Harmony Gold Mining Company Ltd (HMY) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Harmony Gold Mining Company Limited first quarter results for financial year 2015, ended 30 September 2014, international conference.

(Operator Instructions) Please also note that this conference is being recorded.

I would now like to turn the conference over to Mr. Graham Briggs. Please go ahead, sir.

Thank you very much. It gives me great pleasure to present the first quarter financial year 2015 results to you. With me, I have Mashego and Frank. So, if you have any questions, they are capable to answer to them. Frank is also going to help me with the presentation.

Hopefully, you've got the presentation in front of you or on your iPad. Slide number 2, Safe Harbor statement is worth noting there, as there are some forward-looking statements.

On the agenda, those are the agenda items that we are going to go through. A brief overview of the Company and the results of the quarter. Talk about our efficiencies. Frank will talk about the balance sheets and [financials]. We'll talk about mining and exploration in the two economies that we work in, in Papua New Guinea and South Africa. A little bit of an update on Golpu. And then, I will conclude.

Starting on slide 5, quarter-on-quarter results, a very pleasing quarter from the production guys: a 6% increase in gold production; 8% in production profits, and that's because of a slight change in the gold price during the quarter.

Grade continues to increase: 4% improvement in underground recovered grade, and this is on the back of a 5% improvement in recovered grade for the year. So, we've had three years of consistent increase in grades.

An 18% increase in revenue, to ZAR4.4 billion, or $412 million.

The net debt reduced from just over ZAR1 billion to ZAR771 million, and that is $68 million.

Frank will give us more information on the net loss, but that was reduced by 78%.

Slide 6, the operation results. The variances will be quite clear. You can see a 6% improvement in gold produced.

The gold price, fairly flat, slightly down in dollar terms, slightly up in rand terms.

Cash operating costs, slightly up for the quarter. That was due to some one-offs as well as some increases in the payroll, [increases got through] in 1st of July. So, this is the first quarter we have some small increases there. And then, the electricity winter tariffs affected that one as well.

You can see the underground grade that went up and the production profit that increased as well.

Slide 7, a mine-by-mine blow of where they were last quarter/this quarter, the sort of waterfall diagram. In all, a lot of pleasing results there. The one here which we're still very concerned about is Kusasalethu, and we're working hard on that one to get that one right. But some pleasing results from most of the other operations. And even into this quarter it's looking quite optimistic.

And so, the guys are really focusing on increased production, keeping tabs of the costs but there's a good morale on the operations as well.

Slide number 9, attempting to show you some increase in productivity here. This is one of the ways that we measure productivity, in grams per employee. This is total employees; this is including the contractor numbers. You can see that they have been coming down and the productivity has been increasing. We plan to keep going with many programs to assist in this and looking at employee attendance productivity measures like making sure that the [working sites is enough] to cool underground so that people work better as well.

Slide number 10, that's the grade picture. You can see financial year 2012, 2013, and 2014, and now Q1 2015. And Q2 2015 is probably going to be in a similar [region] as Q1.

I'm now going to hand over to Frank, to talk about the balance sheet and financials. Frank?

Thank you, Graham. Please turn to slide 12 for our capital expenditure. On the left-hand graph is in rand; the right-hand graph is in dollars.

If we look at the shaded bar, our guidance for the year was $280 million. Expenditure for the first quarter was $56 million. You can see that's helping out the average quarterly expenditure of $70 million. We are trying to preserve our cash and we are (inaudible) capital expenditure.

If we turn to slide 13, you can see that lots of our operations had a positive cash flow. This is after capital expenditure, with Bambanani and Target 1 doing the best, on the left-hand side. And on the right-hand side, you can see Doornkop is improving from where it was and Kusasalethu [with a] negative $48 million after capital expenditure.

If we turn to slide 15, a low net debt quarter on quarter in US dollars. These are extracts from our cash flow statement. What was fairly pleasing in this quarter is the cash flow from operations: $106 million. This is $57 million better than the previous quarter. And the main reason for this was we produced more gold in this quarter and we also sold more gold in this quarter.

The exploration expenditure stayed the same.

Capital expenditure was (inaudible) in this quarter compared to the June quarter.

The net increase in cash and cash equivalents -- this is our increase in cash after paying for all our expenditure -- was $30 million, and you can see that's increased our cash balance. So, our current cash balance is $202 million, versus $172 million in the previous quarter.

Our debt stayed the same, at $270 million, and that gives us a net debt of $68 million, and that's a $30 million improvement from the previous quarter.

If we turn to slide 17, we've got an income statement quarter-on-quarter in US dollars. On the revenue line, we can see that there's been an increase of 15%. This is due to higher -- more gold produced and also more gold sold in the quarter.

Our production costs increased. Cash operating costs increased by 8%, and this was mainly in the September quarter, as Graham mentioned, (inaudible) a high electricity cost because of winter tariffs. We've also got our wage increases. And we've got [lease-pay] provisions which are a [one-off] but which comes due during the September quarter.

Inventory movements, $15 million. This is because we sold more gold in the quarter than we produced. Some of the gold we didn't sell in the previous quarter was sold during this quarter.

Amortization and depreciation increased by $3 million (sic - see slide 17, "$10 million"), and this is due to higher production. And we've also got new [plants] the beginning of July.

Exploration expenditure, pretty much the same as the previous quarter.

Foreign exchange translation loss is a calculation of our US dollar loan of $270 million converted to rand. Right at the end of the September 2014, the rand exchange rate was ZAR11.32, and we had to [put] through this foreign exchange translation loss of $18 million.

This leaves us with a net loss of $25 million.

Thank you, Graham.

Thanks a lot, Frank.

If we can go to slide 19, you may have seen this press release during the quarter on White Rivers Exploration. A joint venture agreement between them and us. [This is] in a piece of ground adjacent to our Target mine [in three states]. It's on the western boundary of that [overturned] segment there. It could be various economic horizons [in them]. Very complex geology. We have a 35% interest in this joint venture, and White Rivers will be taking it to a pre-feasibility study and they will fund that as well. And so, this is a bit of hopeful stuff for the future, [and certainly], there's a lot of ground there, but it's fairly difficult and complex geology.

Slide number 20, talk about restructuring. We continue to assess our operational performance. You can see that Frank took us through the net cash generated. The two that were problematic in this last quarter was Doornkop and Kusasalethu. Kusasalethu is the problem one, and Doornkop we see some improvements coming through.

So, at the moment -- and we talk about that at the bottom there -- considering an alternative plan for Kusasalethu. We've been given it quite a bit of help from various technical people, and we'll be able to announce that plan once we've signed off on it and have had discussions with unions and other stakeholders.

Obviously, a big focus on safety and productivity.

Target 3 was the other place that we've done some restructuring; that operation is now on care and maintenance.

In Papua New Guinea, we've got some exciting results from early exploration in our 100% exploration area, Kili Teke. Mike Humphries is up there doing some good work, getting sampling values of 2.7% copper, 5.2 gram-a-ton gold from surface anomaly that is excellent. You can see -- in the photo there, you can see that [green staining is copper staining].

On Golpu, new pre-feasibility study, looking at that for the scalable start-up mine. That feasibility is being finalized now. We'll have those results in December. And really been looking at trying to get the considerations by investors -- looking at return on investment, looking at lower capital, and near-term cash flow.

But really focusing on that so that we can adjust that operation in future to survive any gold price, copper price. It is one of those mines that will be here for a long time to go. It's a massive ore body.

We've given that diagram of the position of it. [It means] looking at Asian copper porphyry gold -- gold-copper porphyry deposits, and you can see that it is in one of the higher-grade areas, both on gold and on copper.

Just to conclude, on slide 25, our strategy and what we're focusing on, and this is a long-term focus in the next few years. I'll talk about 1 and 2 in the next slide. Number 3, we really haven't done anything on in the last quarter, nothing of any significance anyway.

On slide 26, safely delivering on plans. We've got an improving safety record. We had a disastrous February, but we're really looking much better than the last quarter, and into this quarter we certainly hope we can keep up that effort.

Production has improved, both grade and tonnage.

Increase in free cash flow. We improved that. High grade. Costs contained largely, except for the ones that Frank and I were pointing out.

Net debt has decreased; now at $68 million.

And, really, to get some value in our share price from Golpu, because I think most people don't have any value in our share price for Golpu. Being able to release that pre-feasibility study will be a major milestone.

Ladies and gentlemen, thank you very much. I'd now like to open up for questions.

(Operator Instructions) David Houghton, Bank of Montreal.

Very encouraging to see your free cash flow generation there, I guess, on a couple of different fronts: beneficiary of the weaker rand but a lot of effort on the cost front. And I guess my question really relates to the principal saving here that we're seeing in the capital expenditure; the slide that's showed on page 12 is quite stark. And I guess I'm wondering to what extent should we be thinking about your sustaining CapEx, going forward? Is this the sort of level that you can maintain? Or, is this just because of the difficult circumstances that we're in with the metal price?

A few things around the capital and I'll allow Frank also to talk about it. One is that it's often difficult to get quarter by quarter fairly flat and to be exactly a quarter of it. So, we do have variations in that, and those really depends a lot on major deliveries that we have on our capital.

We have had a lot of capital basically finishing, capital projects finishing. Phakisa is one that is costing us a bit at the moment, and that's partially the reason why we have very little free cash from Phakisa. But that will be, sort of, mostly finished in the last and next couple of quarters in fact, I think. Frank is indicating that Bambanani is another one that we're near the end of the [decline] project there as well.

So, I guess we're heading towards a situation where a lot of our capital is not growth capital. It's (inaudible) or maintenance capital, of which the vast amount is really on development of the ore bodies. So, the ongoing development is the biggest number in that capital.

And Graham or Frank, given what you can see now, once you come off the spending hump of these various projects, what would you see as a CapEx number that you feel comfortable with on the sustaining side of things, as opposed to any expansionary aspects?

David, I think if we would look at it annually, I think from a sustaining point of view we'd probably be looking at about ZAR2.5 billion; call it $240 million, or so, probably in that region.

All right. Another question for you. Clearly, the illegal mining issue is a difficult one, and Kusasalethu is the principal area that you've got the most activity in. Are there other mines where you've got, to a lesser degree I presume, illegal mining that you need to get on top of?

David, we've had quite a few of our operations at various stages occupied by some illegal miners. We have developed some in-house capacity on security and ways of dealing with these guys and getting them out from underground. A lot of the focus has been on surface infrastructure to ensure that people don't go underground that shouldn't be underground.

On Kusasalethu, what has been really bad for us is the violence that has been going along with it. So, lighting fires, for instance, underground is not the sort of thing that one should do, and it's a big risk, having a fire in an enclosed area like that. So, once our third fire was lit, we realized that we had only one option from a safety perspective, and that was to get these guys out. So, [we're busy] sweeping the mine, basically, and trying to get everyone out.

Okay. Although it does suggest some sort of network of support for those guys that is, I suppose, a cultural change that you need to introduce as well?

Absolutely. They would obviously get supplied, food and water for instance, by probably our own employees.

Okay. And just heading up to Papua New Guinea, if you could just give us a bit of a broad sketch without any necessarily specifics, because I know that you're preparing those now, as to what you can see unfolding here for Golpu? Clearly, a smaller more modularized project is in mind, but can you put any more meat on those bones?

David, I'll try and do that. Marian will be glaring at me, that I don't say anything that I shouldn't say. But I think if you go back and you look at the results of the drilling through Golpu, you will see that clearly that's a very wide intersection of ore body that we get, but within that there's some high-grade zones. Those high-grade zones will in fact be [four feets], and that's where not only the high grades but better recoveries as well.

So, the latest [thesis, what has been] focusing on getting basically, what you could call, a starter mine, looking at the higher-grades mine, but a much smaller mine, but also at the same time have the ability to grow it in future.

So, I think if I'll go back to the last fact sheet, you'll see that we're talking about somewhere from 2.5 million to 5 million [tonnes] per annum, looking at that sort of thing with that much higher grade.

[It can then also] to looking at what mining method we'd use. Mining method of course is not only determined by the shape and size of the ore body, but also the rock shape. So, we've been looking at [sub-level] caving as well as smaller block caving, and therefore also looking at the plant to fit that size of ore body.

So, that's the way we've been looking at it: higher grade, smaller mine, much lower capital, and something that we can adapt to future changes in commodity prices.

Okay. And on the commodity price assumptions that you'll include on these feasibility studies, the gold price has been running against us very, very strongly. Will you be thinking about it even in a tougher gold price environment, so that you've got a range of scenarios that you can present as to what it could look like under prevailing or perhaps future metal prices?

We've been looking at this for the last two, three years, using sort of a single scenario of gold and copper prices, and we've been using $1,250 and $310; so, $1,250 an ounce and $310 per pound. Now, I know of late the gold price has gone down below that, but essentially it's just been for a fairly short period. Obviously, when you do, the results will have sensitivities around these prices.

But I think the starting point, or the base case, if you like, is fairly conservative, not at today's gold prices [notably]. I don't know what percentage of the revenues would come from copper?

70%.

70%.

Okay. Thank you very much, Graham.

(Operator Instructions)

All right. If there are no questions, then I'll just say some concluding comments. I think from my perspective, a very satisfying quarter. It's good that when the production guys really have some good morale and good spirits and they produce results like this, it really is helpful.

Kusasalethu is the one here that we will give you some news flow during the next few months, but really looking forward to the final pre-feasibility study on Golpu and being able to tell you what that mine is all about.

So, ladies and gentlemen, thank you very much for phoning in, and we'll speak to you soon.

Thank you very much, sir. Ladies and gentlemen. On behalf of Harmony Gold Mining Company Limited, that concludes today's conference. Thank you for joining us, and you may now disconnect your lines.