Harmony Gold Mining Company Ltd (HMY) 2010 Q2 法說會逐字稿

Good afternoon and welcome to the Harmony Gold second quarter earnings results. (Operator Instructions). I would now like to hand the conference over to Graham Briggs. Please go ahead, sir.

Thank you very much and good afternoon, or good morning if you're in the States, ladies and gentlemen. I have with me Hannes Meyer, and this is the first time Hannes is doing a presentation on quarterlies, so welcome to Hannes. And please feel free to ask him financial questions towards the end of the presentation.

I'd like to go through slide number two which is our Safe Harbor statement, to slide number three really dealing with five issues here. I've talked a little bit about the key features in the quarter, operational overview, Hannes will do the financial overview, have a discussion on exploration and then the conclusion.

So with respect to slide four, some of the challenges that we've had for the quarter -- sorry, I'm getting a bit of feedback, Dillon.

My apologies, sir. Are you ready to begin your q-and-a?

No, no, no, Dillon, I'm getting feedback.

Okay, I'm not hearing anything at the moment. If you'll hold on a moment I will check the various lines.

Okay, thank you.

Okay, sir, I'm not hearing any feedback.

Okay. No, maybe it's just us, Dillon. Let me carry on.

Thank you sir.

Sorry, ladies and gents, I was on slide four, Safety Challenges. Still number one priority in Harmony, it would be very nice to get to a fatality-free quarter; that's one of the things that we're striving for. An improved safety performance on the previous quarter, however, we have not arrived and, as I said, making lots of effort on that.

A 45% increase in cash operating profit to ZAR800m. In the quarter under review we had an 11% increase in rand Gold price, nearly ZAR265,000 a kilogram. Underground operations, free cash flow after capital their expenditure.

On slide five a increase -- a slight decrease in Gold production but we did do some restructuring, and I'll take you through that. There was a small drop in capital expenditure as expected, the quarter a lot of time and effort spent on commissioning of our growth projects. In PNG some great advances in Hidden Valley, and then we've got some really exciting exploration results in PNG at the Golpu deposits.

Over to slide seven showing the Group operating results, and you can see the Gold production and Gold sold. The Gold price, obviously, the 11% improvement there in the Gold price. Cash operating costs at ZAR192,000, 2% negative there. And I'll take you through the underground operations where you can see that difference. And then the cash operating profit. Exchange rate slightly stronger than the previous quarter, at ZAR7.49 to the dollar.

On the underground operations, Bambanani, a reasonable quarter from Bambanani. We had a fatal there which obviously marred a little bit of the performance. At Bambanani the mining continues, but really the development project in anticipation of mining that massive Shaft pillar is continuing, and that's making good progress. It is on time and we'll soon be -- well, sorry, in about three years' time we'll be in full production there.

Doornkop improvements from the South Reef mining. Really a lot of the developments of tonnage in Kimberley Reef mining happened during this quarter and, hence, a slight drop in the grade, but the project buildup is going well. Elandsrand had a disappointing quarter. It was down in Gold, it had a few stoppages, including the one fatality. It's really a case of getting everything working well in that new mining operation as we extract ourselves from the upper levels.

Evander had a very difficult quarter because we did stop one of the Shafts there; that was stopped in December. Furthermore, we subsequently stopped another two Shafts at Evander. These are Shafts where really the ore body is depleted, and after months of investigation on the possibilities there we've decided to close those Shafts. Joel had improved grades. It's really achieving some good rand per kilogram costs.

Masimong remains our best performer when it comes to rands per kilogram. Gold production was down slightly, but that's mainly due to B Reef. B Reef is a highly channelized reef and we do get grade variances there. Over the page on Phakisa, the whole commissioning of Phakisa is going fairly well. Ice plants, railways, Shaft infrastructure is going well. As well as the development it's starting to pick up some reasonable grades.

Target had a slight grade decline. Really it's operating fairly well. We've got to put more flexibility in that operation in the massive mining. Tshepong had a fairly static production. Higher grade will come through as it mines more in the decline area. Virginia returned to profitability. We closed a Shaft there during the quarter, and in fact during December, and that's got slightly higher grade but much better performance, especially at these core [cost] levels.

In the Pamodzi Free State acquisition we've completed all our business plan there. We did do -- produced a little bit of Gold from those operations. Our planning is really to produce up to 150,000 ounces per annum and that's in 24 months' time. We are hoping to take our first blast there within the week and it'll be ramping up employment up to about 2,500 people. At the moment we have about 800 people employed there.

On slide 10, this is the South African underground operations, and this is where you can see the Gold down roughly 600 kilograms, mostly due to Elandsrand and Evander and, therefore, this affected the rand per kilogram costs but, even so, fairly good operating costs considering that amount of droppage in kilograms on those two operations. Again, I think all the figures fairly self explanatory. I've gone through some of them, including the exchange rate.

On slide 11, this is the performance for the surface operations. KalGold's operating at fairly low grade of something around about 0.83 or thereabouts. The bit of rain that we've had in South Africa lately has affected some of the production. It gets sticky ore, but really a fairly good performance from KalGold.

Phoenix, we managed to get full throughput in Phoenix of around 500,000 tonnage per month of [pailings] and the grade slightly up at the 1.22 gram a tonne. Rock Dumps remains fuller for the dumps and a fairly steady performance there. When you compare Rock Dumps from the previous quarter you'll see a drop in grades. That's really because the previous quarter had a slightly higher grade from the plant clean up.

And then over the page, on slide 12, you can see the tonnage, the grades and the Gold produced and the financial information there. On Hidden Valley, slide 13, an interesting slide of the pipe conveyor that's under construction. It's now fully commissioned but it's quite a massive structure, about 5.5 kilometers long from the Hidden Valley pit to the Hamata plant site.

Slide 14, the performance summary of Hidden Valley. You can see the Gold and Silver produced there, and that's attributable to Harmony. 745 full-time employees, all the contractors have now been demobilized. A lot of commissioning has been going on there of achieving daily targets and so on. We just need to string all the days together. It will go into commercial production during this quarter that we're in.

I'd like to hand over to Hannes, starting at page -- slide 16.

Thank you, Graham. Looking at slide 16 and dealing with the income statement in rands first, revenue up 8% quarter on quarter, and that's attributable mainly to Gold price increase of 10.6% offset by some 6% decline of production and then some de-stocking of inventory within the plants during the Christmas period.

Going to the next slide, production costs, cash operating costs down ZAR94m, mainly attributable to electricity tariffs; the winter tariffs not being applicable in this quarter. And on the next line you can see the inventory movement as well, that's in the kilograms retrieved from the plant operations during the December quarter, this resulting in a cash operating profit of ZAR800m for the quarter, 45% higher than the previous quarter. Amortization and depreciation pretty much in line with the previous quarter.

Under the next line, impairments, we dealt with the Brand 2 closure and Evander 2 and 5 closure in this quarter. Corporate administration and other expenses slightly higher with some political risk insurance in Australia that came through this quarter, ZAR10m, and about another ZAR11m more on corporate, social and investment expenditure during the December quarter.

Exploration pretty much in line with previous quarter. Other expenditures lower and it's due to less foreign currency movement between the Australian dollar and the South African rand, and that's attributable to our Papua New Guinea assets and Australian asset thing. The last item I want to highlight on that page, the ZAR0.49 headline earnings per share right at the bottom of the page, quite a significant improvement from the previous quarter.

Over on the next page, it's the dollar income statement, and that I think goes along to the same line. We didn't have that much variation on the exchange rate, or fluctuation exchange rate quarter on quarter, so I think you can treat that with -- for your information.

If we page over to the next slide, slide 18, balance sheet, we ended September quarter with a debt position of ZAR368m, nearly ZAR1.1b of cash and a net cash position of ZAR726m. We continued with our capital exploration -- capital expenditure program and spent ZAR892m during this quarter. We also paid for the Pamodzi Free State assets and ZAR380m was our net outflow resulted in that. On the next line we've got our cash flow from operations, positive contribution of ZAR329m, and all in all resulting in a net debt position of ZAR217m at the end of December.

We've during this quarter arranged a ZAR1.5b debt facility with Nedbank. ZAR650m of that facility was drawn, so there's still ZAR850m remaining of that facility, less the ZAR800m of cash on the balance sheet, still leaving us with enough cash and resources to continue our growth program and still remaining relatively lowly geared on the balance sheet. The next slide, again, deals with the balance sheet in US dollars. Roughly $87m drawn at ZAR7.50 to the dollar, so a bit more than $100m/$110m dollars undrawn on that Nedbank facility.

Let's page over to the next slide. The next slide deals with how we've been funding our capital program. The red line depicts the operating profit over the past few quarters. The dark grey shaded at the bottom of the slide deals with our sustaining CapEx, the yellow blocks with the growth capital within South Africa. As you can see, in most quarters, except the September quarter, we managed to pay our way for sustained business capital plus the growth CapEx in South Africa. And then the light grey at the top of the bar chart, that deals with Papua New Guinea that we've paid for the Hidden Valley development.

We're looking forward towards March and June. We've got a little bit of a red on top of that bar and that deals with the Pamodzi Free State assets that we'll be spending some CapEx on the coming quarters on those assets.

Thank you, Graham.

Thanks, Hannes. I'd like to turn to slide number 22, a slide showing PNG with the various islands encompassing PNG. It also shows the joint venture area in the center of the slide. Some very important and notable deposits in that area [Lahere], Porgera and so on. I'd like to just focus on the Wafi/Golpu area and that's the area where we've been doing some drilling.

If you go to slide 23 you'll see a map, a plan, of the area. Interesting to note the scale on the top right-hand corner of that map, so all these deposits are fairly close together. Nambonga was one that we were drilling last year as [we] announced that there was Gold there. Wafi/Golpu 6.2m ounces of Gold. The area of Golpu Porphyry is quite substantial; that's in the red. And then immediately north of it is what's called Golpu West, and that's the deposits we've been drilling into recently.

If you go over the page, on slide 24 the results of those bore holes. You can see that there's quite some large intersections of very good grades. The 155 in the second line is a subset, in other words, a portion of that 331, the higher grade portion of it. I've also given Gold equivalent grades here just for comparison purposes and you can see that these grades are quite spectacular. For the conversion into equivalent ounces you need to look at the bottom of that slide to see what prices we've used.

On slide 25 you can see the schematic sketch. You can see the three bore holes with the red and the blues in them; those are the holes with the good values in. So these values are immediately adjacent to Golpu. You can see the white lines which are planned bore holes and one of them is, in fact, drilling. The one which is labeled Golpu Deeps is busy drilling and that's in progress.

In conclusion, just reiterating on our strategy in slide 27, we really are doing what we are supposed to be doing, in creating a sustainable Company, generating some earnings that fund both our growth as well as the dividend. The plan is still to get to 2.2m ounces. We are looking at acquisition and strategic partnerships that could be part of things that we're looking at.

We have made a concerted effort to look more international and our guys continue to look at that, mainly from our Brisbane office. We are really also doing quite a lot of work on improving our cash costs relative to our competitors, and this is why, obviously, the commissioning of our projects is very important and also the cutting out of loss-making operations.

On slide 28, the four grey areas there are the four focus areas, and you can see in red what we've actually done during the quarter; the restructuring of Evander 2 and 5 Shafts as well as 7 Shaft; the Brand 3 Shaft in the Virginia operations; commissioning of capital projects, a lot of work done there on Phakisa, Doornkop, Elandsrand and, obviously, in Hidden Valley. Pamodzi Free State assets, I've talked about that, and we're close to blasting there in underground. We're already producing some Gold from the Rock Dumps as well as the plant clean up. And then the Golpu exploration which has been great.

Going forward, confident that we will deliver on our plan and our targets and the money guys are really focused in that area. We continue to focus on quality of ounces, growth projects on track, as well as all the quality from the operations and really cutting out some of the products that aren't quality. And all the guys really looking at the whole cost issue.

Thank you very much. I'd like to open ourselves for questions.

Thank you very much, sir. (Operator Instructions). Our first question comes from Leon Esterhuizen of the RBC. Please go ahead.

Yes, hi, Graham. Hi, guys. Just a quick check, and correct me if I'm wrong, but in the past quarter you still had something like 20% to 25% of the operations in South Africa cash negative after capital. I'm referring to Target, Evander, Harmony, Merriespruit, Brand 3, etc. Can you give us a feel, Graham, what is the sensitivity around these operations being, say, in the order of 20% of your production base? Can, and would, you be looking at closing down some more of this in the current metal price environment? Or have you got some plans to try and save that?

Thanks, Leon. Yes, good question. On Virginia, you will remember that last quarter we had quite a big loss there, we've cut the one Shaft out of that and that's improved of late, so Virginia actually made a profit. But if you look at [Capital] it made a loss, I think, of something around about ZAR9m. And the one Shaft that we're really looking quite closely at is the Harmony 2 Shaft there. It probably produces about 30,000 tonnes a month at about 3 grams a tonne, so that one's under scrutiny.

The Merriespruit one, we have got quite an amount of potential but they need to perform better, so there's been a renewed focus there. Target have been spending a fair amount of capital still. We've done a complete investigation of that ore body and it's now a case of getting the mine planning and the ore body to speak to each other, so we're still doing some work there. And the other operation which is making a loss after capital is Evander.

Now, Evander has gone through a fairly tough quarter. When we close a Shaft like that at Evander it's obviously fairly tough on everyone. So Evander we'll be spending quite a lot more effort on, I guess, examining the way it's going forward with that operation.

That's great. And, in the same vein, the Q1 performance normally being bad in South Africa after Christmas and New Year, can you give us some sort of feel for what you're expecting going forward?

And then, just lastly, on the same topic, the power cost increases, given the cash negativity after capital, what are you looking for, what are you expecting in terms of that cash or the cash cost increase, given a, say, 30% increase in power cost?

Leon, I think this quarter that we're looking at going forward I guess we're looking at a fairly flat quarter when it comes to Gold production with respect to the quarter that we're in. We are expecting some more Gold coming out of Hidden Valley and more Gold coming out of the Pamodzi assets, so there may be a little bit of upside potential on that.

When it comes to the power costs, if only we knew the power we could actually plan for it. It is very frustrating not knowing what the increase is going to be. We are busy looking at planning around 25% increases and not the 35% as Eskom has been talking, but we just don't know and we don't know the year after, so it is frustrating from a planning point of view.

But we will continue to look at those three assets that we've been talking about, Virginia, Target and Evander. Evander's probably the biggest loss-maker when you look at [after Capital], but we'll have to see how it goes through this quarter.

Thanks, Graham.

Thanks, Leon.

(Operator Instructions). We'll just pause a moment to see if there are any further questions. It appears we have no further questions. Would you like to make some closing comments?

Thank you very much. I think we're in for another exciting quarter. This quarter was really what we planned to deliver and this coming quarter is not going to be without events. And, as I said, Evander is certainly going to be fairly close to our hearts in what we're doing. But, more importantly, it's getting all the commissioning of the projects going and delivering results from those.

So our prediction for Gold price is fairly flat for the next quarter, production is fairly flat, but we'll continue to hopefully produce more from the commissioning mines as well as from the new Pamodzi assets. Thank you very much, ladies and gentlemen, for joining in.

On behalf of Harmony Gold that concludes this conference. Thank you for joining us. You may now disconnect your line.