Harmony Gold Mining Company Ltd (HMY) 2009 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Harmony Gold's Financial Year End Results Conference Call. Please note that all participants are in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions)

I would now like to hand the conference over to Mr. Graham Briggs, the Chief Executive Officer of Harmony Gold Mining Private Ltd. Please go ahead, sir.

Good afternoon, ladies and gents, yes, Harmony Gold Mining Company Ltd. We'll talk about the results for the quarter as well as the year ended. And I am going to take you through the presentation. Hopefully you've got yourself a copy or are reading it online on the website.

Slide two is the Safe Harbor Statement, hope everyone has read that. On slide three the various categories and things that we are going to be talking about. We are going to be talking about the strategy, safety, operational performance. We'll look at our financial overview as well as our growth, and tomorrow's goal, and why invest in Harmony.

If we could go onto slide four, which is the highlights for the quarter. There was a 5% improvement in lost time injury and frequency rates. We are quite proud of really improving the leading indicators for safety, and we'll talk a little bit more about safety later.

In the quarter we became net debt free. We repaid our ZAR1.7b convertible bond, and we repaid our Nedbank loan. We've got ZAR2b in cash.

Production fairly stable quarter on quarter. Most operations did show a little bit of improvement. There were some disappointments, which we'll go through, we'll take you through. There was a two year wage agreement with the unions on wages.

And we've completed our planning for the next year. In the next year we do planning in detail for the year, do some reasonable detail for the next three years and then do life of mine plans, so they've been done.

Hidden Valley has poured its first gold, on schedule in the quarter. And right now, as we speak, Hidden Valley is going through the process of bedding in all the equipment and making sure it works. It is working on mineralized waste at the moment. And Newcrest earn its 50% of the JV.

For the financial year ZAR2.9b net profits, the highest profit ever. We've got a healthy balance sheet, as I said cash of ZAR2b, and being net debt free.

An improvement in headline earnings per share. We've met a lot of our strategic objectives. We've stabilized the Company. We have turned losses into profits. And we've really got ourselves into a position for growth.

We've got several exploration opportunities, and later on I'll take you through the dividend which we are declaring ZAR0.50 per share. And that's the first dividend for five years.

On slide seven, we are now just beyond the June 2009 line. We've spent a lot of money on organic growth. We've spent about ZAR4.4b worth of capital in the last year in getting our projects up to where they are.

A lot of commissioning is still taking place. But we are in a position now really to benefit from all that money that was spent, and really enter the growth days of our strategy.

On slide eight, really what we said we would do on the left, and what we've delivered. I think we said we are going to be creating an outstanding company, generating sustainable earnings that fund dividends and growth. And the declaration of the dividend is part of that.

We've got loads of growth opportunities. I'll take you through some of those about exploration and projects. We have cleared our debt. We had two successful cash generative transactions as well as two successful capital raisings.

Safety has featured very high on our priority; it's certainly the number one issue that all our operations concern themselves with. And that remains a feature of our operations.

We've improved and increased the -- we've increased number of executive management. We've got three additional executive managers; Leon le Roux is one of them. The other one is Melanie Naidoo-Vermaak. Leon is really focusing on engineering issues, and risk as well as insurance issues.

Melanie is focusing on the whole issue of environment. And what we have been look at in the past is really compliance environment. We haven't really got a major thrust into this area, Melanie will change that. The other person is Hannes Meyer, who is the Financial Director Designate.

The operations, we have dealt a lot with operations, and we've closed operations that haven't been profitable. I guess in the operation area this is one area that we have quite a lot still to do both on cost and producing more gold.

On the opportunities we'll talk a little bit about the opportunities, but it's safe to say that we've done quite a lot of due diligences during the last year, very few of them come up with a successful answer and we haven't pursued them.

On production and safety, take you to slide 10, there has been continuous improvement in our safety, and we are really bent on meeting our 2013 milestones, which were committed by a lot of companies some time ago. Rewarding and recognizing our safety achievements and involving all in it. There has been a huge effort in this whole safety issue.

I don't talk about criminal mining, but there has been quite a number of press releases in the past about criminal mining, and it remains an issue and an area of focus.

On slide 11 we have the detail of the safety performance from 2006 to 2009. I'd like to focus you on the lost time injury frequency rates down in sort of below 10. I think that's an admiral performance from all our operating units.

Unfortunately, the quarter was marred by nine fatals, and that really was a negative issue for us. Being the lag indicator hopefully with the healthy eye of the lead indicator these will improve going forward.

I'd like to take us to operational performance, and I'm now on slide 13. This picture gives you a [bit of an] idea of better safety versus better gold production and better rand per kilogram costs.

Two areas that I'd like to focus on here, one is Kalgold. Although gold production was down, that was really planned, it's the end of the D Zone mining last quarter, and really quarter on quarter down, but it actually over-achieved on its plan of gold production. And obviously the rand per kilogram costs are in line with that production and the grade.

The other area is Masimong, Masimong had quite a good gold production, it was down quarter on quarter, but it over-achieved on its plan.

On slide 14 a total of 1% increase in total gold production, 2% increase for underground. A 5% increase in underground tonnage. Unfortunately, a decline in the underground grade, mainly due to the shafts as listed there. And an increase in the total cash costs. In total, that nets out to a 4.5% increase in total rand per kilogram costs.

The drop in the rand gold price was a big issue on this quarter at 16% down at ZAR245,000 nearly ZAR246,000 a kilogram. The capital expenditure was in line with our planning.

And development is going well, we've spent a lot of effort and a lot of money obviously on development, really to try and improve our flexibility and be able to mine the right grades we should be doing. There was also a 5% improvement in capital meters.

On slide 15, the detail in numbers of the various figures. So gold produced 1.1% up there. The other big issue maybe we can focus on is the exchange rate, quite a difference in the exchange rate 15.1% down. Between that and the slight increase in costs obviously that shows in the dollars per ounce up 23%, or a deterioration of 23%, mainly as I say because of exchange rates and a slight increase in the costs.

On slide 16 I've got the detail of the various operations. Don't think I need to take you through that it's all fairly standard and readable.

If we look at the underground operations, for the June quarter 4.9% up in tonnes. Recovery grade is the next one there 3.2% down, should be improving as we go forward. Operating costs at ZAR179,000 a kilogram. Again the same issue there on exchange rates and dollar per ounce [is there].

On the surface operations, I've chatted about Kalgold's mining from the satellite pits. Evander is starting to process from surface sources, we treat that separately. It's really the Leslie gold plant, which is the clean up on it. Phoenix had good gold production.

On slide 19 the results from that, so the reduction in kilograms is mainly due to the Kalgold, but that as I said was planned, the last mining of D Zone last quarter.

Slide 20 is really the production profile for the year, Virginia still being the number one producer, Phakisa and Doornkop still in the low percentages and they will spiral around this as the years go -- as this year and certainly into next year they increase in production.

For the financial year 2009, page 21, or slide 21, that gives the total, 8.7% less ounces than the previous year. The gold price is 32% up from the previous year, and that obviously helped us greatly. Exchange rate is mainly the issue there on the gold price, and the gold price in dollar terms you can see previous year only 6% -- only 6.6% up from $813 to $867.

That's the end of it. Frank, if you could take us through the financials?

Thank you, Graham. If we page to slide 23 this is the income statement for the June and the March quarter. If we start at the top the revenue, our revenue was down by 11%. And this was largely because of the 16% lower gold price achieved in this period. We managed to sell 6% more gold so there was a partial offset.

Our production costs went up by 5%. During the quarter we had one month of winter tariffs of ZAR40m, and there was also consumable stores of ZAR43m, because of higher production.

Amortization, depreciation increased with ZAR243m. Of this, there is the one-off charge of ZAR243 -- ZAR290m which is with Mount Magnet. This charge was offset. There is a credit under the impairments of a similar amount for Mount Magnet.

This is through the reclassification of Mt Magnet from an asset held for sale to a continued operation. We had to calculate amortization for the last two years, put that through and reverse the impairment that we had on Mt Magnet.

Corporate, admin and other expenditure increased during the quarter slightly. Exploration expenditure, ZAR24m of that is in South Africa, ZAR53m is internationally.

In other income and expenditure is foreign exchange losses offset by a profit on the sale of our PNG assets. The net profit was ZAR238m. This was enhanced by a credit on deferred tax of ZAR547m. And this was due to the impairment we had. We had to reverse deferred tax and also lowered deferred tax rates going forward. Our total headline earnings is ZAR0.107 compared to the ZAR0.123 of the previous period.

If we page over to slide 24 this is our yearly financial income statement June compared to June last year. You can see that our revenue went up by 20%, and this was the much higher gold profit we received during this period.

Our production costs increased by 10%. These were increases in both salary, electricity and consumable stores. Amortization and depreciation increased again with that once-off cost of ZAR290m for Mt Magnet, but then also had certain operations coming to production, our amortization rate is increasing.

Impairments of ZAR484m, included in that is the impairment with -- for Target, Virginia and also Evander. Our corporate admin expenditures increases and we reclassified some of our corporate admin expenditure, and we are now showing it under this line.

Exploration expenditure down, internationally we spent ZAR228m, and South Africa ZAR62m. Other income and expenditure includes the profit we made on Hidden Valley of ZAR900m.

The profit from discontinued operations includes the profit we made on Rand Uranium of ZAR1.8b. Net profit of ZAR2.9b that gave us headline earnings of ZAR0.262 per share.

If you page over to slide number 25 this is just to show the strengthening of our balance sheet over this period. At the beginning of the financial year we started with a net debt figure of ZAR4b, cash of ZAR400m giving us a net debt of ZAR3.7b.

During this period we received money from Rand Uranium of ZAR2.1b. We received the proceeds with the sale of Hidden Valley ZAR1.8m. There was the share capital raising of ZAR1.9b, capital expenditure of ZAR2.6b, and then a profit of the other expenses of ZAR2b.

So if we look at our current position we are sitting on a small debt of ZAR362m and cash of ZAR1.9b giving us a net debt position of ZAR1.588m.

If I turn over to the next page this is just a page on our wage and electricity increases for the next quarter. Wages, as you are aware, we had increases of 9.23% on average. That represents 5.2% of our total cost.

Our wage costs for the coming quarter will be plus or minus ZAR100m more than the current quarter, and also in the September quarter we make a provision for leave liabilities [step up] for ZAR35m. That's a one-off provision.

If we look at the electricity, our electricity cost to date was ZAR170m per quarter. There is an increase of 34.6% that results in a ZAR230m per quarter electricity charge.

We've also got winter tariffs, and we pay an additional ZAR40m per month. And our winter tariff months are June, July, August and September, so three of the coming -- obviously the months in the coming quarter we will have additional winter tariffs of ZAR40m per month.

If I page over to page number 27, slide 27, this is just our profit margin. Over the number -- last number of quarters the red line represents the gold price. If we look at the green line that's our cash cost, and the yellow is our operational capital, and then we've our growth capital. So in the fourth quarter we were still able to pay all our capital including our growth capital out of our operating profits.

If I turn over to the next page this is our cash operating profit over the last five years. You can see in 2008 we were sitting at ZAR2.6b and 2009 at ZAR3.8b.

If I page over to page 29 it just shows our headline earnings over the same period. In 2008 we had ZAR0.126 per share and 2009 we've got ZAR0.262 per share.

Paging over to page 30 this is our capital expenditure. We've got quarter expenditure. If you look at the bottom you will see our capital expenditure for the June quarter was ZAR1.1b. Of that ZAR400m at Hidden Valley was spent by our partner Newcrest.

Compare that with the March quarter of ZAR1.061 and our year to date total capital of ZAR4.4b. Our forecast for September is ZAR1.1b, and we will be spending then ZAR344m at Hidden Valley that would be from our own funds.

Thank you, again.

Thanks, Frank. Just to let you know how we are positioned for growth, I think on slide 32 just to recap a little bit on the Newcrest transaction in PNG. This was a transaction which involves not only Hidden Valley but the whole of the Marobe joint venture.

They completed their 50% earn-in for the $526m. We achieved our project milestone for Hidden Valley with the first gold pour. And essentially that mill is getting commissioned now, and the feasibility study really approved to get maximized throughput, really debottlenecking the mill.

On slide 33 is the Hidden Valley area, the ML shown in white on that slide. There's been some focus on exploration here really looking for higher grade areas. Yafo is one of the areas not too dissimilar from the Hamata ore body, a much higher grade. So it's intended to look for some higher grade areas to add to the profile of what Hidden Valley is planned to do.

Slide 34 is the PNG exploration, and this is really the Wafi-Golpu area. Really the Golpu resource, Wafi resource, and then Nambonga is shown there in the sort of dark red colors. Kesiago has been doing -- so had some drilling on it. Not enough to prove up anything yet. There is some focus on the northern side of this -- of these deposits. Really the Northern Margin is relatively under-explored and this is really the focus of part of this to improve that understanding.

This area is turning into a bit of a gold province with copper, gold, porphyries, as well as gold deposits.

35 is our exploration. Evander South is continuing to be drilled. Once those drill rigs are finished towards the end of this year they will move to Poplar. We're going to do some more drilling there. There's some developments on Twistdraai and Evander 6 where we are doing some studies. And there probably will be some proposals on drilling there.

Joel North is having a -- it's got one rig on it and we're drilling some holes there. No values, unfortunately, to share with you yet but we're hoping for some positive results there. Tshepong is doing some B Reef underground development, really as a bit of project. One of the other operations that does a fair amount of successful B Reef ore exploitation is just to the south of this, the Masimong area. So we're quite hopeful of those results.

St Helena, a shaft that hasn't been mined for many, many years. In fact, under-exploited, was sunk in the original Gold Fields days and really done some development there but no ----not really much exploitation. And then some PNG exploration, both inside and outside of the Joint Venture.

On slide 37, just to update you on the ore reserve situation. The reconciliation there financial year 2008 to 2009, really goes from 50.5m ounces down to 48.2m ounces. The parameters are worth noting at the bottom. Gold price mainly is the big parameter. Mined during the year, negative 1.6m ounces. Some equity adjustments, and this is PNG taking it from what it would have been at -- in the end of 2008 to now. And then there's some geology and scope changes there, that's mainly Target and Elandsrand.

Increase in surface sources. And then other adjustments really from a whole host of mines, increase of 1.9m ounces. Giving the total end balance at 48.2m ounces for the end of the year.

On slide 38, objective to get to 2.2m ounces in 2012, we've given you quite a lot of breakdown of how we get there. I have been asked where the capital is, and so on, to get this, to achieve this. All within our plans, and you've seen the sort of capital we're forecasting for September. Essentially in South Africa, capital forecasts at about ZAR2.8b. And then there's just over ZAR300b forecast for PNG.

On slide 39, a project pipeline. The -- on the left in the brownish shading is the projects that are being commissioned now and are developing. Hidden Valley, Phakisa really achieving their commissioning targets. Elandsrand, Doornkop and Tshepong decline.

In the middle, in the gray color, is several operations. The ones with stars in them are the Pamodzi Free State assets. I'll talk a little bit more about them, but I've broken them down into the sort of sub -- sub-assets. Also in that, St Helena 10 shaft has not yet been finalized and included with our resource reserve statement.

And then in the red color, really the medium to longer-term operations there. Project Libra is Evander, a tailings re-treatment. TPM is the uranium projects. Freddies 9 is the shaft we get with the Pamodzi Free State assets. And then Poplar and Rolspruit, Evander South, those three are all in Evander. Wafi and Golpu in Papua New Guinea, as well as Nambonga.

Little bit of detail on Pamodzi Gold Free State asset transaction on slide 40. Purchase price of ZAR405m. I used the ZAR9.33/$ exchange rate there to give $43.3m. It really converts using a previously declared Pamodzi Gold reserve of $24 an ounce, and resource ounce of $2.33. We believe that there's more ounces than that in reserve, resource is probably fairly accurate.

The offer has been accepted by the unions and IDC. There's signing of agreements still to be done and there's quite a few conditions to be fulfilled before this deal actually happens. One of the most important is obtaining the mining rights.

Rand Uranium, we haven't discussed this very much in the past. But it is running like an independent company. John Munro is the CEO of this Company. The partnership, and we own 40% of it, is working well. Just to remind you, it's producing around 220,000 ounces of gold per annum at a cash cost of ZAR185,000 a kilogram.

There's a lot of work happening at the moment on the underground ore resource potential, looking both at gold and uranium, and looking at joint cut-offs. The uranium plant feasibility study, this is the definitive feasibility should be finished by the end of the year. And the plan is there, 450 [sic -- see presentation material] tonnes per month process plant, producing roughly 2m pounds of uranium per annum. Primary feed from that -- for that would be the Cooke Dump, but there would be a secondary feed from the underground.

Investment case of why Harmony on page 43. I think throughput and grade, ounces, set to increase. And this is all from our existing assets as well as the projects that are underway. The development that we have done in the past year are certainly in line with our plan. We've got several new projects under consideration.

We've certainly restructured for profitability and make sure we will add value as go forward. We've got a healthy balance sheet. Net debt-free. We are unhedged, and we've got a strong, cohesive management team. Dividends, it's certainly part of our shareholders returns and, hopefully, we'll get more share price appreciation.

On slide 44, your Company is net-debt free, continues to invest in growth projects and funding those through cash flows. I said that we have funded a lot of -- all our -- all our capital from a lot of sources this year, but spending ZAR4.4b on capital has been no mean -- mean task. It remains bullish on gold price and we are rewarding shareholders with a 50 cent dividend, which is five times cover.

Thank you very much, ladies and gentlemen. We'd like to open ourselves for questions.

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

Yes, thanks. Good afternoon, Graham. Got a couple of questions about the operating outlook. First, just starting with the existing Harmony asset base, 2009 fiscal was a pretty tough year and you guys really struggled to hit the numbers. And I'm just curious as to what sort of changes going forward so that you're confident that you can hit your operating plan for 2012 and 2013?

Thanks, Victor. Yes, it certainly was a tough year. I think we've done many changes and we've obviously undergone a massive restructuring. You don't do that without upsetting a lot of people and disrupting some of the operations, restructuring everyone from shift bosses through to mine captains through clothing operations and so on. These have naturally taken, I think, a lot of the focus and the time. And we are actually, in ourselves, hopeful of much better results having bedded everything down.

So a lot of the promise that we have is bedding operations down. But really the commissioning of the various things that we've done on the projects are certainly going to bear fruit. The other area that will bear fruit is the development that we've done. We've done a lot of development during the past year and this is really what most people classify as maintenance capital. But that has been spent deliberately to get the flexibility up and to be able to produce better results going forward.

Great, thanks. And then basically the -- a similar question applying to the Pamodzi asset. Previous operators have really struggled to make any money there, and it may be because they didn't have the infrastructure that you have. But I'm just curious as to why you think that you can create value from what, arguably, are tired assets.

Yes, Victor. The area of the Pamodzi Gold Free State are several sort of different aspects. Let me just go through them quickly. One is the 2 Shafts main pillar, where previous guys have been trying to mine in the depths of that mine. We don't have any intention of mining those pillars because they're very hard, very high cost. But we will simply go in and mine the shaft pillar out.

We can do that without too much investment because we mine it from Bambanani infrastructure. And, therefore, don't have to prepare the whole shaft and we don't have to mine in that shaft while we're constructively mining that pillar. The plant is an area where we would clean up the plants and demolish it, simply because we don't need another plant. It is an old filter plant so we're not reliant on an inefficient plant.

The Northern asset will require some development and there will obviously be some more feasibility studies on the 9 Shaft area. We believe the 3 shaft area is not too dissimilar to Target, and incorporating that into, for instance, the management of Target will work well. That all will easily be able to be milled at Target plant, which is only 10 kilometers away as opposed to transporting it 30 kilometers down to the other plants.

So I think we see quite a few synergies and we understand that area and hopefully we'll make a big success of it.

I hope so. And good luck with that. And just to clarify, the purchase price is ZAR405m, and is that cash or shares or both?

It is cash and it's paid on conditions of various elements being successful. No shares in that.

Okay. And do you have any sense as to when this might actually close?

I'm hopeful that -- there's actually three or four agreements in it. The one will be an agreement on the plant and some of the dumps, and I'm hopeful that that will close fairly quickly, within the next month or two. The other one, the main condition present there is actually the mineral rights, the Minister giving permission on the mineral rights. And our allowance there is six months.

Okay. Great, thank you very much.

Thank you.

(Operator Instructions). Our next question comes from [David Niffle] from the Deutsche Bank. Please go ahead.

Yes, good afternoon gentlemen. Graham, just following on from Victor, one more question on the Pamodzi transaction. On your CapEx and I guess your production guidance numbers, are there any numbers included for financial '10?

No, we haven't, David. We've got none of the financials in there and none of the capital. But we also haven't got the production in there. Demolishing the plant will obviously generate some money fairly quickly, and the first capital to go would really be fairly small in development of the shaft pillar. But until we've got certainty of the deal we have been reluctant to put any of those forward.

Okay. On your production guidance, also following on from Victor, if -- I think you're on the wire, as saying 1.65m to 1.7m. Now if one assumes, and should we assume about 100,000 ounces from Hidden Valley, does that mean that South African essentially is going to be flat production for the coming financial year?

Yes, the -- so the figures for this year that we've just had, after you deduct the discontinued operations, which is Randfontein, the Cooke operations, it was just short of 1.5m ounces. Hidden Valley, this coming year, will hopefully get maybe just short of [130,000] ounces. And the rest is really increases from Phakisa, Doornkop and Elandsrand. But not huge increases there, so fairly small increases there to take it to 1.7m.

Okay. Following on - just two more questions - following on on the PNG asset, what is your acreage outside of the Hidden Valley Joint -- well, Hidden Valley and Wafi JVs? And what is your, I guess, exploration budget for this financial year in the rest of PNG outside of the JV?

Yes, there's actually three transactions in two different areas. And some of them are progressing through the mining wardens and have been approved. And, therefore, the early exploration is -- it's fairly meager, the meager amounts in both those areas. One is near the -- it's in the Sepik area right near the Northern border with --- what's it -- Irian Jaya. And then the other one is near Mount Hagen. I think it totals about 1.1 thousand square kilometers, but I'll have to get back to you on the actual acreage. I don't think we've focused on acreage as one of the big parameters, David.

Okay. I was just trying to get an idea of how big an operation. I mean maybe another way, how many people do you have on the ground managing these projects and doing the geology?

We've got a general manager on exploration who does a bit on the JV as well as in these areas. Then we've got one dedicated senior guy who is on these areas, and we've got one other geologist here. The guys are building up the various crews to do the (technical difficulty). But geology expertise is fairly abundant in PNG. There's a lot of good graduates around.

Okay. Are there any other regions in the world where you're doing grassroots exploration at this time?

No, we're not. No, I mean PNG remains a very good destination, David. You'll know that it is, I think, number 11 in the sort of world rankings of countries that produce gold. But when you look at those rankings and you look at the sort of exploration potential of PNG, it's -- does feature very high up. So we're really keen on the elephant territory of PNG.

Yes, okay. Thanks so much, Graham.

Thanks, David.

Thank you. Our next question comes from Paul Durham from Auerbach Grayson. Please go ahead.

Yes, thanks. Good afternoon, gentlemen. Just on the income statement, Frank, I know the fourth quarter's normally a clean-up quarter but can you just give me some clarification why that massive tax credit in the fourth quarter? Because, obviously, that skewed the financials all the way through there.

Yes, with pleasure. What happened is, in the fourth quarter we do our impairment exercises. And because of the impairment you actually reverse the deferred tax on those assets which you impair. And the same time we do the impairment exercises we also look at the average tax rate on those operations. And that has led to a much lower tax rate on those operations on the life-of-mine plan. And that created a [switch] through to that credit. Thank you.

Okay, thank you very much.

Mr. Briggs, we have no further questions in the queue, sir. Would you like to make any closing comment?

Yes, thank you very much. Ladies and gentlemen, thank you very much for attending this conference call. I think it's indeed been a pleasure to produce these results and to present them to you. I think your Company is in a good state. We certainly need to continue to focus on production, costs control, those are two issues that really we need to drive further. But the Company is in a position and it's in position to take advantage of various opportunities. Thank you very much.