Harmony Gold Mining Company Ltd (HMY) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Harmony Gold Mining Company Ltd second-quarter 2014 and six months ended December 31, 2013 results. (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, Dillon, and welcome, ladies and gentlemen wherever you may be. It's afternoon here in Cape Town (inaudible) you'll be pleased to know. With me I have Frank Abbott to help me through the financials. I also have Mashego here so we can pretty well answer hopefully most of the questions that you have and if not, of course, Marian and Henrika are available on their emails if you want to drop them a note and question.

On slide 2 the Safe Harbor Statement and I'm going through the presentation as you've hopefully picked it up off the website. Agenda, Slide 3, I'm going to talk about mining, profitable ounces, where our focus is and our focus is on margin. I'll talk about Wafi-Golpu, a little bit of information about Wafi-Golpu and what we're doing there. Frank will take us through the financial results and then I will conclude.

On slide 5, our strategy. This is a slide that has not changed much over the many years that we've had it and certainly I intend to continue to pay dividends into the future. So we're really looking and focusing on margin and therefore growth in profits and that comes out of the second bullet point down, growth in margin and therefore have free cash flow to be able to pay those dividends.

A lot of what we've been doing in the last few months, last few quarters in fact, and will probably continue into the next six months, is really looking at optimizing the operational delivery, trying to deliver on the projects that we've spent capital on and really focusing on those operational plans to be able to deliver on those.

Sharing our rewards and profits, we've talked about dividends and obviously we have a host of other stakeholders as well.

Slide 6 is the rand per kilogram, the all-in sustaining cost, but I'd like us to go to slide 7 which is in dollars. You can see that in June, the end of June we were $1,551, that came down to $1,264 in September and now down at $1,222. We'll have a look a little bit at the effects of the exchange rate on that and obviously you can go back to slide 6 to have a look at the rand per kilogram terms.

Slides 8 and 9 really go together but let's talk to slide 8 first, and we are talking about some of the operations that have really done very well here, less than $1,000 an ounce and we're talking in all cases all-in sustaining costs, Joel, Target 1. Target 1 has had some great quarters and done very well, Bambanani is really starting to perform well, mining the shaft pillar, the decline is still not in operation yet but is being equipped and certainly that will be better in getting tons out there, and Phoenix, our tailings operation.

When you look at the next group of mines, Hidden Valley, Kalgold and Unisel, Hidden Valley has turned around the corner dramatically from a few quarters ago. Three few quarters ago it was more than $2,000 an ounce, last quarter it was around $600 -- $1,600 sorry, and this quarter it is just above $1,200 an ounce. Our total all-in sustaining costs is below, as you've seen on slide 7, $1,250 and so the real focus is to continue with the increase in margins.

Over the page on slide 9 Phakisa, Tshepong, Masimong and Doornkop, some of these operations have been refocusing during the last six months. Tshepong has basically gone through a management change as well as we've done some restructuring in labor there, about 10% of the labor force. So there's been a real focus to get that operation back onto where it should be and now we'll see things settling down on Tshepong going forward, so we're looking forward to better performance there.

On Doornkop, we took out the Kimberley Reef mining; that happened towards the end of December and, of course, now there's again about 10% of the workforce has been taken out there. And a lot of those people, because they're quite skilled from the Kimberley mass mining have been transferred to other operations. So those are two operations that have been restructured.

Phakisa, we continue to spend some capital, the latest capital was really spent on various refrigeration plants, but looking forward to getting that down into the $1,250 to $1,300 mark by the financial yearend. The capital was skewed certainly towards the frontend of this financial year.

The disappointment for the quarter was Kusasalethu; it should have done a lot better. We had some technical issues, bottom of shaft issues and unfortunately because of the mining sequence there we couldn't get back into production as quickly as we wanted to.

And Target 3, we mention there that we'll probably do some restructuring in Target 3 to make it profitable.

Slide 11, a little bit of an idea of what we're focusing on in safety. We have had very good success on safety and we continue to focus a lot more on safety. Certainly our management now believe that we can mine without having a fatal which is a mindset change in the South African mining scenario. We're doing much better but we need to ensure that we don't have anybody dying on our mines, so that still remains an objective.

Slide 12 talks about the six months to the end of the December 2103, we also have the six months to the end of June 2013 here and if you go to the quarterly booklet you'll see the six months ended June, December -- sorry December 2013 and December 2012. And so you can see our trends really on various things like the rand per kilogram and where we are. So obviously in the six months December 2013, June 2013 we are 10% better there. In the US dollar per ounce we are 18% better there. The difference between the two is obviously in relation to the exchange rate, bottom line there on slide 12.

If you look at the all-in sustaining costs and that, of course, the big difference there between the 10% improvement and the 15% improvement is capital expenditure mainly. And the dollars per ounce goes from $1,600 down to $1,200 and that's a 33% improvement, that's on the six months to June and December.

If you go to the booklet you'll see the similar comparison on December 2013 and December 2012 and you can see where we are in the unit costs there and that's quite a good story as well.

Slide 13 is a slide on the December quarter versus the September quarter. The production was flat, the gold price went down 3% in rand terms, 5% in dollar terms. Cash operating costs came down by 5% in rand terms, 6% in dollar terms. Pleasing improvements in grade. Operating profit you can see is minus 5% there, you can say virtually flat mainly because of the lower gold price as gold price down to ZAR415,500 in that quarter. And all-in sustaining costs below the ZAR400,000 per kilogram mark. Exchange rate for the quarter was 10.12, that's the December quarter.

Slide 14, grade trend. Three quarters of improvement of grades, you can see also the planned grade for the financial year at 4.79, that's what we're planning for this year and this last quarter 4.85 and hopefully we'll get similar to the 4.85 in the coming quarter.

Production, slide 15 in kilograms, slide 16 in ounces and pretty flat in most of the operations. Kusasalethu you can see the disappointment there, it should have done much better and hopefully we will see better production coming forward into the next quarter.

Slide 17, rands per tonne, a bit of comparison and you can see in the bullet point at the bottom where the source is for that and you can see that Harmony is still the best rand-per-tonne deliverer in the South African gold mining industry. Sibanye and AngloGold have a 2 rands per tonne advantage over us however and therefore in their rands per kilogram or dollars per ounce terms they should be a lot better than us. But you can see that we're still pretty efficient when it comes to rands per tonne.

On slides 19 and 20, all-in sustaining costs, we stack up each of our operations from the highest cost Kusasalethu down to the lowest one Bambanani. You can see the operations that are performing below $1,000, you can see operations performing in and around below $1,200 there and then obviously those on the right are the ones that are requiring more work to be done and that's where a lot of the focus is. Doornkop now restructured, Tshepong now restructured, work to be done at Masimong, work to be done at Target 3, Kusasalethu is a case of we've got over those technical problems so we should have a better quarter. And Phakisa, of course, has been spending some capital so that's why it is where it is, and it is where it is and was planned to be that way.

Slide 21, a little bit of sensitivity to the rand/dollar exchange rate. The grey bar is where we were last quarter at 10.12 and that gives you $1,222 an ounce but if we just continue at ZAR398,000 a kilogram you can see what happens with the changing exchange rate. Of course our plan is not to stay at the ZAR398,000 a kilogram, our plan is to get that down so we should get a good advantage in dollars per ounce terms.

Wafi-Golpu. Slide 23 is just really a schematic section of 2009 Golpu and today what it looks like just to show you how different this ore body is. There has been a lot of drilling over the years and just to see it where it is. It's a fantastic ore body, it's 20m ounces of gold, 9m tonnes of copper, it's potentially one of the best copper/gold projects in the world today. We are doing a lot of work with the appointment of an engineering company to look at a modular expandable mine and also looking at going underground, underground access.

Slide 24, I do give you an indicative timeline and we're really in the stage at the moment of where the orange dot is, really the process of feasibility of underground access and looking at a modular type mine, so that's what is happening at the moment.

I'm now going to hand over to Frank to talk financial results.

Thank you, Graham. If we page over to slide 28 we've got our income statement for the quarter of December versus the September quarter in dollars. If you look at the revenue line it is flat and that's because of the gold sold increase by 5% but also offset by the 5% reduction in the gold price.

Our cash operating costs reduced with $24m, the savings were in electricity $19m, the South African region has the winter tariffs during the quarter of December and from Hidden Valley we had a $5m saving.

Inventory movement was a negative $15m and this was the result of the reduction in gold inventory over this period, the previous period we had built up gold inventory and then this period it reduced.

Our operating profits were $7m lower. Amort was pretty much the same as the previous quarter, exploration expenditure slightly lower.

foreign exchange translation loss $13m, this is from the $270m loan that we have for Papua New Guinea and because we do our income statement in rand we convert that to rand and the rand weakened against the dollar and then we convert that back to dollars for the purposes of the statement.

Our taxation was $1m versus $4m in the previous quarter. That gave us a loss of $10m. The exchange for the quarter 10.12 versus 9.96 for the previous quarter.

If we turn over to slide 29 we wanted just to show the impact of the foreign exchange translation on our results. The net loss for the period was $10m, the foreign exchange translation was $13m, so our net profit excluding this was $3m.

If I turn over not to slide 30 but slide 31, we have our cash flow summary quarter on quarter in dollars. Our cash flow from operations before exploration was $80m. That was substantially more than the previous quarter. Again we had the advantage of reducing our gold inventory during this period compared to building up gold inventory in the period before. Exploration expenditure, $11m, slightly lower. Income and mining taxes $3m and our capital expenditure $62m.

We can see here that our cash flow from operations paid for both our exploration expenditure and capital expenditure.

Our net debt increased by $5m, but if we look at the make up there our debt in fact stayed the same but our cash balances reduced slightly and this is in dollar terms. In rand terms our cash balances actually increased but converting it back to dollar are a bigger exchange rate in December we've got the dollar balance being slightly smaller.

If we turn to slide 32, this is our borrowings which we've renegotiated. Our rand facilities for ZAR458m expired at the end of the December quarter and we renegotiated the loan, so we renewed this and replaced that with a facility of ZAR1.3b which replaces the old facility. This will mature in 2016.

At the same time we also thought it opportune to renegotiate our covenants with our banks, for both our US dollar and rand facilities and I've listed the different covenants there. What's of importance is that the first covenant we changed, it used to be EBIT/total interest and then the last covenant tangible network replaced market value. So we feel much more flexibility with the current covenants that we have there and we're very happy that we could actually change them.

Thank you, Graham.

Thanks, Frank. For conclusion I'd like to go to slide 34. This slide is really about the sort of foundations, again, in our strategy, what we've said, what we've done and the picture going forward.

In our growth in margin we have, as indicated some time ago, we've closed the last shaft that we intended to close and now we're looking down every operation and looking at the unprofitable areas like we have at Doornkop, closing that. We have had some changes in management, those changes mainly have happened in the General Manager level and the Human Resources management level and then we've done quite a bit of restructuring of the labor force. The intent there every mine in Harmony should be below ZAR400,000 a kilogram on all-in sustaining costs.

At the same time focusing on operational delivery and optimization of that. We have the advantage of the lowest rand per tonne; we need to continue to keep that advantage. Capital and other costs we've been reducing, that has gone through the whole company, there's obviously still more work to be done, the easy stuff is done and we need to do some more of it. Then we've got the ore reserve flexibility.

Slide 35 is just an indication of what we think is where the upside in the share price is. We've got increasing grade, lowest rand per tonne, good capital discipline, free cash flow. We still remain unhedged both on gold terms as well as in exchange rates. We've certainly got balance sheet strength and, as Frank pointed out, no debt. We're geared very much to the South African currency because 93% of our gold is produced here in South Africa and obviously what happens in South Africa and to the currency is very important. We've got earnings growth and the Golpu, one of the top gold/copper resources in the world, there's no doubt about that.

The graph on the right-hand side gives you an idea of what the market cap per reserve ounce is in Harmony versus other companies and $24 an ounce versus $65 on our South Africa peers and then, of course, internationally the cost per ounce is very much higher.

In short, we really have been focusing on managing costs and production. Kusasalethu was a bit of a disappointment on the production but certainly we believe we're over that. We're going to mine profitability in future, there's no doubt about that, and that's really what our management approach is about.

There is in the presentation some appendices, some detail on grade, detail on rand per kilogram costs year to date versus what we gave guidance about, both in rand terms and in dollars and then a graph on all-in sustaining costs at the rand per kilogram as well as the dollar per ounce level.

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

Thank you very much. (Operator Instructions). It appears we have no questions. Do you have any closing comments?

Ladies and gentlemen, thank you very much for listening to us. Thank you for taking the time out to read through our presentation. hopefully you will find further information in our quarterly booklet and obviously there's a lot of financial information there as well.

Thank you very much and enjoy the rest of the day.

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