Harmony Gold Mining Company Ltd (HMY) 2010 Q4 法說會逐字稿

Good afternoon, and welcome to the Harmony Gold Mining Co. Ltd. results for the fourth quarter and year ended the 30th of June, 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, Dylan. Ladies and gentlemen, thank you very much for joining us. Afternoon or good morning, depending on where you are.

I'm going to go through the presentation. Hopefully you have got it and seen it, possibly got it from the website. Also, the quarterly booklet is available with a lot more detail in it.

If I could draw your attention to slide number 2 with the Safe Harbor statement, and then agenda, basically going to talk about the strategy, operations, financial overview and I've got Hannes Meyer with me here with me, who will talk about exploration, and conclude.

Slide number 5 is the strategy. It's a familiar picture. You can see what our objectives are -- generating earnings, funding dividends and growth. And the sort of four pillars that we have, we've done quite a lot on that in the last year. And growth in production ounces, we haven't done in the last year, but if you look at the operational changes or the closures of shops and so on, you will see that our growth assets are starting to produce.

And we talk about acquisitions. Nothing on the acquisition of producing units in the pipeline, but we obviously have acquired a fair amount of exploration tenure in Papua New Guinea. A lot of emphasis on productivity (technical difficulty). Commissioning our capital projects has been key to that, and you can see the growth quarter on quarter in those assets. And optimizing the actual portfolio, a lot of closures have happened. A lot of restructuring has happened in the Company.

Go to slide 6. Safety -- a big focus on safety. There have been a lot of improvements on a whole lot of safety factors in the Company. Unfortunately, fatalities have left a bit of a blot on the copy book, but we continue to strive to get to zero fatals.

High-cost loss-making operations have been closed. You will have seen that our reserve levels have been maintained at around 48 million ounces.

And a healthy margin is really what we're striving for. There have been productivity improvements. And the productivity -- we'll look at it a little bit later -- but it involves a multifaceted approach. A lot of our capital has been spent, and, really, the assets are starting to produce the results from their capital expenditure. And this will take you through debt and talk about cash cost levels, and we are declaring a dividend of 50 SA cents.

On slide 7, a little bit of detail of the various actions and key steps. I don't want to go in to all of them, but really if you look at productivity, you will see that there is a training element, a huge amount of training going into the Company. A lot of motivation, safety and health areas -- health really to try and keep people not absent and keep people productive, so there is an emphasis on that.

There's an emphasis on having good working conditions, good environments, cool working areas. And we have good relationships with our labor unions, so there is a multifaceted approach. We haven't put them all down here, but really a strive to get the grams per total employee [costed] up.

The financing of our commissioning projects -- we've obviously been spending our capital there. Doornkop is close to completing its major capital, as is Kusasalethu. Tshepong decline now producing, not at full tilt yet, but it's producing in Hidden Valley's commissions.

If we go over to slide 8, we are growing the Company, a lot of emphasis in exploration, Wafi-Golpu and the tenements. A future mine there, Wafi-Golpu; I'm convinced that that is going to be a future mine.

Concept study is in progress. We put a date on there of, hopefully, production of 2016. So there's a lot of feasibility, pre-feasibility studies to happen, and that will happen in the next two years. But I'm convinced that that is going to be an excellent producer.

And then acquiring -- well, nothing on the horizon in the high gold price environment we're getting the -- it's certainly a nice target to have, but really every asset is overpriced. And we really need to be able to add value to an asset that we acquire. So nothing on the horizon.

Slide 9 is a fairly busy slide with every operation in different color. And you can see the sort of contribution going forward of various assets. For instance, if you look at Doornkop, which is third from the bottom, in the sort of I guess avocado green color, it's a significant producer going forward. And the red line at the top is the underground grade. So there's a lot of detail in this and you will know that there's an Investor Day on the 25 of August, where we will go through the detail of asset by asset.

If you page over to 10, slide 10, you can, again, see the ounces produced at production profile is in the solid blue line. Cash costs and then the -- really the maintenance capital in the gray color and the green in growth capital. Nothing has been put in sort of latter year or '14, '15 here for Wafi-Golpu, really, because we don't know what the figures are. But you can see at the price of gold of ZAR275,000 a kilogram, there is a nice, healthy margin between our costs and the gold price.

And if you look at the detail in the quarterly report, you will see that our prediction for this coming year is at a total cost, including capital, around ZAR260,000 a kilogram with a cash cost around ZAR195,000 a kilogram.

On slide 11, talking ounces, mainly here, and similar graph in production. (technical difficulty) here on the left-hand graph of those two, is the total grade, not underground grade, total grade, including surface operations. Red is underground ounces. The gray is surface and the Black is Hidden Valley.

And then the cost per ounce; and you have to take note of what we've used as a rand/dollar exchange rate there at the bottom. So we've used 8.19 to $1. And you can see that we get down to very competitive levels going forward, mainly as a result of improved production, improved productivity from our new assets and higher grade.

On slide 12, a list of all the assets there, what the target ounces are, and what the life of mine and various bits of comments. If you just go and look at the top five, you will see that there's some significant producers. These are going to be great mines with a great future, with mine lives in the order of say 15 to 25 years.

But even if you go down to Joel, which has got a fairly short life, you can see that we've had had some recent exploration success, more detail in the document, the quarterly document. I would expect that life may double.

Going to slide 13, this was out in the press release. It shouldn't be new numbers to you, at 48 million ounces, maintained. And you can see the reductions and increases.

The -- just asterisk at the bottom talks about mineral resources, mineral resources that are around about 190 million ounces, down from previous year of about 9%. But that's not surprising despite all these sort of closures of the various shafts that we've done, Evander 2 and 5 and 7, and some of them in the Free State as well.

If you look at the key features of the quarter on slide 15, talk about seven fatalities. So despite some great indicators on lost-time injuries and some significant achievements in various operations, it's all an area of future focus.

There's a significant increase in the resource at Wafi-Golpu. Hidden Valley in commercial production. And then looking at the sort of detail of the quarter, 49%, our operating profit -- ZAR942 million. Improvement in production, improvement in grade. Cash costs steady at around ZAR199,000 a kilogram, and that's with South Africa. If you look at the total, it's just over ZAR200,000.

So despite a lot of increased costs -- and Hannes will take us through some of those on electricity and the like -- we've managed to maintain our cash costs.

Go to slide 16. I will leave you again to look at the detail. You will see at the bottom, exchange rate is very flat compared to the previous quarter. You can see the gold price in RAND terms, as well as dollar terms, is around 10%, 11% up. Gold producers, up by 4% and cash operating profit by 49%.

Slide 17 has got the year on year. Again, starting with the exchange rate at the bottom, significant strengthening of the rand from ZAR9 in the previous year to [ZAR7.50] this year.

Production levels and gold produced, fairly flat, 2% down. Again, a lot of closures in operations and there's roughly about 5 tonnes of operation closure in gold. And of course, we only had about 1 ton down, which means that our growth projects are starting to produce very nicely.

And you can see the gold price significantly up 26%, but in rand terms, because of the strengthening of the rand, only 6% up.

If we look at the underground operations, on page 18 or slide 18, again, a similar picture emerges. Cash operating costs nicely contained despite the increases in electricity and the winter tariffs and so on. But generally, a very pleasing quarter from underground. Surface operations on page 19.

Hidden Valley on page 20, we achieved commercial production in two of the months, so you've got two of the months of the quarter included as commercial production. The first one was capitalized. Gold production up; silver production up. Plant throughput is up. And there obviously issues at Hidden Valley (technical difficulty) really bits of oxidation and really fresh material has been elusive. So where we thought there was going to only be 10 meters of oxidized material, it's more like 40 meters fresh rock to gold [dumpster] is very elusive. And then, it gets compounded by more rain and the like. But I won't go into all the list of excuses. There's still quite a bit of work to be done in Hidden Valley, and I'm very optimistic that it will actually be a great mine and produce what it should do.

I'd like to hand over to Hannes to talk about the financials.

Thank you, Graham. I'm going to skip the first slide, to slide 22, on rand terms because the exchange rate was fairly constant during -- quarter on quarter.

So if I go onto slide 23, looking at revenue, up by about [$]17 million (sic - see presentation); 10% increase in the gold price attributed quite significantly to that. In addition to that, we had 6% higher gold sold.

Cash operating costs up by $18 million. $15 million of that is Hidden Valley's first quarter of commercial production, which we have accounted now as operating costs, and a $10 million increase in electricity quarter on quarter due to winter tariffs. Those two added to, again, gives us $25 million, but a bit of reduction on costs due to shaft closures at Virginia operations.

Royalties -- this is the first quarter of full royalties in South Africa. Royalties are coming to $4 million, up from the $1 million in previous quarter.

That resulting in an operating profit of $125 million for the quarter. And payments basically lost a little bit of the Virginia operations that we paid from the previous quarter's Nigerian payments.

If we look at employment termination and restructuring costs, that relates to how many true administrative fees closure during the quarter. I think what we want you to see from this is the previous quarter counted then for the Brand and Evander charter close. I think we have dealt with these shafts now, and we are well poised moving forward.

Exploration expenditure, pretty much in line with the previous quarter. Continue to invest in our growth outside of South Africa, especially in Papua New Guinea.

And taxation, a big charge for this quarter -- $30 million. The biggest item of that is $27 million in deferred tax. That relates to our annual review of our business plans. So we've completed our business plans, looked at the rates going forward. Their higher rand gold price that we're operating in.

In addition, we've got some beta plans on some of our shaft, and that relates to a bigger charge in the deferred tax; there's a charge in the deferred tax of income statement that are credited to the liability of the balance sheet, not a cash flow item.

That results in a net profit for the quarter of $2 million. Underlying loss of $0.01 a share, and if a adjust then, when I take out the termination and restructuring costs gives me a $0.02 adjusted headline earnings per share.

Paging over, and I will skip 24, going to page 25, on dollars quarter on quarter. Still got low gearing debt-to-equity at 4%. The debt to EBITDA of 0.6 to 1.

Look at the debt, started the quarter at $137 million, added $19 million of debt, so ended with $156 million. Our cash position improved from $66 million to $101 million, so that's an improvement of $35 million.

If we look at cash flow from operations, that's up to $144 million compared to the $79 million, mainly attributable to the higher gold price and gold sold.

Capital expenditure, up a little bit this quarter, as expected. We invested a bit in -- it was generators that we acquired in the Free State, some equipment at Doornkop, and they are for multi assets, which -- consume a bit of capital. Exploration, pretty much in line with the previous quarter and then a restructuring charge -- $11 million for the quarter.

That resulted in the net debt position improving from $71 million beginning of the quarter to $55 million at the end of the quarter, an improvement of $16 million.

Skipping the next page and the next one, or maybe I should just touch on -- slightly on this. On the rand exchange rate, we have quite a big movement. Let's go to page 28.

The exchange rate year-on-year this year ZAR7.58 versus ZAR9 to the dollar in the previous year; 22% strengthening of the rand.

If we back that now further, we go to the revenue side; revenue we had a 17% improvement. Significant improvement in the gold price in dollar terms over the last year.

Cash operating costs, that is up 29% year on year. In rand terms, it's up by 9%, so the exchange rate resulting in quite a big movement in dollar terms cash operating costs.

Operating profit of ZAR387 million for the year. Amortization is up in rand terms by 9%, but in dollar terms, it's up by 27%. So that's ZAR181 million charge for the quarter.

And [earning] payments and restructuring costs, which we had to deal with in this year.

Page over to the next slide, slide 29. Social investment expenditure is up by 2.5 times compared to the previous year. As we spend more according to our social and labor plan in our communities, surrounding our mining communities, and as well in the communities from where our mine workers originate from.

Exploration expenditure, pretty much in line with the previous year. And then tax, again, the deferred tax charge is quite a big swing year on year. That's a change of $86 million, with a charge of $33 million this year compared to a credit of $53 million the previous year. That resulted in a net loss for the year of $25 million. That will headline vastly of $0.01 a share. And if adjust then for these restructuring elements, it gives me a $0.06 adjusted headline.

Just page over to the next page, page 30. I apologize. I just got this one in rands. Just tried to normalize a bit of the earnings and say for the quarter we had ZAR13 million, and for the year, ZAR192 million loss.

Taking account of the non-recurring cost that we do have in our numbers, termination, restructuring, the impairments, the deferred tax. If I eliminate those items, it results in a normalized earnings of ZAR335 million or $44 million, then, for the quarter. Or, and then for the year, ZAR595 million or $66 million for the year. Thank you. Graham?

Thanks, Hannes. I'd like to just talk about exploration. Slide 32, is a slide showing Wafi-Golpu, Wafi the gold deposits, Golpu, the copper gold porphyry. From this, you can see the plan view of where these projects are.

But, the focus is obviously moving around and looking at the circles, the exploration targets, as well as those orange areas, the dotted orange areas. Often these copper porphyry areas are a multitude of deposits, and at the moment, we really only know about two of them very well.

Nambonga porphyry is a third, much lower grade. Western zone has been a bit elusive. We've got a few holes into that. There's some nice gold values, but we haven't been able to string them together. Really to say that there's quite a lot of exploration still to happen in the Wafi-Golpu area.

However, we will continue with the concept study, and that is really on page 33. Looking at the different concepts, different concepts are not difficult to understand because really they're different sized open pits. The first one would be open pit just the oxide material and getting early cash flow from that. That would really be on Wafi's gold, we're talking about.

The second one is really a bigger open pit looking at not only the oxide, but the transition material. And the third one is looking at open pitting a big open pit, including some of the top of gold Golpu. So that would be a big open pit.

The underground potential, obviously, looking at the higher-grade Wafi area, the Link zone, and Golpu is undoubtedly going to be a blocked cave.

So, there are some concept studies being evaluated now. Hopefully within a month or so, we will have some results from that, and then we will commence on pre-feasibility studies.

In conclusion, on slide 35, we've got achievable strategic plans and business plans. There's a huge emphasis on safe and profitable ounces. Key actions there -- improvement of production is obviously very important on these (technical difficulty) we have. Productivity is a huge area of focus, getting those grams per (inaudible) up, commissioning of the projects and exploration.

We've been doing some exploration in South Africa as well. And you will see from the booklet that Joel has got some six holes drilled into it, and it actually shows the extension of Joel down another level.

At the moment, we are the lowest South African underground production unit. When we look at rand pit on costs, I'm talking about South African operations, not international operations, obviously at some advantage in that and we need to keep our costs down so there's a big focus on costs. And we're really in a good position to fund our capital growth and to fund our dividends.

So on slide 36, just to recap, we're really trying to turn this Company around, generate those earnings, funding dividends, and growth, generate that free cash flow and really grow the Company. So we've positioned to deliver, and I will take any questions.

If we've got a controller, we will take some questions.

(Operator Instructions). [Johan Steyn], Citibank.

Hi, good afternoon, Graham and team. Just a quick question on the CapEx outlook for the next couple of years. If you look at 2010, you add first project CapEx free cash flow of negative about ZAR1.1 billion. How do you see that developing going forward given your CapEx guidance? And then also, secondly, with a longer-term perspective or growth options through Wafi-Golpu and the fact that you still post project CapEx free cash flow negative, how do you plan to fund this project?

If you want, I will answer that question. If we look at the CapEx profile this year, we have the ZAR3.4 billion. We're looking at roughly about the same number for this year coming.

If we go to slide 10 that Graham presented earlier, [obviously financial director]. At the current level of the gold price, the cash operating costs with the normal sort of sustaining CapEx in the gray shade, and then we've got the green and major CapEx. We should be [fund] that -- in terms of that.

That means we still have to -- the margin that we have in that will also have to fund in exploration and corporate costs and general cost in terms of that. So we'd probably be on a sort of break even for this year following all of that in terms of a cash flow basis.

And going forward, Wafi-Golpu aiming for production 2016, and we probably have to do some -- the major CapEx work starting in somewhere in 2013, somewhere around there.

So I think if you look at that same slide, slide 10, we've got margins opening up within South Africa. So we've got cash flow generated in South Africa to fund that.

We booked a significant copper [in bulk]. Always look at some off-take agreements as well and look at how we can fund that in future. It's not really a big concern for us at this moment but we are well poised to deliver strong cash flows to fund that.

Just a follow-up question if I can. Thanks, Hannes, for the answer. If, for FY '11 CapEx that remains in the order of ZAR3.4 billion, that's quite a rise from what I think previous estimates were. So can you just take us through where the increase in your 2011 CapEx would come from?

I think it's roughly ZAR1 billion or something to that extent more than what we gave previously. The previous number was also in real terms 2010, so a bit of inflation would have accounted for ZAR200 million-odd of that change then.

Then target, we've started to grow for Block 3 area. That's about ZAR100 million odd CapEx. Evander, we've got a project on the go there that -- targeting specifically Evander 8 area in the decline or high-grade area; that's ZAR100 million additional CapEx, ZAR120 million.

At Hidden Valley, we're looking at replacing a piece which we didn't have in earlier, and that's about also -- that's AUD20 million, another ZAR120-plus million.

And then, some more expenditure on the Pamodzi assets. Plus in Phakisa, I think we've had a bit more operating costs being capitalized over next year. I think that accounts for probably about ZAR700 million or so of those changes.

Sorry, and just confirm, on the Pamodzi, how much was that, the additional ZAR200 million Pamodzi assets?

I don't have that.

Oh, sorry; I just -- probably the balance then, okay.

Yes, but we will share it at the Investor Day as well (multiple speakers)

Okay, excellent.

Some of that.

Thanks, Hannes.

Sorry, it's Graham here. The Pamodzi capital has been shared when we acquired the capital, we gave an estimate of that capital. And I think it was about ZAR130 million, but we will check that figure.

Yes, yes.

And the other thing about Wafi-Golpu is of course you know the quantum that may be required to be funded in sort of '13, '14, '15 and into '16 is not firm yet. I mean our estimates are that it may be somewhere between $2.5 billion and $3 billion, of which 50% is ours. And of course, it doesn't all happen in one year. So, but I mean those quantums will come out with the various feasibility studies that we do.

Okay. Thanks, Graham. That's all from my side.

(Operator Instructions). Steve Willis, BMO Capital Markets.

Just a quick question on your cash cost profile going forward. I notice it's dropping off fairly significantly and just wondering if you can discuss some of the impacts, whether that's just a faction of the increasing grade profile that you are showing, or if that's improve productivity with increased spending on training and everything else. I was wondering if you could just go through that and talk about maybe cost pressures in South Africa in general.

Thanks a lot. Yes, it's a few issues. One is the increasing grade -- underground grade profile. That is certainly a significant fact, and you can see that quarter on quarter, our grade has increased and it's the start of it, so that's a contributor.

The other one is that we're talking about these new assets with better infrastructure, orebodies, more amenable, in other words, not so spread out geographically; distance to get to operations is easier and so on. So there is naturally a built-in product the issue in simply that these are newer orebodies and newer infrastructure.

Then, on top of that, there is, obviously, the various programs that we are doing; there will be better ventilation. We're also looking at training programs and so on. So it's a combination of issues.

The way that we construct these costs and sort of various rand per kilogram cash cost profiles, obviously, incorporating those costs that we know about, so for instance [has come] increases in the next few years at 25% incorporated, we would have incorporated the next increase in salaries and so on.

But beyond that, we keep things flat. And that is simply we don't know what CPI and what sort of cost pressures we have. So for the first year, it's included and partially into the second year which will be '11, '12, it's incorporated. And then after that, we keep the inflation flat, basically.

Okay, great.

Yes, so that's the explanation. I hope that gives it to you, Steve.

Yes, it's perfect. Thank you.

Leon Esterhuizen, RBC.

Hi, guys. Just a simple question. Can you tell us what your view is in terms of your black economic empowerment credentials right now? What do you reckon you have as a percentage for black equity ownership?

Yes, it's a fairly easy answer. It's 32%, 34%, Leon. So we've done a lot of black empowerment deals in the past. We don't have to do any more work on that front. So there's no surprises coming from Harmony on that front.

Just to make sure, so you're not going to give away assets to anybody?

Not at all. No. (multiple speakers) we have to do, Leon. As I say, we calculate ours at the moment on an equivalent ounce basis at 32% to 34%. Obviously, there's lots of different calculations out there, but we believe that we are -- we're satisfied to the 2014 target.

Okay, great. Just one more question. You're leveraged assets following the closure of some of those mines that you just mentioned have seen quite a sharp increase in grade from those particular assets. Is that grade profile for the leveraged assets just going to drift down? Or do you expect that to at least remain stable while your growth assets pick up?

No, I think -- I guess we haven't got any leveraged assets left, Leon, is the answer, except for really Merriespruit 1. Merriespruit 1 is one area -- it was underperforming and it still has been underperforming, even in this quarter.

But generally, taking out the various underperforming assets in, for instance, Virginia, the net result you see is better grade. So you take out the Harmony 2, which is really performing very, very poorly, you take out Brand, which is performing poorly, you know the overall Virginia improves in grade.

And Evander had a difficult quarter, so it's maybe not a very true reflection because we had quite a few ventilation issues. And you will see from the commentary that there's some waste came out in the system. So it's not a good reflection on the grade.

But really, there's no more closures to happen other than the Merriespruit 1 and really we've got that agreement with the unions that gives us time because we do have natural attrition in the rest of our operations to be able to transfer people. So, it really gives us a bit of time as well. But hopefully they are successful and it shouldn't cost shareholders anything to keep them open.

Okay, great. Just from your guidance, going from about 1.4 million ounces to 1.7 million ounces in the following financial year, and then looking at the guidance for the next quarter being roughly flat if I'm not mistaken, given the issues at [Buckley] and Joel with PNG coming online, it looks like you are effectively looking at the second half of your financial year to be the strongest half. Am I right?

That's correct, Leon. The Papua New Guinea, Hidden Valley, certainly the first six months is still going to be fairly difficult, but it improves a lot better towards the end of the year. And then also, sort of projects will improve quarter on quarter. And, therefore, the second half of the year is going to be much better than the first half.

All right. Thanks.

Gentlemen, we have no further questions. Would you like to make some closing comments?

Thank you very much. Yes, I think certainly from our side, a pleasing end to the year, a pleasing quarter, in that we've achieved a lot of our objectives. We've done a lot of hard work, done a lot of restructuring. All of those things do cause a little bit of chaos in any company's life, but we're actually coming through very well and very optimistic. And we have these plans and they're achievable. We just need to produce the results that we're promising. So thank you very much for listening.

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