Harmony Gold Mining Company Ltd (HMY) 2010 Q3 法說會逐字稿

Good afternoon, and welcome to Harmony's results for the third quarter ended March 31, 2010. All participants are now in listen-only mode and there will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). Please also note that this conference is being recorded. I would now like to hand the conference over to Graham Briggs. Please go ahead, sir.

Thank you very much and good afternoon or good morning, ladies and gentlemen, depending where you are. With me I have Hannes Meyer, Financial Director. I've also got Michael Humphries from -- he is from our Brisbane office, dealing a lot with the Papua New Guinean exploration. So if there are any questions, we'll defer some of those to him.

On slide two, you'll note our Safe Harbor Statement. Slide three is the agenda. I'm going to deal a little bit with the key features, operational review. Hannes will do the financial. He'll go through the exploration and I'll conclude.

On the key features, which is slide four, one of the dominant features of the quarter for us was to continue on our strategy. We continued to roll out our strategy, which is really behavior based. And we had 99 days fatality free. We continue to look at our operations and where we have operations that are making a loss we have been restructuring them. And in the last six, seven months we've either closed or indicated that we are going to close seven shafts.

We did during the quarter have a 10% decrease in gold production. However, 6% of that was due to restructuring and only 4% for other reasons. Capital expenditure, as expected, was down by 19%. And our growth projects, we have been spending lots of money over the last few years on these growth projects and capital. And those growth projects are really all in their commissioning phase and will start producing and there are some good trends that are coming out of those projects.

Excellent exploration results out of Papua New Guinea, but we've also been doing exploration at Joel, north of Joel. And we've also been doing some exploration at Evander, Evander South, and we can chat a little bit about those. But we've been spending quite a bit of money on exploration over the last while.

Disciplined mining is obviously what we really are about and that's trying to get the most out of the ore bodies.

On slide six, this is the Group operating results. You'll see the gold down there by 10%. The ounces you can see there as well. Gold price pretty flat, whether you are looking at it in rands or in dollars, and the exchange rate at the bottom. What is quite interesting in this particular slide is that the operating costs in rand per kiloton (sic) is only 4% down -- sorry, 4% up, negative 4%, and that means that the guys had some good cost control in the operations to achieve that with a 10% down in the gold price -- in the gold production.

Slide seven is the underground production. The underground production down 12% and the cash operating costs, rand per kilogram terms, negative by 6%.

If you page over to slide eight, really, operation by operation, Bambanani had a very good quarter, both grade and tones, had a nice increase in profits.

Doornkop still going through a lot of commissioning issues there, but interestingly enough the South Reef is actually delivering according to our reserve declaration. It certainly looks like we'll be able to recover more than 5 grams a tonne from that reef.

Kusasalethu had a very difficult quarter, with really some main reef and waste ore-pass problems. There were some blockages there. We had to mix the ore with the waste and that creates a bit of havoc at Kusasalethu.

Evander, we had the closures of those operations 2, 5 and 7, and really we've been looking at lot at 8 shaft and the potential of Evander. We can talk a little bit more about that, if there are any questions. But really the restructuring at Evander is continuing. And the one thing about Evander is that it does have a lot of resources and potential projects and it's a case of how do we unlock the value for our shareholders there.

Joel, lower tones. The lift shaft going to the bottom of that operation on the North Shaft and it caused a little bit of a delay in some of the tones coming out, but grade is flat there.

Masimong had a slight lower grade, mainly due to the B-reef. In the B-reef we mine there, although it's only a small amount it's got fairly high value and that was an issue at Masimong.

Phakisa, good progress on Phakisa, and I'm now on slide nine. Commissioning of the third train on the rail-veyor. We continued to commission on the ice plants. Really, it's going reasonably well there. We've had some geological disturbances, but in the total outlook for the ore body it's still as we expected.

Target delivered tonnes and grade according to plan. Tshepong improved grade, better mine core factor. Tshepong will improve grade as we go forward, as we mine more and more from the decline area.

In Virginia, we have indicated that we are going to close the Merriespruit 1 and 3 and Harmony 2 shafts. Really, the ore bodies there are virtually depleted, very low grade material that we are mining there.

On the Pamodzi Free State assets, produced a small amount of gold. Those assets we've been [expanding] for more than a year. It's a case of getting them safe and sound, so that we can actually get production ramp-up there. But all in all, those two shafts of Steyn 2 and the Lorraine shaft is ramping up.

Then the surface operations, slide 10. A cracker of a quarter, really, recovery grade really shows there a 29% improvement, mainly due to some cleanup in the plants, Steyn Plant as well as Winkelhaak Plant. And gold produced at 1,009 kilograms.

On the surface operations, slide 11, you can see that Kalgold was affected, as well as Phoenix affected by rain. Any pit gets affected by some heavier rainfall. On Phoenix, the slime tailings operation, really what affects there is when you have a lot of rain it actually affects the estuary of the pump material. That drops and you get less tonnes throughput.

Rock Dumps had a good quarter, and quite a bit of that of course is because of the break and then you get a bit of extra capacity in the plant. And then there are some details on the plant cleanups, both from Steyn Plant.

Hidden Valley, on slide 13, going through all the commissioning issues there. We've got a few of the details on what went wrong. But really the plant commissioning is going very well. I visited the plant during the quarter. It's really getting through all these teething problems and it's starting to perform very well with tonnage throughput. And I am certainly hopeful of a normal quarter this quarter.

I'd like to hand over to Hannes, to deal with the financials, and I think we are going to commence with slide 15.

Thank you, Graham. Talking on slide 15, going through a comparison quarter on quarter, if we look at revenue, revenue down 15%. This can be attributable to three areas, 6% of that due to shaft closures, 4% decrease in production from our ongoing operations and then as well a change in our inventory lock-up during this quarter. Normally happens during this quarter is that we've got more gold produced than gold sold. Gold's locked up a bit more in our plants during this time of year, which is a reversal of the December quarter.

If we look at our cost side, the second line on costs, cash operating costs down 7%, about ZAR140m. That's attributable to the shafts that we've closed, Evander shaft 2, 5 and 7 and Brand 3 shaft. So we managed to get that reduction in operating cost.

Talk about royalties, royalties came into effect March 1. That is within just one month of the quarter, the royalty bill that we picked up. And then, as discussed earlier, inventory, with the buildup in inventory at the (inaudible) plant now there's a credit to costs. So, all in all, it resulted in a reduction of production costs of 13%, quarter on quarter.

Operating profit down about ZAR170m or 21% for the quarter, to ZAR634m. Amortization and depreciation pretty much in line with the previous quarter. And then, during this quarter, we had an impairment charge of ZAR196m to our income statement. This resulted to the announcement of the closure of Merriespruit 1 and 3 and Harmony 2 shaft, so that's a write-off of the book value that we still had on our balance sheet. The ZAR104m in the previous quarter related to the Evander and Brand 3 shaft closure.

Then, if we look at employment termination and restructuring costs, we incurred ZAR120m in this quarter. That related to Evander and Brand closure.

Turning over to the next page, page 16, corporate and administration costs, we had a ZAR8m decrease in expenditure this quarter or 7% change, quarter on quarter. And then, exploration expenditure, which Graham will get to a bit later on, we had an increase of ZAR24m in total. That in South East Asia was ZAR28m increase in expenditure, mainly related to Wafi/Golpu and some of our other tenements in Papua New Guinea. It's really investment in our future that we see there.

All of this resulted in a net loss for the quarter of ZAR295m. And basically, the big drivers behind that was the nearly ZAR200m impairment, as mentioned on the previous page, and the employment restructuring costs of ZAR120m. That related to a headline loss of ZAR0.32 per share. And if I adjust that then, removing the restructuring costs, that relates to a ZAR0.06 per share loss for the quarter.

If we go to the next page, page 17, there isn't much difference in the percentages because of the stable rand, quarter on quarter. The only items I want to highlight there, impairment then $26m for the quarter and the employment termination and restructuring costs $16m for the quarter.

Turning over to page 18, resulting in a net loss of $40m for the quarter, a headline loss of $0.04 per share and adjusted then for the employee termination costs, a $0.01 loss per share.

Going to page 19 and looking at the balance sheet, we started the quarter off with debt of ZAR1.025b. We had cash of ZAR808m, resulting in a net debt of ZAR217m. Our cash flow from operations this quarter showed ZAR614m contribution and that included other items like working capital adjustments and other items in the balance sheet as well, so about ZAR230m improvement quarter on quarter.

Capital expenditure, as Graham mentioned earlier, down, decreased by about ZAR170m there. That was ZAR723m for the quarter. Exploration, increased expenditure, as mentioned earlier, ZAR74m, and restructuring costs of ZAR120m, resulting in a net debt at the end of the quarter of just over ZAR500m. So that resulted ZAR300m cash outflow in the Company for this quarter, of which about ZAR200m can then be attributed to the exploration and the restructuring efforts that we've been going through.

The net debt position still just over ZAR1b, then, at the end of the quarter. We have a ZAR1.5b debt facility with Nedbank, ZAR900m drawn at the end of the quarter. And then we have a Nedbank AVRD loan that we guaranteed previously and which we declare on our balance sheet, which we've settled now during this quarter. Still remain with low gearing on our balance sheet, with ZAR1b of total debt on the Company balance sheet.

Thank you, Graham.

Thanks a lot. I have got Mike here with me. I'll go through the exploration, but he will interject if he needs to catch on something that I've missed.

I'm now on slide 22. 22 is a map of Papua New Guinea. The yellow is the Mobile belt and a very prospective area. We show mines like Ok Tedi Porgera. And in the hatched area is Wafi/Golpu, as well as Hidden Valley, and that's the Morobe JV. And you can see that it has about just over 3,000 square kilometers. There has been a little bit of addition during the last while of about 515 square kilometers.

The other areas that we've been active in and you've seen some issues on from our press releases, very positive is the Mount Hagen Project. We are actually drilling there. We are on our second hole already. Amanab is a project which we pegged. It's in a very alluvial gold rich area and our challenge is to find the source of that. We've also added some new applications in the Southern Highlands Project and also in the Central Province. So this was Papua New Guinea. There's other deposits. If you look towards the right of that, you'll see Lihir and you'll see another red dot on the island of Bougainville that's Panguna or Bougainville Copper.

Slide 23, you'll see that we are really dealing with a world-class belt, as we've just discussed. And the joint venture mineral inventory will grow by about 45m ounces equivalent for the seven-year period between 2003 and 2010. We as Harmony have spent approximately AUD108m in the seven-year period in Papua New Guinea. Discovery cost, which is I guess world beating, if you like, is less than AUD10 per ounce of gold. I think we are in the right territory to find more significant gold deposits, but gold copper as a by-product like Solvay and Mali are certainly not out of the running.

If we look at slide 24, this is really our exploration drivers on Hidden Valley. We've heard about the commissioning there and the completion of that now. Really, there's a mine up there with a 10-year life, but lots of prospective ground and we own not only the [NL] but also exploration tenure around the mine. So we'll really be looking for more deposits there.

On Wafi/Golpu, pre-feasibility is probably what we are going into soon. We still continue to drill in that area and there's a target for us to finish a definitive feasibility by 2013. Besides that, we will certainly be continuing to look in the Regional area and all three of these areas are in the Morobe joint venture.

On slide 24, a graph showing the resources in equivalent gold for the joint venture. And you'll see they're totaled using the gold price of $950 and a copper price of $2.72 per pound, giving you 53m ounces in equivalent. Certainly quite a major discovery because most of that is in Golpu.

Paging to slide 26, a little bit of a roadmap. In the top, we've got various bullet points on how we do it and what we do. Obviously there's a lot of landowner and negotiating and getting onto the ground. Our guys are pretty proficient in it in Papua New Guinea and certainly make work of it. But we have got exploration teams mobilizing explorations on the ground and really getting into a state where we can drill as quickly as possible.

The arrow is a little bit of a roadmap on what's happened at Wafi/Golpu and Diamond Drilling and the various, if you like, discovery areas. So, Nambonga was discovered in 2007; it was a bit of an upgrade. One of the big drivers of our recent discovery is a new drill contractor and lately even deeper drilling rigs that we've had. So it's really a case of stepping out and drilling. And this really goes back to our pre-feasibility study back in 2005, which indicated either we'd have to find something bigger from Golpu or we'd have to reduce the capital dramatically. So that's why exploration continued to focus on the ore body.

Slide 27, a bit of a pictorial on the whole region, with the Golpu deposit on the right and the Nambonga on the left. You can see the dash line is the limit of what our drilling has been in the past, and also the Diatreme and the red zones, which is really the Wafi deposit. It's quite extensive and you can see from the dotted line there's probably still a lot more drilling to be done and hopefully a lot more discoveries to be made.

On slide 28, giving you some of the latest figures. We did have some of these figures in the press release. However, WR333, we didn't have the final data for that hole. You can now see 727.5 meters of nearly 0.7 gram a tonne gold and nearly 1.4% copper and some moly as well. Equivalent gold grade at 3.52. This was quite major when you compare it with other copper-gold deposits in the world and it's certainly hugely significant. Again, for the equivalents, we've used the data that's given at the bottom of that page.

On slide 29, the golden area which looks like probably one of our teeth is really the original resource as it was done back several years ago now. And you can see the drilling that's happened, and that's the blue zones, of plus 0.3% copper and the red zones plus 1% copper. So you can see that the envelope has increased significantly and there's some data on the drill holes.

If you page over to slide 30, you can see the area in gray shading where we now think that the ore deposit has now opened up to. The little diagram of a stadium there is actually Loftus Stadium. So, all the Blue Bull supporters, that's Loftus and you can see you can stack quite a lot of Loftuses in this ore deposit. It's a major ore deposit and I'm sure it's going to be a major world-class deliverer of gold and copper.

On page 31 or slide 31, a little bit of an idea of the mining options. There are several mining options of the blue area, which is the Wafi zone, including looking at either just the oxide pits or going down to the large oxide and sulfide pits, but also looking at bulk mining options. Wafi deposit as a whole is just below 2 grams. I think about 1.9 gram a tonne. But it has got some high-grade zones to it. In Golpu, I guess my favorite is certainly looking at block cave, but there's a lot of work to be done and a lot of scoping studies that need to get done in short order to determine which one we choose there.

Net result of that, on slide 32, is we're really in a highly prospective zone here in Papua New Guinea, with a potential for giant multi-million ounce ore bodies. We're very keen on it and that's why we've been spending a lot of exploration dollars in this area. The Wafi/Golpu project will have a profound impact on our resource base, and we've given some ranges that are the same ranges that you saw in our press release. And then, on top of that, we've got quite a few areas, 8,000 square kilometers of exploration tenure. What we're doing at the moment, the Kurunga one is the one on Mount Hagen. And you can see that we're progressing those quite dramatically.

In conclusion, slide 34, our strategy. We're still focused on our strategy. We continue to look at growth and these growth assets that we have. Geographic diversity, of course PNG is really where we focus. Although we have been looking at acquisitions, it's something that's fading a little bit because of the affordability of the acquisitions. So exploration is probably more of a preference right now.

We're certainly looking at productivity, efficiency and clear commissioning of our projects is of vital importance to us. Unfortunately, those projects just take longer in South Africa to get commissioned. And we'll continue to look at optimizing our portfolio. And as you've seen, we have been closing loss-making operations.

With that, I'd like to open up now for questions.

Thank you very much, sir. (Operator Instructions). Our first question comes from Wiseman Khuzwayo of Business Report. Please go ahead.

Thank you. In fact -- about redundancies, you had about 1,100 jobs last year which were shed. And are you planning to shed any more jobs this year?

Yes, thank you for the question. We lost about 1,100 jobs from Evander, the closure of those three shafts in Evander. We have since announced that we are closing shafts in the Free State. The total number of people in the Free State that may be affected by those closures is 3,700.

How many?

3,700.

3,700. Okay.

We are still in discussions with the union on how to avoid retrenchments. Fortunately, there are several ways of avoiding some of these retrenchments. We are, as you know, continuing to grow on some of our operations and those will require more people. And we're looking at all sorts of ways of accommodating people. Preliminary figures that I have at the moment is that if our plans work out well and all our discussions with the unions, we should be having to retrench less than 700 from those assets. But it's still early days and we're still in negotiation and discussions with the unions.

Yes. Thanks a lot.

Pleasure.

Our next question comes from Leon Esterhuizen of the RBC. Please go ahead.

Yes. Hi, Graham. Sorry, I dialed in a bit late so I didn't get the start. So if you did this, just tell me so and I'll go and play the thing back. But I just want to check with Kusasalethu, or the Elandsrand mine, the problems that you've got in the ore-passes. Is this ore-pass scaling -- is this a very big problem that's reoccurring at Elandsrand? What exactly is the issue there?

Thanks, Leon. Yes, it is in scaling. But the ore-pass has really come down from the old mine into the new mine and we've got a few zones that have been scaling. And the scaling caused some blockages. We've now had a look at the ore-passes. In fact, we'll probably have to line those shafts and that may take a bit of time. And the real unfortunate part of that is that we have to mix the waste with the reef and that affects the grade, obviously affects the amount of ore that we throughput in the plant.

So yes, we'll have to do some relining there. It is a problem that does happen with some of the deeper mines a little bit, and so I guess it's not a rare thing but it will take us a bit of time to get it right. But in the meantime, we'll have to be mixing the ore with the waste and that will affect the grade.

Okay. So I don't know if you mentioned this, but what is the timeframe or the expected timeframe to completion of the relining?

Well, we've been into the ore-pass and had a good look at our case and planning it out. And I really can't tell you because we haven't planned it out yet, but we'll do one at a time. So it will probably take a bit longer because we don't plan to stop mining there. So if one stops on these things, obviously you can get them done much quicker but we wouldn't do that.

Okay. Sure. Just one more question, if I can. The amount of money that you intend spending on restructuring the Free State operations or the operations that you're closing down, is that all through now or there is still some more to come?

Leon, it's Hannes speaking. No, we haven't spent any money on the restructuring, in terms of the Virginia operations. We've spent the money in Brand 3. We've just announced the Virginia operations, so we're still in discussions with the unions. So we haven't incurred any expenses, in terms of restructuring for Merriespruit 1 and 3 or Harmony 2 yet.

Thanks. So just as an indication, then, the amount that you quoted was ZAR120m. Can we sort of plug in a similar number for the following quarter?

Leon, I think it all depends on where we get to with the unions. I think we said the number in terms of Evander was about 1,200 people, 1,100 people will be affected.

Probably a similar number is going to (multiple speakers).

Okay. Yes, okay. All right. And then the operations, obviously, from PNG and some of your new projects should now start coming through, I guess. So your expectation for the following quarter and the one after, let's say just for the next six months, do you see your new operations and your PNG operations in particular really starting to pull this wagon now?

Yes. Leon, my -- if you want an estimate of how much gold we can produce next quarter, about 11.5 tonnes, so that's probably 370,000 ounces or thereabouts and probably similar the quarter after. So, the new operations taking over from the closed operations, if you like, for the next six months.

Yes. And okay, sorry to keep on, but that does imply higher grades. Am I right? Your grade profile is probably at its lowest point right now. I don't know over how many years. But it must start earning at this point. Am I right?

That is correct. That is correct.

Okay. Thank you, guys.

Okay.

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

Well, thank you very much, ladies and gentlemen. It's been a great pleasure to present these results to you. I think in -- overall, Harmony is still on its strategy. It has been talking about a strategy for some time. Commissioning of our projects important and delivery of those projects is very important, but we are making some hard decisions in closing operations down. So thank you very much for listening.

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