioning targets. Soon in this quarter, we'll have some separation of the reef in the West, so there'll be some different numbers from Doornkop going forward.

Evander really had quite a poor performance from many environmental ventilation conditions, both on Evander 2 and 5. Also a bit on 8 shaft. We have put a new risible hole there that should hold during those months and hopefully environmental conditions will improve. Bambanani, we predicted lower production from there, so there were some higher costs in rand per kilogram terms. This is basically a result of the fires which we had some time ago in the high grade areas. We hope to see some marginal improvements during this quarter from that.

Joel had a disappointing quarter. We did some shaft repair work. The north shaft at Joel has got cable guides and these were replaced during the quarter. Virginia remains our biggest gold produce. Phoenix Tailings plant had an increase in gold production, mainly through increase in throughput. And Kalgold had a marginal increase in gold production. The quarter that we're in is probably the last quarter that will have any tonnage out of [Thesan] and then we'll be into the [satloc] pits.

In the surface operations, slide 21, this was a combination of Kalgold, Phoenix and the dumps. And you'll see that the grade there is mainly due to a slightly lower grade, mainly because, of course, the increased throughput in Phoenix as well as the dump grades, which is really rock dumps. Slide 22 is the same slide in imperial terms. Operating costs there is $509 an ounce.

These are a few slides on the project pipeline. On slide 24, a photograph there of the drilling rig at Evander South. There have been five rigs drilling at this area. We had 2.2 million ounces of reserve in the feasibility study. We set out to try and extend that in numbers as well as up-dub in the region of sort of 300 to 500 meters below surface. The drilling is taking place there and hopefully that once we've finished that drilling, we'll take it again through a pre-feasibility study. St. Helena project is really in the stages where there's a lot of environmental planning that's being done and that needs to be pushed through in the months to come ahead.

Slide 25, Hidden Valley. Newcrest all set to achieve their 50% equity by the end of the financial year, 2009, that is true. They have achieved the 40% during the quarter. More commissioning is during the middle of this year. And certainly, there has been a lot of work around -- study indicates that -- we've got some indications that we can improve the mill there, both debottleneck and get more throughputs. But there's certainly a lot of potential in that region.

And if you're onto slide 26, you can see sort of a plan. You see there also a photograph of the mining lease, showing the Hidden Valley pits, the Hamata Pit, the Mill Sites and a bore hole which we did on Yafo at a pretty substantial grade, five meters of nearly 12 grams a ton and one of those meters was 42 grams a ton. We're really hunting for some higher grade throughput in that region. There is lots of potential.

On slide 27, the sort of the Wafi-Golpu is really a region of copper-gold porphyries, as well as some gold deposits. The licensed drilling we've been doing is at Kesiago, near the bottom of that pit. And reasonable indications of good copper-gold, porphyry there -- 388 meters at 0.24 gram per ton gold and 0.1% copper. Certainly, a new discovery. The challenge here is going to be putting some of those together and really trying to eke out a mine in this highly prospective region while we continue exploring.

Now to hand over to Frank Abbott, probably starting at page 29.

Thank you, Graham. If we look at slide 29, this is a stack bar of our cash cost to kilogram. That's the blue column. And then, on top of that the operational capital to kilogram. And on top of that the growth CapEx to kilogram. So, that's producing the total cost per kilogram on all four costs, including both working costs and capital. The red line is the gold cost over the same period.

If we look at the similar quarter and we look at the difference between the red line and the blue line, we can see what the margin was between our working costs and gold costs and that was ZAR84,000 per kilogram. And that represented 33% margin on sales price. If we look at the March quarter, the margin when much wider. The margin was ZAR123,000 per kilogram and that represented 42% on sales price.

If page over to page 30, we look at extracts from our income statement. The top line is our revenue. Our revenue went down from quarter to quarter. The gold sold was lower and that was offset, of course, because -- with a much higher gold price. Our production costs came down about ZAR203 million. The cash operating cost came down by ZAR30 million because of lower consumable cost. And in the inventory movement, resulted in the balance of ZAR170 million, a lower cost.

In the current quarter, we actually locked up gold wherein the previous quarter we actually sold gold out of lock-up. If we look at corporate and administrative expenditures, they come down to ZAR80 million. Included in our exploration expenditures, ZAR71 million. It's ZAR54 million then to expand to Papua New Guinea and that's full paid by our intending to support the new case.

Other income and expenditure of ZAR326 million. Included in the ZAR326 million is a profit on selling another [10%] of our Papua New Guinea assets to new list. Loss-profit from discontinued operations, previous quarter is ZAR868 million. Included a profit on the sale of how Cooke shafts to rent around. Our net profit was down ZAR972 million and if we look at the headlines earnings per share, it was slightly up on ZAR123 per share.

If we compare to slide 31, delivering on our promises. Rand uranium transaction was concluded and we received ZAR1.75 billion. It was $171 million and, fortunately we did lock in a favorable rent, dollar exchange rate and we banked ZAR1.75 million to that. We are repaying the convertible bond on the 21st of May and we also did the second capital raising during the quarter of ZAR938 million. We will repay 7.5 million shares and that should represent 1.9% of our issued share capital and we did it at the subscription price of ZAR124 per share. The cumulative share we thought it applied 4.5% of our shares through capital raising. We repaid on Nedbank loan of ZAR750 million.

We page over to slide 32 for capital expenditure. We see the total CapEx to the quarter was down to ZAR1.061 billion. This is ZAR1.061 billion compared to the ZAR1.2 billion from the previous quarter. The operational CapEx at South Africa came down ZAR55 million. The previous quarter was really high because of equipment of reported Target. And there's also been a reduction at Phakisa because of the ice blowns that was bent on the previous quarter. And in Hidden Valley came down ZAR90 million. We expect that our capital expenditure in the June quarter would be approximately ZAR650 million.

I hand over to Graham. Thank you.

Thanks, Frank. Over to the conclusion and outlook, I think when it comes to gold we are still very bullish on gold. That doesn't mean to say that we believe that the gold is going to go up to dizzy heights, but we think that the gold price of $900 an ounce is a good gold price. There's probably going to be improvements in that. But we certainly don't -- aren't negative on the gold price.

There are various sort of supply-demand issues, organic growth opportunities we have in our companies. So, we can increase gold production. Our planning is fairly conservative with around ZAR225,000 to kilogram and for that we used $750 an ounce at ZAR9.33 to the dollar. World gold production seems to be decreasing, except possibly China. That's the only one that is increasing. There have been less exploration successes of late. ETFs continue to increase their stockpiles. China is increasing its gold stock and generally gold, as a financial instrument, and it seems to be really taking shape as opposed to just jewelry demand.

Harmony outlook for the future is really focused on safety, production, costs, but also having sustainable profits and delivering more consistent results quarter-on-quarter and year-on-year. We believe we can maintain a strong margin and so we are very bullish about everything that we've done in the Company and are looking forward to the future as a very strong company now that we have no debts.

I'd like to open ourselves 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. Graham, let me, if I may, just press you a bit on a point you just made about maintaining steady production from the asset base. And I guess one of the things that I see is that from one quarter to the next, some of the operations seem to shoot up to the top of the performance chart and others seem to lag. And I realize it's very difficult to get all the assets performing on an even keel, but what can you tell us about the things that are being done in terms of management and specific operations to get most of the operations performing well most of the time?

Thanks, Victor. Hi. Yes, there's several issues here. One of them, Victor, is simply having the flexibility in the operations so that when you do lose a face on a grade or you do lose a face for some other reason, that you have alternative places to go mining. And that, the heart of that is really getting the development up and going, keeping developing and getting that flexibility. Now, that sounds like fairly easy and quick, but unfortunately, to get a raised line through, it takes you somewhere between 18 months to 24 months.

So, we haven't been mean on our developments, on our sort of operating capital. We've continued to do that and flexibility is improving on a lot of our operations. This is really key to places like Elandsrand, of course, where this is one of those issues which hasn't been really focused on in getting a development going. So, development is the most important to match.

There are obviously issues in some of these operations. But generally, sort of a fairly satisfactory quarter and we're satisfied in where we're going because we've been focusing on the bigger operations with the longer life. The Phakisa, Doornkop, Tshepong, Elandsrand is really where the big focus has been. So, although issues like the maintenance at Joel shaft were certainly a hamper, it's not a huge producer. So it's really all the basics of mining, Victor.

Okay. Great. Thanks, Graham. Second question goes to the convertible loan. I didn't hear clearly. Was that already repaid or will be repaid on the 21st?

Thank you. It will be repaid on the 21st of May.

Okay. So, that's fine. I just didn't understand when -- clearly when you made that comment. Great. Thank you very much.

Thank you. (Operator Instructions).

Mr. Briggs, our next question is from [David Little] of Deutsche Bank. If you can go ahead, please, sir.

Yes, good morning, gentlemen. Just a question, I mean, as we get close to, I guess, your financial year end, what -- can you give us some insight into what you're looking at for production in financial 2010 on ounces produced, I mean, as you bring some of these projects into production and what the path is to 2012 that you talked about a couple of times.

Hi, David. Yes. This is a time of the year when we do a lot of our planning -- business planning as well as our sort of strategic planning. It's, at the moment, the major step-up in production really comes from Hidden Valley. So, Hidden Valley will start producing during the middle part of this year. So, probably the end of June into July. Hopefully, it gets into full commissioning finished by sort of October. We -- our expectation is that Hidden Valley should be producing about 130,000 ounces for the coming year.

Other operations in South Africa should really be fairly stable, around the 1.6 million ounces, so that takes us somewhere between the 1.7 million ounces and 1.75 million ounces for the next year. The ramp up on sort of Doornkop, Phakisa really happens in the year after that.

Okay. Now, you speak of the 1.6 million ounces annualized. I mean, right now we're running, what, about 1.45 million ounces? I mean, where is the shortfall right now in your Group that we're not seeing?

Yes, I mean, our plan was to get to the 1.6 million ounces during this year that we're in. There obviously is a shortfall. And that's in -- that's really in quite a lot of operations all over the place. So, we have got that shortfall this year. The coming quarter will be better. But it is not going to make us up to the 1.6 million ounces.

In financial 2010, do you think the 1.6 million ounces from the South African asset base is the right number to use?

Yes, yes, it is.

Okay. Thanks.

Thanks, David.

(Operator Instructions).

We have a follow-up question from Victor Flores. Please go ahead, sir.

Yes, thank you. A question on the deal that you've done on the Cooke shafts. Now, that that's largely closed, what should we expect going forward from this joint venture?

Yes, Victor, it's -- we're now 40% owners of Rand Uranium. It is treated as a sort of separate company. It's got its own CEO, own management team. Most importantly, there's a project team which is busy progressing the definitive feasibility on the uranium plots. The uranium assets, potential ores, they are twofold.

One is the underground, mainly at Cooke 3. But also the Cooke Dump. And we're going through that process hopefully by the end of this year, the calendar year, that definitive feasibility study will be complete and then we'll be able to get a good idea of, certainly, the amount of capital that is to be spent there. But also, the potential on number of tons of uranium oxide it can produce and at what costs.

It's looking quite optimistic. I think the close that we start looking at the uranium market, it gets -- there's quite a lot of interest. Forward sales, contracts, are certainly looking much better than the spot prices. So, it's fairly encouraging, but really, we have to wait until the end of the calendar year before we'll get good information there.

Great. Thank you.

Thank you. We have a follow-up question from David Little of Deutsche Bank. Please go ahead.

Yes, thanks, gentlemen. Inside slide 11, you showed your ore reserve development and ore reserve block. I haven't seen this presented this way in the South African -- by other South African companies. How do I actually use this chart in stable, Graham, and I mean, what should we be looking for and what do you look for when you look at this graph that you presented here?

Thanks, David. Yes, I think the intent, obviously, is to be developing some of the grades to what you have in your ore body. And the black graph is the ore body. So, if you had a rolling four-quarter average and if it was similar to the ore body, then you'd say, well, these guys were pretty spot on in what they estimated in ore body. They're getting their development values out of the development and therefore I should be able to get the grades that I'm producing that they say in the order statements.

The variants, however, have got different reasons and if you don't mind, I'll just pick on one or two just to take you through it. So, let me choose the biggest variance, which is Bambanani. Most of the Bambanani ore is actually the sharp pillar itself, very high grades, well over 2,500 centimeter grams per ton. But the reality is we're not developing that sharp pillar at the moment. We're developing our client in other areas and that's why there's a big difference there. The shaft pillar will be planned to be mined in the future during the sort of planning session. We'll certainly know a bit better, but it will probably start in about three year's time. In that case, you will see a leap in the development grades.

Let me choose another one, the other way around, if you don't mind, Elandsrand. Elandsrand grades there actually have been overachieving lately, both in the rolling four quarter as well as the current quarter. And that is because we're actually developing in a fairly sweet spot at the moment. Now, that means that come 24 or 18, 24 months time, the grades in Elandsrand should be much improved. And this is a sort of a fall early indicator of what the grades will be in any particular area.

Okay. Not to get too technical on the call. Certainly, like Elandsrand, we know that your mine call factors have been quite low over the last couple of years and that's resulted in you essentially having to lower your ore reserve estimates. So this grade, this -- your ore reserve blocks, are those at the previous mine call factors in the -- with the poor recoveries?

Yes, this -- these ores that have blocked here would be the lightest ores declaration which would have been June 2008.

Okay. And do you make adjustments to your development grades for that recovery on the mine call factor?

It doesn't -- they're now trying just to be development price. Development grades are as they are. And what often happens in that -- and you'll see it in some of them -- and for instance, this is a total grade. Now, we have changed the schedule at the back of the quarterly book. Previously, we had development grades and tax entities. We've now broken them down into operation to operation.

So, that's a lot more useful both in development meters as well as grade. But often, you -- obviously have some viability issues, you go through dead patches and the like. And therefore you see in mines like Virginia, you will often see development grades lower than the block grades and that's simply because a lot of that is actually unpaid areas.

Okay. Okay. So, I have to know these operations pretty well to use this chart. Thanks, Graham.

Okay. Good.

Thank you. Mr. Briggs, there are no further questions at this time. Would you like to make any concluding remarks?

Thank you very much. Ladies and gentlemen, I think being debt free, having cash in the bank, the cash is certainly not going to burn a hole in our pockets. We are managing to -- certainly going to be producing some good cash flow going forward, be able to support our capital. This is a time, certainly, when we're in the planning phase. But we're optimistic that all the things that we're doing in the Company will hopefully produce more consistent results going forward. And thank you very much for listening in.

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