Harmony Gold Mining Company Ltd (HMY) 2011 Q1 法說會逐字稿

Good day and welcome to the Harmony Gold Mining Company Limited quarterly results conference. Please note that all participants are in listen-only mode and there will be an opportunity for you to ask questions after today's presentation. (Operator Instructions). I would now like to turn the conference over to Graham Briggs. Please go ahead, sir.

Thank you very much and welcome, ladies and gentlemen, to this conference call. I have Hannes Meyer with me as well as Mashego. I'll be handing over to Hannes for the financials. I'll be calling out on the slide numbers as we go through just so that we can stay on roughly the same slide and, hopefully, everyone has got it downloaded from the website.

Slide two is a Safe Harbor statement. You'll note the annual reports and F-20 for June 30, 2011 they are on the website should you wish to see a copy of them, otherwise, I am sure you can request a copy to Marian or Henrika.

Highlights for the quarter, our record operating profits increase 45% to ZAR1.3b; that's the highest-ever revenue. Headline earnings increased by 217% to ZAR0.95 per share. On the production, in line with what we've been forecasting, a turnaround at Joel.

We were obviously stopped for a period last year and we've been spending a fair amount of capital and equipping the bottom of the shaft there to be able to mine in the level that we are working on; the continued build up at Phakisa, Kusasalethu and Doornkop; and during this quarter we have commenced restructuring of Bambanani. That affected not only Bambanani, but also the bottom areas of Steyne 2. And we've transferred a lot of those crews into the other build-up operations, mainly Phakisa and Target 3, as well as Doornkop.

Some exciting exploration results, we'll talk a little bit about that, and the Wafi-Golpu pre-feasibility study.

So the agenda on slide four. We'll talk a little bit about safety, our strategy, Wafi-Golpu, exploration, operational results, then hand over Hannes for the financial results, and I will conclude.

On slide six, unfortunately, we had two fatals during the quarter. I guess this is -- safety is requiring a lot of our attention. Alwyn Pretorius is the executive that's in charge of safety and health now. He is doing a sterling job on looking at everything from a macro to a micro perspective. And I am sure that we will implement best practices or leading practices that we find on our different mines in order to improve a lot of our safety. Having said that, we have had some improvements in our safety statistics and they are listed on slide six.

Our strategy, slide eight, a slide that you've seen before, all about growth and growing and exploration, optimizing asset portfolio to really improve the cash cost. In some cases, this has resulted in restructuring and for that we -- I'll talk briefly about Bambanani in Spain.

On slide nine, just increasing project value, and I've tried to plot the various assets on this slide -- on this graph. You can see that Wafi-Golpu is still in the resource definition, heading towards the pre-feasibility study stage, still a lot of value to be added there. A lot of value, obviously, in the exploration areas, which are way down on the curve. Doornkop, Phakisa still in the build up, as is Hidden Valley and Kusasalethu, but that's my opinion of where we are in the project value.

And then on slide 10, this slide has been presented before. We've given guidance in 2012 of between 1.45m and 1.55m ounces, building up to 2m ounces mainly from the South African assets. And as we do that gold cash cost should decline, and that's the blue line. Then going forward, 2017, early production from Wafi-Golpu, building up to full production and further declines in the cash costs if you treat copper as a credit to cash costs.

South African gold environment, on page 11, a real dramatic increase in the gold since 2008. In fact, if you look at 2007 the increase is similar, close to a 100% increase. Quarter on quarter there was quite a change in the rand gold price. So although the increase in gold was only 14% in US dollars it increased by 20% to 396 -- just over ZAR396,000 a kilogram.

And this resulted in some decent operational profits, if you look at them on page -- on slide 12. A real good graph there and it's in rand from the left-hand side top, dollars on the right, and then an increase in the operating profit margin in the bottom graph.

Wafi-Golpu, on slide 14, the drilling is really supporting the resource that we declared in June and supporting a lot of the pre-feasibility studies. One of the boreholes that we did get, WR406, results are there, again, supporting the resource declaration that we had.

We are going to have two more large-capacity drill rigs on site they -- in Papua New Guinea, not yet on site working, but they will be soon. We've established a fairly good experienced study group. It consists of various people, including people from Newcrest as well as ourselves, and many consultants with experience in large projects like this that have been appointed for different parts of the studies. So pretty confident that we'll deliver the pre-feasibility study and it's on schedule for June.

On the Wafi transfer structure, really a program looking forward, systematic grid-based soil sampling, it's going to continue. Also alteration mapping very important in these type of studies and these type of deposits. Generally these deposits are blind, don't crop out at surface and, therefore, need a good understanding of the geology. Hopefully, we will be able to put one drill rig onto the transfer structure during the balance of the year. And there is a 3,000 meter drill program planned for the transfer structure.

On slide 16 the left-hand part of that is gold anomalous and then copper anomalies. You can see the Wafi-Golpu signature of 26.6m ounces of gold and 9m tonnes of copper right near the middle. And then Zimake is looking like a good anomaly coincident with magnetic intrusive. So we need to some more work there and more drilling, but it's really looking like it's got an exciting signature. We will see when we start drilling.

In the exploration, on slide 18, we had four areas. We've dropped the one area; that's Tapini. The tenements were surrendered after we reviewed a lot of the data that we had in that area. Mount Hagen, we've been drilling around there. I'll talk a little bit more detail around that. Amanab and Tari also progressing some work. Hopefully, around Tari we'll be doing aeromag survey in the near future.

On the Kurunga intrusive complex, and this is in the Mount Hagen tenements, really a nice magnetic and we've got some associated high-order regional copper gold stream sediments, [dansan] ore ridge and spur sediments, and we've done some follow up drilling. You can see the drilling holes on this -- on that sheet, most of them fairly shallow. The one that we are highlighting here on the next page is PNDD001.

It's giving some good indication of a target copper-moly intrusive. It's obviously not economic as yet, but it's certainly giving all the indications that we are onto something. So a lot more work to be done as assays pending for the second hole.

On slide 21, just for the geologists, I've given a little bit more detail on what we got here. It's all suggestive of a copper-moly dominated porphyry system. It's got a sequence of volcanics and intrusives and there are various mineralization styles that we are dealing with here. But we will see in the months to come as to how we work this one out.

On the operational results, slide 23, we give this detail quarter on quarter. And you can see the sort of margin that's opened up mainly, there, due to the rand/gold price. The rand/gold price looking pretty good, around the ZAR396 or thereabouts. If you page over, and this is in dollars per ounce, again, a good margin opening up for this quarter. And if you look at that, because of the change in the exchange rate, in fact, total dollars per ounce or total cost is slightly lower than the previous quarter.

On the Group operating results, slide 25, quarter-on-quarter gold produced pretty well flat. 500 kilograms really lost due to strike action during the quarter. It could have been better. Restructuring at Bambanani affected us slightly negatively and, obviously, the two fatals did create safety stoppages.

But the real important areas to talk about on this one is the gold price, 14% up in dollars, 20% up in rand per kilogram, and that led to the operating profit increase in dollars of 37%, call it 38% and 45% in rands, so impact of that new higher gold price straight down onto the operating profit line.

A few detailed slide on some of our build-up operations. Doornkop increasing margin quarter on quarter, so gold production increased. And obviously there has some -- been some transfers of crews from restructured operations, in this case, Bambanani. They'll be more productive going forward.

On slide 27 a good idea of square meters mined. You can see the dip in August. This is a monthly graph, so in August this is the effect of the strike that came through in the August month. And you can see that dip in both square meters and development meters. And you'll be able to see this in the following graphs as well in the different operations. Productivity, we measure productivity in both grams per total employee costs, so that's what TEC is, as well as tonnes per TEC.

Paging over to Kusasalethu, Kusasalethu has had some steady three quarters now, so at a much better spot than it's been in the past. If you look at the slide 29 you can see the big dip in August again, development meters increasing and also productivity improving.

Phakisa has still got a long way to go in its build up and it is starting to build up, but it's still got a long way to go. Again, some crews have transferred from Bambanani and that will be, hopefully, showing productivity increases going forward.

You see on slide 31, although those productivity numbers are slightly behind the curve when you look at grams per TEC, we've still a long way to go there, but certainly heading in the right trend, as well as development meters and square meters mined. Hidden Valley, a good solid margin for Hidden Valley. Hidden Valley's worries were around the overland conveyor. That's been re-commissioned now, completed in September month and will -- you see the build up.

Between the conveyors, as well as some trucking, we hope to give proper throughputs during this quarter and, hopefully, we'll achieve the benchmark of the desired capacity of that plant, which is annualized at 4.2m tonnes per annum. You can see that increase in the silver production there led to better costs and that is because of a credit to cash costs.

Evander, slide 33, a transformed Evander, remembering, as you can see on the graph, that we've spent some capital going back in September, December and even before then; a decision made some time ago to restructure those operations, and it's really showing. And some great profits coming out of Evander with some good results there. And over the page you can see the productivity as well as -- as you can see, the dip as well in the August month.

I'd like to hand over to Hannes to look at the financial results.

Thank you, Graham. On slide 36 we've put some of the key features and highlights of the quarter. A great quarter for us; net profit of ZAR478m, or $67m; earnings of ZAR1.11 a share in South African cents, or $0.16; headline earnings a three-fold increase quarter on quarter, from ZAR0.30 to ZAR0.95 a share, or $0.13 per share.

In this quarter we also had the first draw down on a US dollar loan facility that we put in place. We drew $50m towards the end of the quarter. Dividend we paid, which we -- that was declared in the -- at end of the previous quarter, ZAR258m. With the dividend and the positive cash flows we managed to decrease our net debt by about $42m for the quarter.

If I go to slide 37, revenue [reduction] and gold sold pretty much in line with the previous quarter, but higher rand/gold prices translated an about ZAR500m increase in revenue quarter on quarter. Cash operating costs up by about -- a bit more than ZAR200m, the major driver in that, electricity costs. We are in the winter tariff season, so two months of winter tariffs. That accounted for ZAR133m of electricity cost increase compared to the previous quarter, as well as some wage increases that came into effect on July.

If we look further down the line, employment termination and restructuring costs, that relates to the Bambanani restructuring. That's ZAR34m that we incurred for the quarter. Exploration in line with the previous quarter.

A look at reversal of impairment in -- of investment in associates that relates to a transaction with Gold One with regard to our stake in Rand Uranium, that's a transaction denominated in US dollars. With the weakening in the rand compared to the dollars we expect to realize more cash in rand terms and, therefore, the increase -- or the reversal of some of that impairment which we accounted for previously.

All of that translated into ZAR411m headline earnings, or ZAR0.95 per share.

Just page -- over to slide 38, and that shows it, then, in dollar -- dollars. The rand decreased by about 5% to the US dollar in the quarter. We can see the impact on the cash operating costs, then, the increase of the electricity of $19m for the quarter and labor $25m, offset by some of the rand weakening on the quarter, therefore, a lower increase in our dollar operating costs. That translated into $0.13 per share headline earnings.

I'd like to page over to slide 40, and this talks to the balance sheet at the end of the quarter. We started this quarter off on a debt of $230m, we ended at $250m, cash of $102m at the beginning of the quarter and a closing balance of $164m, inflated a bit by the drawdown of $50m towards the end of the quarter.

If we look at the individual line items for the quarter, cash flow from operations, strongest quarter, nearly $200m of revenue from those -- or cash flow from those activities. Paid the dividend of $32m during this quarter. Some working capital changes there. Capital down quarter on quarter, down from $123m previous quarter to $98m in this quarter. Exploration largely in line, as is corporate and social investment expenditure, and incurred some restructuring costs in this quarter relating to Bambanani.

Net debt at the end of the quarter, ZAR86m (sic - see presentation), compared to the ZAR128m (sic - see presentation) where we started off in this quarter. It's an improvement of $42m quarter on quarter. The still low debt to equity ratio of 6%. Aren't we well placed in terms of the balance sheet?

Thank you. Graham.

Thanks, Hannes. Some very pleasing financial numbers there. And if we look at the conclusion, slide 42, what we look at and see at the moment is that the stronger gold prices are expected for this quarter. This quarter to date, although only four weeks' old, has got gold price of around about ZAR420,000 a kilogram, so that's looking good for this quarter. Profits and cash flow will continue to grow, both from build up in operations as well as this great gold price.

Continued build up Phakisa, Kusasalethu, Doornkop and Hidden Valley, so Hidden Valley is expecting to have a better quarter. More exciting exploration results coming out of PNG, hopefully, both from our 100% owned as well as from the joint venture and, especially, the transfer structure. And then Wafi-Golpu progressing with its pre-feasibility study and, hopefully, tracking that in line with expectation.

Thank you very much, ladies and gentlemen. I'll quickly now open up for questions.

Thank you very much, sir. (Operator Instructions). Our first question comes from Mandy LaGrange of Investec. Please go ahead.

Hi, Graham and the team. I just want to get some feedback. We're hearing that you are considering linking a dividend payment at some point in the future to the gold price. Could you please talk us through the consideration, particularly from a Company who -- we know you need your cash going forward and there's still quite a lot of concern in the market as to how you are going to be funding the Wafi-Golpu interest? So could you just talk us through that, please?

Sure, Mandy, hi. Yes, I guess the question keeps coming to us based on North American operators who are talking about this thing and, therefore, what are you, Harmony, going to do with your cash. And it's an answer which I answer that the first thing is we must be able to fund Wafi-Golpu in the -- and that mine build there. Certainly, that is quite a long way off, when the big calls come in somewhere from 2014 onwards, but in the meantime there is capital going into Wafi-Golpu. There's more exploration to be done and if we do some early works.

So Wafi-Golpu remains our number-one priority and I guess it is going to be a challenge and a topic for us, as management, to make sure that we make use of our cash as our shareholders would expect. So at the moment there is no discussion about linking our dividends or anything to the gold price, Mandy. It's purely, I think, speculation in the press, coming out of what's happening mainly in North America, I believe.

Okay, thanks very much. Could I also just ask quickly on the decision to halt mining in the sub-shaft at Bambanani. Can you give us an indication of how much of your reserve -- I think it's about a 1.3m ounce reserve, could potentially be removed from the mine plan if that's the case, there's going to be no more mining there?

Mandy, it's very little. In fact, that sub-shaft was planned to probably continue for about another year or year and a half, and then decline. So it's actually very little in the way of reserve that is taken that way. The big reserve is the shaft pillar itself. And the whole issue around the sub-shaft is it's very expensive to operate, especially from an electricity point of view. It gobbles up as much as a small town would use in electricity, so it is very expensive because it requires a lot of cooling. And the grades, as you know, have been disappointing of late.

Yes.

So the decision was made on that. It will obviously not meet its year's forecast, but that's the right decision to do. It was also a good decision from the point of view of transferring crews to the build-up operations. Although it's a little bit earlier than we planned, these people are valuable and we would rather put them on our growing assets as opposed to have them on something that's really disappointing.

Okay, thanks. Just a final question with regards to Masimong and the [waste] price system. I think you may have mentioned in the report that there'll -- you're expecting another three quarters for the maintenance work, or maintenance to be completed. So can we -- are you expecting similar production levels for the rest of the year from Masimong for the next three quarters?

Yes, Mandy, the main production issue that gets affected is the waste mixing in with the reef and that affects the grades that you see. Masimong didn't have a great quarter; it suffered a little bit both from the stoppage of, obviously, the strike, but it also suffered a little bit in some production issues. But it's nothing that we are concerned about. But you will see this great trend being negative compared to where it has been in the past, and that's mainly because of waste being mixed with the reef.

Okay, thanks very much.

You're welcome.

Our next question comes from [David Little] of Deutsche Bank. Please go ahead, sir.

Yes, hi, guys, a great set of results. A couple of questions just on, I guess, Wafi-Golpu. The feasibility study is -- are you saying it's definitively pushed out to Q2 of 2012? And I'm just curious if the production start-up dates might be moving out as well. And maybe, on the decline, it sounds like Newcrest is seriously looking at a deeper first cut for the block cave. It's something twice the original depth that you guys have suggested. Does that defer the original start up as well?

David, hi. Yes, the original pre-feasibility dates that we had -- and this is going back probably about three quarters -- we had as March. So we had it probably three months earlier. And what's really informing the pre-feasibility study is, to a large extent, the drilling we've been able to do. And when you are drilling and reaffirming all the information to get proper reserves we've have had to do quite a lot of drilling, and that's the main area that has been suffering a little bit, is drilling production, if you like.

Remembering that this ore body is 1,000 meters, 800 meters deep and that means we have to drill holes around about 2,000 and collect information from both the host rocks as well as the ore body itself. And that's really where the big issue has been on how do we inform the mining studies if we don't have all the information. So that's been probably the single biggest area of slippage, if you like, in this sort of --

So we've officially, all of us, moved to the June dates and at the moment I wouldn't like to change anything on the production dates. I think the best information that we'll get out of that is, when we've completed the pre-feasibility, we'll obviously have much better dates and times and capital or forecasts etc.

On the block cave, the guys are thinking quite differently on the block cave and what to mine first. And they've been looking at everything from a two lift to a three lift. In the last scenario I briefly looked at -- actually, at a three lift; a smaller lift number one near the top and then two lifts further down.

Now that doesn't mean to say we are mining any deeper. It means that the rock strength and the ability to last for that longer draw is what really determines how long a level's going to last. And that's critical for a block cave. You don't want your box fronts and box holes to wear out while you've still got material above you and you can do another -- draw some more off.

So that's the critical area of this whole block cave. And to say are we deep or shallow right now I don't think is necessarily right, just because we've changed the way that we are looking at lifts. But, having said that, the guys are still working hard at everything here and then we'll see what happens.

Okay, thanks so much.

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

Well, thank you very much, ladies and gentlemen. If you have any questions or further questions, please don't hesitate to send Henrika or Marian an email notes. And we look forward to being able to give a strong report of where we are next quarter as well. Thank you very much.

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