Harmony Gold Mining Company Ltd (HMY) 2012 Q1 法說會逐字稿

Good day, and welcome to the Harmony Gold Mining Company Limited first-quarter results for the financial year 2013 international analyst call. All participants will be in listen-only mode, and there will be an opportunity for you to ask questions after 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. Good afternoon or good morning, ladies and gentlemen. I'm probably competing with all the parties post the election, if there's any people from the US. But welcome, all the same, to those that are listening.

With me I have Frank Abbott; I've got Mashego. I've also got Marian and Henrika here with me. So we should be able to answer any questions you have.

I'll be going through the presentation. Hopefully, you've got that from the website or you've been emailed it. Slide two, Safe Harbor statement. What's important there is that there is our new annual report on the website; interesting reading and lots of facts there about Harmony. So that's worth reading.

On the agenda, I'm going to go a little bit of overview on the quarter, talk about Harmony as an employer, operational results. Financial results, I'll hand over to Frank for that. We'll deal with two slides on exploration, and then we'll conclude.

I'm on slide five. Quarter on quarter, looking at the gold production, increased by 8%; operating profit 9% higher. Cash operating costs did increase. Two effects there. It's really a seasonal thing. Two months of winter tariffs for electricity, and then there was the annual wage increment in July 1. So that's what affects the quarter-on-quarter increases. Increase in headline earnings per share to ZAR1.23 or $0.15.

On slide six, got the production there going back to September '11, so September last year, where we deal with five quarters there, and you can see the increase in production. And also the grade is shown as the black line. Increase in grade to 4.52, and that's the underground operations. And we're talking about continuing operations here. The only operation that isn't is Evander, so Evander's been taken out of those results.

A lot of questions on grade so we've put some detail in here, thanks to Henrika. The grade, you can see the actual for financial year '12. You can see the adjustments, and that's the grade we should really be comparing to with recovery. That deals with after mine core factors and plant factors and the like. And you can see the operation by operation.

So, operations like Joel had an excellent quarter. Target 1 had an excellent quarter. Masimong is improving after the ore pass has been fixed, and so now we are starting to tram waste and reef separately. Phakisa's still got a long way to do and a long way to go; a lot of development happening there. Tshepong has been a little bit of a disappointment, mainly from the decline, but I'm sure that will pick up going forward. Bambanani/Steyn, much improved there at just over 10 grams a tonne. Bambanani's getting into the mining of that pillar, so that's going to improve. Target 3 also had an impressive improvement.

On slide eight, the first part of that is really the guidance we gave for the Investor Day. So, the expected potential ounces in financial year '16, we've divided that by four so you get the quarterly numbers. And you can really compare what we have got this quarter with what we're saying in 2016.

The first three, Kusasalethu, Doornkop, Phakisa, (technical difficulty), and you can see that to get to their target there's about 70,000 ounces to go there. Tshepong, a little bit underperforming there, so 10,000 to 15,000 ounces. Masimong is getting close, a little bit better on the grade, and it'll be there. Target is over. Bambanani is also in buildup; the grade's improving, but obviously the volume needs to pick up. And Target 3 is, despite its grade, still being down; it's nearly there in production. And a lot of those operations have really got some good results.

If we go into -- slide nine is rand per kilogram. Slide 10 is dollars per ounce. And we're looking at the Company here in continuing operations. The red is cash costs, operating costs, the grey is maintenance capital, and that includes all our development and maintenance. And then the green is growth capital. And you can see the margin there between the black line and the different bars, because that is the gold price.

Talk a little bit about Harmony as an employer. On slide 12 we've got a safety graph, both the lost time injury frequency rate as well as fatality frequency rate. We've been doing a huge amount of work on these areas in safety, and today Kusasalethu got 1m fatality free shifts. It joins Target 1, who's gone three years now and is over 1m fatality free shifts, as well as Phakisa. So, a lot of our operations doing very well on safety.

Slide 13, a lot has been talked about in people and wages and so on in various mining industries, so we've just sketched out a little bit of the information there. The only operation that has been affected by a strike has been Kusasalethu, and that was from the beginning of the quarter we're in, so not the quarter that we're reporting on. There was a wage adjustment in the beginning of October, and that will result in about a ZAR10m increase in costs per month. In the conclusion, there's a competitive remuneration package both for non-management as well as management.

Last quarter, we spoke a little bit about equity numbers, in other words previously disadvantaged people now in management and technical ranks, and we were talking about 43% last quarter. Now we're just mentioning another part of charter requirements, and that's really looking at the whole housing strategy and what we're doing, promoting home ownership in various ways. Continuing to develop old hostels into rental units, and so create more rental stock in the places that we're working in. De-densifying hostels, so that there will be one man per room. And really just a focus on a lot of houses.

We give you some statistics there as well. 38% of our workforce are still residing in hostels. Generally, we have a workforce where a number of people still come from various migrant areas, mostly Lesotho, which is fairly close to the Free State gold fields, so not really many coming from far afield. And 50% of the workforce preferring to take housing allowances and living in the housing villages around our mines, so not in squatter camps around our mines but in actual municipal villages.

Slide 15, we talk a little bit about Kusasalethu, and this is really looking forward to the quarter that we're coming into so that you're well aware of this. We've lost quite a few days here, and it's taking a while to get the machinery and everything going. It's a case of being able to blast, being able to move the ore, get the ore mixed as backfill and get it back into the support.

So, there's a lot of work that's taking place there in getting the production up. And the estimation at the moment is that we'll lose 25,000 ounces. And the cost, we've given an estimate there. Obviously we'll get much better numbers on the cost closer towards the end of the quarter.

Amidst all these national strikes, we've been rolling out some values in our organization. We've given the little logos of each value there. These logos came from the employees and they've been supported very well by all, so we're rolling out a bit of program on those. These are not values that the Chief Executive chose. These are values that the people in the organization have chosen.

On the operational results, and I'm now on slide 18, very briefly, those operational results hide a lot of very good performances. Joel had good grades, produced over 900 kilograms. Target 1 produced over a tonne of gold, Kusasalethu 1.6 tonne of gold. Bambanani had a fantastic improvement, as well as Target 3 also had a good improvement. So, generally, some good performance from a lot of the operations.

I'd like to hand over to Frank on the financial side.

Thank you, Graham. If we turn to page 21, slide 21, this is our cash flow summary in US dollars, quarter on quarter, so we're comparing the September quarter with the June quarter.

Our cash flow from operations were $190m in the quarter. That was $44m higher than the previous quarter. Exploration expenditure stayed very much in line. Proceeds from sale of investments, the previous quarter included sale of certain assets at the Evander mine. Our capital expenditure was $115m. Included in the $115m was $26m spent in Papua New Guinea. We declared a dividend of $26m.

So you can see there our net positive cash for the quarter is $15m at the end of the quarter versus minus $5m the previous quarter, so we had a $20m improvement in our net positive cash for the quarter. You can see our cash balance has increased to $275m, and this is after paying our capital expenditure and the dividend for the quarter.

If we page over to the slide 23, this is our income statement quarter on quarter in US dollars. We can see our revenue increased by 7%. We sold 4% more gold in this period and the dollar gold price was higher by 3%. Our production costs increased because of electricity increases in this quarter. In this quarter we paid higher electricity tariffs because of winter rate, and then our labor increases from July 1.

Our amortization and depreciation for the quarter is in line with the average of the previous year. Share-based payments, the $13m includes $10m of the employee share option plan, and $8m of that $10m is a once-off cost which we've provided. Exploration expenditure $16m; most of that was spent in Papua New Guinea.

Profit from discontinued operations is the profit after tax from Evander. The previous quarter, we had the profit from the sale of certain assets at Evander included.

We made a net profit of $65m, against the $14m the previous quarter, and that gave us a headline earnings per share in US cents of $0.15 versus minus $0.01 the previous quarter.

Thank you, Graham.

Thanks a lot, Frank. Talking a little bit about exploration, slide 25, the Morobe joint venture slide there. We can see the outline of all the different tenements.

In the northern part of that, the Wafi/Golpu tenements. We're showing the Wafi transfer zone. Still a lot of action going on there, rigs drilling for technical reasons as well as further ore body reasons, and so we're making good progress there. In the Hidden Valley district, towards the middle of that map, you can see the different trends there. You can see where Hidden Valley/Hamata is. And then there's some regional exploration that they're doing as well in the joint venture.

Slide 26, this is the 100% Harmony tenements. Most of the work has been happening at Mount Hagen and Tari; some drilling happening at Mount Hagen. Tari, the guys are getting onto the ground after the electromag done previous quarter, so there's really some hard work and some foot stomping that's going to happen amongst the geologists there.

Slide 28 is a recap on our strategy. The main three thrusts on our strategy, looking at growth, exploration and optimizing operational delivery, really the focus is on those and growing in various areas, including profits. And as Frank pointed out to you, after dividends are paid, capital exploration was paid, we still had money to put in the bank and we now are net cash positive.

A reminder, on 29, of what we achieved in financial year '12. This now adds to this; this is the next quarter. And so we continue to look at focusing on our strategy and improving.

Slide 30 is a gold price graph. On the left, see the gold price increasing. And then on the right, basically, look at this a little bit around the other way. In fact, what we see here is the gold price is static and is holding its value. Then all the currencies are actually being eroded. They are declining in value versus the gold price. So I guess what we're saying is that the only one that's really holding its value is the true one, and that's gold.

There are some appendices here, really looking at more detail on the operational results, including Evander at the back there, Hidden Valley, the surface operations and so on. But you're welcome to look at those in the time that you have.

I'd like to open ourselves for any questions.

Thank you very much, sir. (Operator Instructions). We have a question from David Haughton of BMO. Please go ahead, sir.

Yes. Good morning, Graham, and thanks for taking this call for the North American market. Appreciate that. You seem to have gone through the strike issue, relatively speaking, unscathed compared to your other firms down there. What do you put that down to, do you think?

Hi, David. Yes, we do get asked this question quite often and it's difficult to say, other than we do, in Harmony, do things a little bit differently. For instance, we do have our pay structure slightly different to other companies. We have slightly lower basics and more variable. So that means that as we've been improving our safety, improving our production, so the employees benefit more in the variable side.

We did post the whole issues in the platinum sector, while it was still happening, in fact. We upped our communication very -- to a very high level. We collapsed the communication levels. We had meetings with unions and management and on really trying to resolve issues. Because what was apparent to us in the whole platinum sector was that there could have been a strike about any particular issue. They happened to choose the famous ZAR12,500 per month issue. But we looked at it and said, well, any issue can really create it. If we create the right environment, we'll resolve all our issues, and that's the way to do it.

We also opened our discussions, so that we didn't just restrict them to the previous unions and so on. We really opened our discussions so that everyone could have their ideas and put their ideas on the table.

So, really a good effort. Obviously the general managers and the HR managers worked extremely hard during this period, and continue to do so. I guess, David, the old rules as they've applied in South Africa for the last 25 or 30 years, in some way, have -- don't apply any more. And we need to look at the new way of engaging, and that may be multiple unions, multiple representatives, employees and so on. So, it's going to be an interesting change for people in South Africa. They're used to a -- one recipe book, if you like, for the last while.

Yes. It also seems that it's incredibly complicated. AngloGold yesterday saying that there was a sit-in at one of their mines that meant that they had to shut it down for a while. So, strange bubblings of unrest that are very difficult to get your head around, from at least sitting on this side of the Atlantic.

Yes. David, I can't really comment on AngloGold, but the press that came out of it was saying that there was an unresolved issue. Now, obviously, there are always going to be unresolved issues; otherwise we wouldn't have something like unions. But I guess what we were saying during that time is let's try and resolve any bubbling issue. And if we can't resolve it, let's get it into a box where we're all working on it to resolve it in future.

All right. And your goal for this year, you're still sticking to the 1.3m ounces. Do you see scope for the catch-up on that lost production that you'd indicated in your presentation, or should we think of that as just an adjustment to your annual target?

I guess what we're saying at the moment is we're making that adjustment to our annual target, David. But we're optimistic and we'd be hopeful to try and make some of that up.

Because the bigger plan at play here is getting towards your 1.7m ounces that really does require some of these operations to hum very well, and obviously you need a supportive workforce to be able to get there. So there is a bigger game at play, from Harmony's point of view, as well.

Yes. No, absolutely. We're focused on the long term. So obvious -- we have to speak to everyone, quarter on quarter, and talk about our results. But the long term is where we're at, and the game we've been playing. We can only do this if we've got support from everyone in Harmony, no matter what level in the organization you're on. It's a people business that we're actually operating.

All right. Well, thank you, Graham. I'll let someone else have a go.

Thanks, David.

Our next question comes from Andrew Byrne of Barclays. Please go ahead, sir.

Hi, Graham. Hi. Just to catch you again, just two questions, if I may. The first one is, when I look at the crux of that [draft] to 1.7m ounces, the material mines that we need to see improvements off and where the real opportunity lies to have a phenomenal leverage to return on capital is Kusasalethu, Phakisa and Tshepong. When we're looking into them, at the moment there is a significant potential and a gap between the grades you've got at the moment and the reserve grades. Could you just talk us through the progression that you foresee at those three assets, given that they're the real material ones? And is there any point over the next two years where we're likely to see a significant step change?

And then the second question I've got is -- this is much more bigger picture, and I assume the answer that you're going to give will be we'll look at everything that comes across our table. But some of the rhetoric that we've seen over the last two to three months, in light of the strike that we've seen, is that AngloGold and Gold Fields to some extent are being penalized due to their South African exposure and are looking at ways to reduce that exposure. If they were to look to dispose of assets inside of South Africa, would you be willing to take a look at them? And would you be willing to sacrifice some of the development at Wafi/Golpu for that?

Okay. Quite a few questions you've got there. Andrew, let's start with the grade and the ounces, if you don't mind.

Sure.

Because it's not just grade; it's also volume as well. So the three build-up ones on that list on slide eight, Kusasalethu, Doornkop and Phakisa, you can see that the build-up to go there, if you add the lot up on where they are now and where they've got to go, is about 70,000 ounces more. It may be a little bit more than that, depending on where you average it.

Tshepong has been underperforming, so Tshepong needs to get up to 48,000 ounces. At the moment, it's closer to 37,000. Masimong is obviously close, but there's a little bit to go there. Bambanani is quite a way to go. It's less than 50%. It's only about a third of its production. And a lot of that doesn't come out of the grade. It's the grade that we're currently mining but it's volume business, so that's got to grow a bit more in volume. Target 3 has got a little while to go, and it's a little bit of grade, a little bit of volume as well. Mainly there it's getting into the basal reef, so it's a change from the current reefs they're mining to the basal reef.

So there's a little bit everywhere. But we are, what, 100,000 ounces short of our target?

Yes.

70,000 out of the top three. A little bit, 10,000 or so, out of Tshepong. What's that, 15,000 or 20,000 out of Bambanani, and then the balance at Target 3, and that makes up your 100,000 ounces. So I guess we're fairly confident of getting there. So it's a combination, Andrew, of grade and tonnes.

Yes.

On the issue around South Africa -- and I'm sure that we also get penalized. In fact, we may get penalized more than those other companies that you talked about, because we are more South African. However, we have never said that we want to leave South Africa. We certainly talk about diversification. If we have an opportunity of putting a few eggs in another basket, we will do so.

But you know we've done a lot of hard work in South Africa. We think we've been successful in our strategy over the last few years. We've closed a lot of operations. We no longer operate any of the original Harmony assets. All the assets we operate are acquired assets. We've spent a lot of shareholder money on those assets, and I think we have to say we've done what we set out to do. We're now in a situation where they are generating free cash, and so we're looking forward to that.

So we quite like what we've got in South Africa. We like our assets. And we think we know the South African environment and we operate fairly well here. So that's the sort of sentiment that we have got here.

Now, if those other companies decided to sell some of their assets or try and get rid of them, obviously it depends on the asset and it has to be an asset that's worthwhile. It would be silly of us to buy an asset, like we did in the past, which has an extremely short life, and then we end up having to retrench people and so on. So we're looking for a comparative quality asset that we have in our present South African portfolio. So, if those opportunities came up, certainly we would look at them.

Yes. That's great. Thanks for the clarification there.

Thank you.

(Operator Instructions). Gentlemen, we have no further questions. Do you have any closing comments?

Well, thank you very much, everybody, for listening to us. As I say to the people in the States, hopefully you've stopped drinking your champagne and you're getting on with the day's work. To everyone here in South Africa, thank you very much and enjoy your day.

Thank you.