Harmony Gold Mining Company Ltd (HMY) 2014 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Harmony Gold Mining Company Limited international teleconference that will cover the results for the second-quarter, full-year 2015 and six months ended December 31, 2014.

(Operator Instructions). Please also note that this conference is being recorded. I would now like to turn the conference over to Graham Briggs. Please go ahead.

Thank you very much and good morning, or good afternoon if you're in South Africa. We are in sunny Cape Town, just outside the Mining Indaba.

Unfortunately, we've been busy with our quarterlies so we haven't been there, but a very warm welcome to you all. And it gives me great pleasure in doing the presentation on the quarterlies.

I'm certainly hoping that you have got the presentation from the website and that you've seen the various bits and pieces of information that we do have on our website.

Slide 2 is the Safe Harbor statement and then Slide 3 we're going to talk about value and our focus on that. We're going to talk about Golpu and the value of that. Frank is here and we'll go through the financial results and then I'll conclude.

When we get into the detail if there are some questions, Alwyn, Chief Operating Officer is here so we can talk on the South African operations. Johannes van Heerden is also with me and therefore can talk anything on Papua New Guinea, Golpu, Hidden Valley and the like.

I'd like to go to Slide 5 and really look at the strategic scorecard. One of the main aims of course is to have safe operations. We've had a good safety run here in South Africa.

We had a quarter free of fatals, which is great news. Alywn has been doing a lot of hard work on safety and we continue to focus a lot of our efforts on safety, so hopefully we can continue to get the graph going in the right direction.

The second item there is really about increasing the cash flow. What we have been doing is a lot of restructuring in our operations. This was a quarter when that dominated a lot of what we were doing.

Target 3 was finally put into care and maintenance during the very early part of the quarter. We closed a hospital down and we commenced on Kusasalethu's restructuring. So it was a busy, busy quarter from that point of view and Frank will take us through the financial and you'll see the implications there.

Main aim, of course, is to keep our debt low and we've, on December 15, announced the Golpu studies as we have them at the moment and I think the response from the market was quite good in that.

Slide 6, a graph showing the improved fatals and, obviously, this is a graph which -- any fatal is one that you don't want to have, but the trend is in the right direction. And we'll continue to work hard on our safety, striving for zero harm.

Slide 7. I guess I'm quite monotonous in saying that Golpu is spectacular and this is really a great asset, talking about driving our total costs down there. We'll look at the cash costs and the costs of Golpu. And one can imagine with that in the Harmony portfolio what will happen to the whole Company's costs.

Again, the restructuring, we've talked about that very briefly. At the same time we've been able to keep our grade at the 4.8 grams a ton, that's for the six months, and we will continue to work on that.

Kusasalethu, of course, was a disappointment this quarter in the production results. That's not unexpected, because we did talk about the fires and the restructuring and so on there, but we've managed to keep the grade at 4.8 grams a ton.

On Slide 8 the operational results, the effect of mainly Kusasalethu and Hidden Valley in the top line there of gold production and I'll take you, on Slide 9, on the other operations just now.

Gold price slightly down in rand terms, down to ZAR433,000 a kilogram. Gold price in US dollar is down to $1,200 this last quarter. And you can see the rest of the financial numbers in that.

If we look at Slide 9, quite apparent there in the red numbers are Kusasalethu well down on its production forecast for the quarter, but the rest of operations in South Africa are doing well, underground operations.

Target 3, as expected, has got a zero there on its production guidance. It did produce a little bit of gold during the very early part of this last quarter. And some of the operations did very well.

If you look at Tshepong, you can see that it over achieved in its production guidance as an example, as did Masimong. So some of the operations are doing well and achieving their plan, so credit to those guys.

Hidden Valley had a slightly disappointing quarter mainly due to an accident which they had in the plant. There was a fatality there and the resultant was that operations were stopped for some time so we lost a lot of milling days in that.

The various surface, this is dumps, that didn't achieve its planned production. And this was a bit of a sacrifice, mainly because of the power outages that we've been having, so we've been sacrificing the lowest-grade part of our operations on that.

Let's go to Slide 11, just to recap on the resource growth here from 2009 to today, a golden tooth shaped.

Ore body in 2009, 800 meters in depth, maximum width about 300 meters. You can see how that has grown over the last few years. So very successful getting it up into over 20m ounces of gold and 9.4m tons of copper from where it was in 2009, so great achievement there.

And then on Slide 12 a bit of a recap of what the ore body looks like, where we plan to mine, block cave 1 and block cave 2, and then in stage 2 block cave 3, and really what are we doing about them going forward.

So advance exploration starting somewhere around June 2015 now. That will be a lot in the engineering planning and, hopefully, some preparation for that decline. Feasibility study has started. Hopefully, that will be completed by the end of the calendar year, aiming for the first production in 2020.

Stage 2 is now in the pre-feasibility stage and that's going parallel with the stage 1 feasibility, also planned to be finished in the calendar-year 2015.

Slide number 13. In the black is the capital expenses during this time. There is a capital -- some detail on a future slide giving exact numbers of capital. So the project capital is $2.3b, but you can see that this gets through a maximum negative cash of $1.6b.

That's on a 100% basis and, therefore, Harmony will be up for half of that. But by 2021 the project actually generates more cash than it does use on capital and that's when we're mining block cave 1.

And then in 2024 we'll be mining block cave 2 and, obviously, that's when production really ramps up. And then all the other costs and you can see the revenue there as well.

Paging over to 14, copper and gold revenue, obviously, this varies depending on where you are in the project, but probably about 75% of the revenues come from copper and the balance from gold. And then we've got total operating costs and then total operating costs plus realization costs, realization being smelters and shipping and the like.

So it gives you a good idea of the margins of this operation in any particular year, obviously, very high margins in the early stages and then tapering off to lower in the 2044/2045.

And that goes on to Slide 15 where we show how stage 2 fits in. And we've slotted stage 2 on the end of the BC2 and that means that we've allowed it to go down quite low. Obviously, one's got the optionality of bringing this in earlier and -- but it gives you an idea.

A 70-year production profile; I don't think there are too many companies that are planning a new mine with a 70-year life. It's quite phenomenal the size and the value of this ore body.

Always questions to us on how are you going to fund it, so Slide 16 is a slide which demonstrates two scenarios, one at Harmony's 50%, the other one Harmony 35%. That is on the assumption that the PNG government buys in 30%.

And the right they have, remind you, is that they can buy up to 30%, so that's not necessarily what they will do. So I guess the -- excuse me -- reality of the numbers is somewhere between the 50% and the 35%.

First few years fairly low capital expenditure, $15m in this financial year, the rest of this year, $55m -- excuse me, I've got a frog in my throat -- and then in 2017 $105m.

And then the capital expenditure ramps up quite a bit and in those last three years, 2018, 2019 and 2020 close to $600m. And obviously that's when we won't just be able to fund it out of internal cash flows, but we'll look at other instruments as well. But that's a few years ahead of us.

The reason we've got the change in financial-year 2017, you'll see the plus $45m there in the Harmony equity only 35%, that's when the government would buy-in, because that's the decision time of getting the mining lease. And that's the time that the government would decide whether they're going to take a stake or not.

Slide 17, just a quick recap on capital, sustaining capital, and also I think the most important here is looking at the cash costs or the total production costs.

But really the cash costs you can imagine at these negative figures, adding that into the total Harmony production, how it will bring the total [costs] profile of Harmony down. So very important that slide.

We think that the market has given us some credit from Golpu in what we've done. I think we've always maintained that this asset is a game changer and really got good value. We haven't seen that value in our share price and I think everyone, certainly analysts and so on, have discounted it to zero probably.

But we've tracked the share price from December 15. Of course, there is the whole Christmas period, New Year period, and then our share price has done a little bit more magic than a lot of the other share prices because of Golpu.

I'm going to hand over to Frank now. On Slide 19 Frank can talk about the ice that he's got on Slide 19 and then carry on.

Thank you, Graham. We see the ice plant at Phakisa. This cost us about ZAR45m and that was in this quarter. And that was part of the reason why our capital expenditure was bigger in this quarter compared to the previous quarters.

If we page to Slide 20, as Graham said earlier, this is a quarter where we tried to restructure for more profitability. During the quarter we looked at every one of our shafts and we've identified and we've removed all lower grades in unprofitable areas, which resulted in scrapping of those carrying values of those areas.

In the case of Masimong those were areas that we are not going to mine, which is abandonment of ZAR216m. In the case of Kusasalethu these are levels, the upper levels in the mine, the old mine which we're not going to mine, of ZAR214m. So in total R38m which we are scrapping and it will be reducing our carrying values because we're not going to mine those areas any more.

The second bullet point there; we've also restructured some of our operations. Graham mentioned that the Ernest Oppenheimer hospital was closed. We finally closed Target 3 and we're in the process of restructuring Kusasalethu.

And we've also accepted the voluntary separation packages from 59 of our management staff. So in total our restructuring cost during the quarter cost us $16m. And we haven't seen the benefits of this yet. This -- we will see lower costs going forward.

On Slide 21 we show Kusasalethu. We've got a picture there. You can see the two shafts and the brown line that's the surface line. And you can see at the top we've got those levels, 78 level to 95 level, and we've scrapped all those levels.

And the book value or carrying value of those levels was ZAR214m and we are scrapping that. So we wouldn't need to further amortize it. It would now be written off. And you can see there with the new mines that we be from line 98 to -- level 98 to level 113 and these are in higher-grade areas.

If we page over to the Slide 22 we've got two graphs on top of each other there. The top one is to show electricity consumption and this is in gigawatt hours. And you can see in the year 2012 it was 3,000, and year 2013 it was lower, but mainly because of Kusasalethu that didn't operate for the full year.

It went back to the normal level of 2,800 in year 2014 and we are predicting it to be down to 2,600 in year 2015. That's a 7% saving. And the way we'd be looking at saving is we are focusing on using our electricity outside peak demand and we've used all the technology to reduce our electricity bill.

However, our electricity cost is increasing despite that. We can see that in the year 2015 it goes up by 4.6%. But the average rate increase in the year 2015 is 10.4%, so we are able to reduce the impact of the electricity cost.

If we page over to Page 24, this is the extract from our income statement quarter on quarter, US dollars. The first column is the December 2014 quarter. And we compare it to the September quarter.

Our revenue $327m, that's 21% lower than the previous quarter. This is made up of 14% less gold sold and also 6% lower price received for our gold in dollars.

Our production costs reduced over this period and this was mainly because of low electricity rates because it was summer and not winter tariffs, our labor costs which have reduced with Target 1 -- Target 3 coming through, and that gives us the 14% saving on our cash operating cost.

Our production profit was lower than the previous quarter. Amortization was slightly lower because of lower production. Employment termination and restructuring cost of $16m and then we have the loss on scrapping of property, plant and equipment of $38m.

This is the once-off amount of scrapping and we won't see that going forward. We made a net loss. If we add back the loss on scrapping of $32m we made a headline loss of $47m.

If we page over to Page 26, this is our cash flow statement for the 2014 quarter -- the last quarter in 2014, our second quarter. Our operating cash flow is $64m. These are all the operations except Kusasalethu and Hidden Valley.

Our capital expenditure went up by $7m. A major part of that was that ice plant we saw earlier for Phakisa. Our operating cash flow then was lower than the previous year mainly because of the capital expenditure and lower gold price.

Kusasalethu a loss, or cash flow including the CapEx was $21m, Hidden Valley $6m. We paid $9m for restructuring costs, we had other expenditure of $16m and then we had a working capital change of $35m.

Our working capital increased during the quarter and the reason for that was that we paid our creditors early. Because of the December Christmas break we paid it early. And we also owed additional month of VAT from the receiver of revenue.

We show our rand refinery shareholders' loan of $11m, which they drew down, and that reduced our cash by the $3m, which gives us still a cash balance of $119m.

Thank you, Graham.

Thanks a lot, Frank. Just to conclude, as you can see, it was a quarter of a lot of restructuring, a lot of one-offs, if you like, and we are certainly aiming to see the benefit of those restructuring operations in the future.

You don't see them in the quarter you do it, that's for sure. And that's what we're focusing on is to get all our operations profitable in this year and really being in a position to be able to fund Golpu.

So, safe, profitable ounces being mined. The restructuring operations, that is a bit of a forecast for this year that we end in financial-year 2015 when you look at the 1.1m to 1.2m ounces.

And then planning to develop Golpu. It's a great asset and we certainly plan to put some money into bring it into production, which means that we have a fairly diversified portfolio of some gold and copper, but also of some PNG as well as some (inaudible) exposure.

Thank you very much. I'd like to hand over for any questions.

(Operator Instructions). David Horton, Bank of Montreal.

Good morning, Graham and Frank. Thank you for hosting this call and taking the questions. I've got a couple of questions.

Just looking at Kusasalethu and the outlook there, you've got your quarterly target of about 50,000 ounces per quarter. In an ideal world when would you think you'd get back up to that run rate, given the restructuring?

Thanks, David. Yes, what we've got on the forecast there is not our new current plan that we're working towards of 47,500 ounces to 50,000 ounces. That is the prediction we had previously. We've left it the same at the moment just because we haven't finalized the life-of-mine plan.

Although we've made it known that we've restructured the operation, or busy restructuring, we hope that we'll get through the employment termination process by the end of this month, February, and then we'll be able to tell everyone what the plan is.

I guess there's a little bit sensitivity around where we are in that process of Section 189 and how many figures we want to tell everyone, but -- so we have got a plan just to mine out of those bottom-five levels at slightly lower tonnage that we were before, but also higher grades.

And obviously the main aim in reducing our exposure to those levels is that we actually take out some of the, if you like, fixed costs of Kusasalethu in, stop operating those seven levels. We actually take ventilation, water reticulation as well as engineering fixed costs and so on out of that operation.

So it's -- we're right in a bit of a sensitive period with all the restructuring, but we will be telling you exactly what that new plan looks like. It's slightly lower than what we have here and -- but it's not -- we hope to get back to where we want to be in June month, so not June quarter, but June month.

So this quarter's still going to be in the midst of a lot of restructuring and various issues and then, hopefully, by June month we'll be in a position to say this is the production level that we're going to operate on.

Okay. So I guess the gist of that is lower tonnage, higher grade, lower cost, shorter life?

Yes, I'm not so sure about the life. We're still going to do that plan, but ultimately we're not about life. We are about profitable operations at the moment, so life is of less importance to us.

But that may be the conclusion that we have. But certainly lower tonnage, higher grade, more costs come out than tonnage or grade -- or, sorry, kilograms.

Okay, over to Hidden Valley, an unfortunate situation there. Where do you see you getting back to your ideal run rate on production?

I think -- Johannes is here, so he's welcome to answer the thing. But we're back into operation, back at the state of mining that we were -- mining and milling that were before the accident.

So that happened [and] mid January we were back into full production. So I think the last month is certainly a big hiccup, but if you look at the last six months I think it's been indicative of much better run rate than we've had in the past. So it's back up and running.

I don't know. Johannes, do you want to add anything? No, okay.

Okay. Over to Golpu, still in Papua New Guinea, where are you at for land access for the mine and infrastructure, and possible transportation and (inaudible)?

Sorry, David, you can hear us okay?

Yes, I could. There was a bit of a noise on the line. I can repeat the question if you didn't hear it.

If you don't mind, just repeat the question.

Yes. So for Golpu, just thinking about land access, where are you at as far as the access that you need for the future mine, the infrastructure, transportation of the con from mine to the coast, coastal infrastructure an all that kind of stuff?

That's a big question, but Johannes is going to attempt to answer it.

As it relates to the infrastructure required to access site, we've got all of that in place. We've spent quite a bit of money over the last few years to upgrade the access road into site. So all the areas on which we intend placing infrastructure in the project area we have got access to, so that's not a concern.

We have done some preliminary work on the access road that would be crossing the Markham. That work will progress during the next few quarters as part of the next phase which we're currently in.

For [our] early-works perspective we're doing definitive feasibility study work on that to get it to a level of engineering, which will allow us then to progress it once we've got the various approvals in place.

The concentrate pipeline will be following that road and then into the port of Lae. That would at this stage follow current road infrastructure in place, so we're quite comfortable about that.

And then the discussions with the PNG port authorities as it relates to the Lae tidal basin. They've developed the one part of the port already. We've had conversations about the part of the port that we would want to locate our infrastructure on. Once again that's all in place and in line with their development schedule, so we've got no concerns about that either.

All right, thank you for the update. I'll pass it over to someone else now. Thank you.

(Operator Instructions). There are no questions in the queue at this stage. David, do you have any follow-up questions?

No, that's good. Thank you.

Okay, let me just summarize then very briefly. Highlight of the quarter has to be the results on Golpu and what we've declared. Obviously, the response in the market is good and so that has been great for us.

Then the whole restructuring process, although that doesn't look like a highlight, I think we're making good progress on getting the Company with all its operations to be both a safe and profitable Company.

And every operation needs to be make money after its capital bill. We need to be in a position that, not only are they profitable, but we have enough money to build Golpu so that certainly when we go down our strategy we're getting some fix for that.

From a quarter financial point of view, of course, it looks quite difficult in the way that we're going forward, but we will see the benefits of what we've done this quarter going forward, so making some good progress on the general strategy in going forward.

So with that thank you very much, ladies and gentlemen, for listening to us and enjoy the rest of the day.

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.