Harmony Gold Mining Company Ltd (HMY) 2010 Q1 法說會逐字稿

Good afternoon, and welcome to the Harmony Gold Mining Company Limited's results for the quarter ended at the September 30, 2009. 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).

I would now like to hand the conference over to Graham Briggs, Harmony's Chief Executive Officer.

Please go ahead, sir.

Thank you.

Good afternoon or good morning, ladies and gentlemen, depending on where you are. Thank you very much joining us. I'd like to go through the results. Hopefully, you have the presentation, which is on the website, as well as the supplementary information on the quarterly.

I'd like to draw your attention to the Safe Harbor Statement. You will notice that the date has changed there. The annual report and the 20-F are available on the website, but the date there is June 30, 2009.

Today, we're going to cover a bit of an overview, some return on capital, operational results, financial overview, and that Frank will do, and Frank is sitting with me here, and then we'll conclude.

I'd like to go to slide number five, with a cartoon showing our strategy and where we are, focusing on increasing ounces between 2009 and 2012, growing to 2.2 million ounces. And the various issues that we find very important in the company, looking at the portfolio and trying to get the best value out of the portfolio.

Operations and productivity, getting the best out of our operations, growing either through acquisitions or looking at partnerships, a strategic objective there on doing that, and also looking at our own projects and growing organically from our own projects.

On slide six, those four strategic objectives and the progress we're making on those. So, we did during this last quarter, produce 376,599 ounces, well onto our production targets. Acquisition and partnerships, President Steyn shafts doing well on meeting all those conditions, President.

Hidden Valley, JV progressing well. I'll talk a little bit on Hidden Valley later.

And then Rand Uranium, we are doing that feasibility study on the Uranium project. That we hope to complete sometime the end of November, and hopefully we'll be able to release the results of that study into the markets in the next three months or so.

Huge focus on safety, productivity, and operational issues there. And also looking at our asset portfolio, some of our operations are near the end of their life in Virginia and Evander, and those will require dealing with in the forthcoming months.

If we can go onto return on capital, and I would like to take us to Doornkop on slide number nine, which has got "Doornkop (US$)" at the top. It really shows you what we've been spending on Doornkop over the last period. The flow of dollars spent on that project, it is quite noteworthy to see that in this slide, as well as others, you'll see that there is a huge amount of expenditure that we spent on capital in the years '07, '08 and '09. And we are now over the peak of our capital. And the black line indicates the buildup of ounces coming from this project. So decreasing capital going forward and the buildup of ounces very important.

If you'd like to go to slide 11, Elandsrand. This was where the mine, the new mine has been developed below the old mine, and so its buildup in ounces is slightly different and also the expenditure of capital. But you can see that it is close to the end of its capital, and there's a buildup of ounces coming through. And those results, you can actually see in the quarterly results as well.

Phakisa, on slide 13, similar picture. The buildup of capital, over the hump of the capital, the buildup really coming through during this year. The red is all money been spent and the gray color is the forecast.

Hidden Valley, on slide number 15, very much higher capital. You can see from the graph that we've dealt with so far. The capital expenditure in South Africa, although at a high level, is far less than in international operations. A lot of capital been spent here. Over the hump of the capital, a little bit more capital to go during this year. A buildup to commercial production will hopefully happen during this December quarter. But you can also see the Harmony equity ounces in black, and the total ounces for the project. The capital we're talking about here is the capital into the project, irrespective of whether it's come from Harmony or our Joint Venture Partners.

We move over to slide number 17. Again, the pictorial with all of those capital added together. Financial year '09, you can see, was a peak with that Hidden Valley capital, but a lot of capital been spent on our projects during the last few years, and we're now heading into the territory of less capital being spent in the forthcoming years.

Slide number 18 is the buildup of the ounces. We're below the worst, the dip of Financial Year '09. We're now increasing our production in Financial Year '10, and you can see that the buildup in this year will be just above 1.6 million ounces. And the buildup from the various projects, they're all very important -- Elandsrand, Doornkop, Phakisa, and of course, Hidden Valley.

Operational results on slide 20. A 6% increase in total gold production, that's higher than the guidance we provided. A 6% increase in underground tonnage. Improvement in the total average grades, that's surface and underground.

5% increase in the cash cost, that's in rand per kilograms terms. You'll see that these figures are slightly more different in dollar terms. That's mainly because of the change in exchange rate, and Frank will talk about the exchange rate when he talks about his part of the results.

A decrease in the rand gold price, again strength of the rand during this quarter had a decrease in the rand gold price despite the very favorable dollar gold price. And less capital spent during this quarter than the previous quarter by 17%.

On slide 21, this is the safety slide. Pleasing improvement in a lot of the factors there. Unfortunately, the fatals have still been plaguing us, but it's the straight thing to report on the fatals.

The leading indicators, however, are looking good. Our safety program, looking at behavior of people and really trying to change the safety culture of the organization is working well, but it takes a long time to get everyone's minds and hearts changed. But there are some pleasing, as I said, leading indicator signs.

On slide 22, got the gold production quarter-on-quarter performance of the various operations. A lot of pleasing green ticks there, which is gold production better than the previous quarter.

A few crosses, the Evander and Virginia, and Phoenix. Phoenix was not a concern. It was really a big effort to ensure that we get the grade right, and so there was a little bit of a hiccup in some of the tonnage there.

Evander and Virginia are two of the operations struggling a bit. Some of the operations in Virginia are near the ends of their lives, so we've had some plant closures there at any respect, and we may have a little bit of a timing issue on those closures, same with Evander.

On slide 23, a very proud team there, a lot of sweats and tears went into the production of the first gold at Hidden Valley. It's well on its path of ramp-up into commercial production levels during this quarter. So, that, hopefully, will happen during this quarter. A big issue there is the conveyer completion. This is the conveyer that transports the ore from Hidden Valley to the plant sites at Hamata.

I'd like to hand over to Frank, who will be taking you through slides 25, 26.

Thank you Graham.

If we can page to slide 26, this is the extract from our income statement in dollars. From the left hand side, we've got the September '09 quarter versus the June quarter. We see that the exchange rates in rand dollar, strengthened with 8% on quarter-to-quarter, from ZAR8.42 to the dollar, to ZAR7.78 to the dollar.

Our revenue increased by 12%; 6% was the increase in gold production, and then 5% was the increase in gold price in dollar terms.

Production costs, cash operating costs increased by 20%. This was due to the increased electricity tariffs and winter tariffs of $17 million.

LIBOR of $21 million, we had LIBOR [rate] increases on first of July. And then also, because of the 8% strengthening of the rand against the dollar.

On our cash operating profit, we're down by 19% to $71 million. Amortization and depreciation is lower than the previous quarter. The previous quarter, there was a once-off charge of $28 million for Mount Magnet.

Now impairments during the quarter, corporate administration expenditure in line with the previous quarter, so also exploration expenditure and other income and expenditure. And we have a net loss of $3 million, and that gives us a headline loss cents per share of $0.02 per share for the quarter.

If we page over to the next page, which is the next slide, it's slide 27, this is in rand terms again. This is a reconciliation between our debt cash position at the end of the previous quarter to the end of this quarter. At the end of the previous quarter, we had a net debt position of ZAR362 million, cash of ZAR1.9 billion, giving us a net position of ZAR1.588 billion.

We paid a dividend of ZAR213 million during the quarter. Our capital expenditure during the quarter was ZAR915 million. In the quarter coming, the capital expenditure is going to be lower, and we will talk about that on the next slide.

Cash flow from operations was ZAR266 million. With the higher gold cost that we're receiving in rand terms now, that we will be receiving another ZAR220 million from our revenue for the quarter.

We also, during this quarter, we had the once-off electricity winter tariff of ZAR75 million, which will not be repeated in the coming quarter.

We page over to slide 30, these are our quarterly capital expenditure in dollar terms. We see in September '09, we spent $118 million. In the December quarter, it's going to go down to $110 million, then it will go down further to $95 million, and then in June '10, it will be $75 million. And that is almost the level that it would stay going forward.

If we page to slide 31, this is our cost. If we look at the wage cost, there was an increase of $21 million, and that was because of the salary increases from the first of July. Electricity, the electricity tariffs increased by $17 million, which included winter tariffs of $10 million. Our total electricity charge for the quarter was $44 million.

Thank you, I'm going to hand over to Graham.

Thanks Frank.

On slide 32, we have been asked a lot of questions about electricity, a bit of pictorial and a discussion slide here. The Eskom proposal, as we have it is electricity increase of 45% per year for the next three years. This will obviously fuel a lot of increases on our various suppliers, fuel other commodities.

I'm sure if this happens, it would fuel inflation, expectation would be 2% more than what it would normally be. Household budgets and this would impact directly on people and wage demands would go up.

And right now, our sort of figures would be that our cash cost may increase up to 15% per year. And then electricity and that sort of scenario would represent 25% of our cost as opposed to the 13% current.

This is merely a proposal and it's very difficult for us to calculate the full effects of this, especially in these sort of early days of it being a proposal and not fixed. But I can assure you that in our way of thinking, we need to look at ways of saving power. We are a big consumer of power, so we need to look at ways of saving power.

Fortunately, we have increasing productivity coming through and increasing grade in our operations, in some ways that does combat these things. However, this is just an indicator of the sort of discussions that are happening, both within Harmony and within the industry about the Eskom proposal. So, nothing fixed there, but a bit of a discussion [document].

Over the page on slide 33, a bit of a history in the last year of the gold price performance in dollars. And here, the U.S. dollar scale on the right is going up to $1,000 at the end of September. And in rand terms, you can see that the gold price has been hovering around the ZAR240,000 probably for the last six months. At today, it's probably closer to ZAR260,000. The rand has weakened slightly, and so it's around ZAR260,000 a kilogram.

Our outlook on slides 35, we are very bullish on gold. We continue to be bullish on gold. We have growth opportunities internally. We continue to plan our operations to make a profit, and therefore, planning a ZAR225,000 a kilogram.

Gold production is still decreasing in the world, and a glance of the various quarterlies' results that have been coming out lately, will indicate that very few companies are actually increasing production. In my count, Harmony is only one of the two that I've seen so far. Admittedly, not all the results are out, but the world gold production is certainly going down.

Exploration, I think worldwide has failed to produce significant results. In exploration, we are working hard in PNG, and certainly from between us and our joint venture partners, we're expecting some great results out of that area, and I would refer you to page 12 of the quarterly booklet.

So, we have a view of the gold price, somewhere between $1,050 and $1,100 for the next six months or so. Exchange rate, we would reckon it's probably going to be closer to ZAR8 than the ZAR7 for the dollar.

The investment case for Harmony, we've seen from the various slides on capital expenditure that we got higher throughput coming forward, grade is improving, ounces are going up. There is a huge development drive. We can see that from the capital spend on the total capital, that we really focused a lot on operational development capital.

We've got a healthy balance sheet. Frank took us through that, and a bit of a glimpse on what it might look in the next quarter and how optimistic we are there.

A good management team, both as executive management and on all our operations. We've got some great guys on our operations.

And the share, of course, is very liquid, and we really want to focus on sustainable shareholder returns, and hopefully, share appreciation.

Thank you very much. I would like to open myself and Frank for questions.

Thank you very much, sir.

(Operator Instructions).

Our first question comes from Shane Hunter of BJM.

Please go ahead.

Hello, good afternoon again.

Hi, Shane.

Just one question now really, it just refers to one of your slides there, number 29, where you've shown your outlook now for the quarterly expenditure on capital. And I was just trying to get a [slip] of what out of that amount was going to be spent at Hidden Valley?

Shane, it's -- let me try and get that answer to you. And I haven't got that exact figure here, but if you go back to slide 15 --

Yes.

In U.S. dollars or slide 14 in rand, in rand, you pick it up as about ZAR200 million.

[Versus] the September quarter, it was ZAR249 million.

September was ZAR249 million, and going forward --

It was about ZAR150 million.

A ZAR150 million -- in that region, Shane.

So, you're saying a ZAR150 --

Million rand.

Over the rest of the year?

Yes, yes.

ZAR150 million -- and it's for Hidden Valley?

Yes.

Okay, great. Thank you, that's all for me.

(Operator Instructions).

Our next question comes from David [Lytle] of Deutsche Bank.

Please go ahead.

Good morning, gentlemen.

I just want to -- looking at your capital profile, looks like you had nearly $100 million a quarter for the rest of the year if one looks at slide 17. And then kind of varying and contrasting that to your cash flow statement on slide 28, are we looking at a financing or a need to raise money some time towards the end of this financial year, or into financial 2011?

And how should we actually look at your cash position, because clearly, you're going to burn through a lot of cash this year at the current gold price levels?

Yeah, David, hi.

I think there's several things here. So, if we go to slide 27, it's probably a good place to talk about it.

You can see that the once-off of ZAR213 million once occur again, that was the dividend. The ZAR266 million would improve by roughly at the present gold price, ZAR220 million, plus another ZAR75 million, the once off for the electricity tariff. And then, the ZAR915 million is about a hundred less at about just over ZAR800 million.

So, that's approximately a ZAR600 million turnaround quarter-on-quarter, all those figures added up together. So, though, you know, the cash requirement in this next quarter is far less than the present quarter.

But to try and answer your question on is there going to be a rights issue or not, no, there's not. We've still got a very healthy balance sheet. If we need some short term cash and not included in here is the Pamodzi Free State transaction of ZAR405 million. We've got assets [for free], and one can raise a bit of bank finance on if we've got a short-term cash issue. But we're not planning any rights issue or anything like that at all.

Has the Pamodzi money gone out or do I need to put this on top of that? On top of your bars?

You have to put it on top of the bars.

Okay, okay. And one other question just before close. You've been mentioning operational problems at Kinross and some of the other free state shafts that are near the end of their lives. And I was just glancing at your production profiles, it looks like some of those shafts actually saw increased production during the last quarter.

I mean what should we expect from those three or four shafts you've been talking about in the press about potentially closing?

David, there's a few issues with different operations in Evander and Virginia. The ones that I'm really referring to are operations like the [Branch Shaft]. The Branch Shaft is one of those areas that we bought some time ago. We've got five years more production out of it than our predecessors, and really managed to squeeze as much as we can out of them.

Right now, the ore body is depleted, and although there is some ore in the ground that's sort of less than three grams a ton. So, it's a depletion of ore body issue really on some of these shafts.

That applies to Harmony 2 Shaft as well. We've been mining a little bit of Basal Reef there, and a bit of A Reef and Leader Reef. Most of that doesn't add up to more than three grams a ton. So, it's an ore body depletion issue. They were planned to be closed. It's all a case of timing.

In Evander, if you remember, going back to our August investor day, we did give a profile of Evander with seven shaft closes and Winkelhaak, the Evander 2 and 5 shaft, close in the time. It's a bit of a timing issue I think on 2 and 5 shaft, they may come forward a little bit.

But again, it's really focused more about depletion of the ore body as opposed to anything else.

But have you undertaken notification of the unions of closures of the Evander 2 and 5?

There is some discussion going on, so nothing is firm. We haven't got any numbers on the table. We haven't got a date yet. No notices were issued or anything like that. I mean this is really just giving people notice that we are looking at restructuring those operations.

Okay, thank you so much.

(Operator Instructions).

Our next question comes from Paul Durham of Auerbach Grayson.

Please go ahead.

Yes, good afternoon, gentlemen. I'm sorry I was late onto the call, but could you, just for my edification, just talk through Hidden Valley ramp-up please? I know that you had exceptionally heavy rains and a problem with a gearbox. How do you sort of see quarter-on-quarter tons and ounces coming out over the next sort of four quarters please?

Thanks, Paul.

Yes, it has been a difficult ramp-up, and you know the sort of gearbox failure was completely unexpected. One doesn't expect a new gearbox to fail like that. So, the guys have been working quite hard on that.

One doesn't like to blame the weather, but there is that fact about PNG. So, we in effect probably about three months, two months behind in a sort of ramp-up.

We're expecting that it will get into commercial production during this quarter. Now, that's probably going to be towards the end of November, and I'm not sure how the accountants would be treating that, whether they'll put the whole of a quarter in as capital or treat it as sort of month-by-month, but we'll have to see how that goes.

And then it will be in full production, really going full swing. I think the guidance that we gave to the market was really somewhere between --

(inaudible - multiple speakers)

105 ounces to 125 ounces for the year. It's probably going to be closer to the 105.

Okay, but that's your account right?

That's our portion, yes, our [50] (inaudible).

Okay, good, thank you very much.

Thanks, Paul.

Gentlemen, there are no further questions. Would you like to make some closing comments?

Thank you very much.

Yes, I'd just as a closing comment like to thank Frank for all his hard work in the last two years. It's certainly been a fairly tough time, but we've all come through it very well, thanks to Frank's assistance. Hannes Meyer is -- will be the appointed FD as from the first of November. So, I thank you very much for listening in.

Thank you very much, sir.

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