Harmony Gold Mining Company Ltd (HMY) 2016 Q1 法說會逐字稿

Ladies and gentlemen, good afternoon, and welcome to the Harmony Gold Mining Company Limited international teleconference. . (Operator Instructions). Please note that this call is being recorded.

At this time, I'd like to hand the conference over to Graham Briggs. Please go ahead.

Thank you very much, and good afternoon or good day, ladies and gentleman. Very nice to have you with our call. It's the first quarter of the financial year 2016, and that is the quarter that's ended September 2015.

It's -- hopefully, you've got all the information on the website, as well as the presentation. The presentation is fairly short, and so hopefully that will leave lots of time for questions, if you have such.

I will use -- I will refer to the slides, because that will make it easier to be on the same page. I have with me Mashego and Frank. Frank is more than ready to answer any financial questions that you may have.

So if we start with slide 2, basically, the effort that we've put in in the last while is returning the results, and what we see here is a 17% increase in the underground gold production from South Africa, so they've really done very well. The 8% increase in underground grades, and this is all due to the whole restructuring operations that we've had over the last time.

Of course, the latest ones were Kusasalethu and Doornkop. Kusasalethu, where we closed on seven levels and basically took 1,500 people out of that operation. Doornkop, a smaller one, but 500 people out and really focused on the better areas of the South reef.

South African operations, all profitable, designed to be profitable. They weren't all profitable this quarter. Kusasalethu and Kalgold weren't, but really designed to be profitable and should be profitable by next quarter.

We're on track to meet our guidance, our guidance that we gave in the beginning of the financial year, and that's going well, despite quite a slow quarter to Kusasalethu, but it is building up, and obviously I've got insight into the first month of the next quarter.

Excellent drilling at Kili Teke. That is proving to be quite a nice ore body. We've drilled about 15 holes into that ore body, and it's really showing that it's got something worthwhile, continuing to develop and continuing to explore. We have since the end of the quarter put another rig in there, so we've now got two rigs.

Golpu's feasibility results, due to be completed in December. That's on the stage one. Prefeasibility on stage two, also due to be completed. Obviously, it will go through the review process then, and so hopefully we'll have returns of that feasibility and prefeasibility study early in 2016, calendar year 2016.

On slide 2 (sic), really focusing, as we said, on increasing our margins, so the 7% reduction in all sustaining costs in South African operations, down at ZAR436,751 a kilogram. I think for offshore investors, you can look at -- you need to understand the exchange rate that has to be a careful understanding in your investment scenario, because the rand has been weakening, and therefore you can see that, in dollar terms, that's down 14% in dollar terms to $1,045 an ounce.

And that's on the all-in sustaining cost level. Of course, there are some non-cash items in that, so South African operations, certainly operating with a nice margin.

17% in underground gold production, that again, South Africa. 8% increase in underground recovered grades to 4.99, remembering that we promised 5 grams a tonne for this year. A 5% decrease in total cash operating costs, including capital, and that's for all operations down to $1,062 an ounce.

12% increase in production profits and total production exceeds the average annual production guidance by (technical difficulty) percent. So despite good production from some of the operations, the total, because some of the operations actually made up for that, those that lost. So on balance, we're above the guidance by 6%.

Slide 4 gives you the June kilograms from South African underground production, and then in a waterfall graph, you can see Kusasalethu did better, Doornkop down slightly, only 2 kilograms, but that's based of course just after the restructuring with 500 people. So they've actually done a good job to get going again.

Phakisa is doing much better, as is Tshepong and Masimong. Masimong, remember, operates at about 3.86 grams a ton, so it's certainly doing a nice margin for such a low-grade operation. Bambanani doing well, and even Unisel, the old lady of Harmony, which when we bought it in 1995 was ready for closure, 20 years later, still got five years' life, and it's produced some great results.

Slide 5, again, just the profit or rand in millions on the left-hand axis, just the percent of gold on the bottom axis. As you can see, the dots are the June quarter. The red diamonds are the current quarter. Most of the operations on the right of that have done better.

Joel, a little bit of a disappointing quarter. We had a fatal at that mine, so there was a safety stoppage, unfortunate one there, and that affected the quarter. Kalgold, despite what the results indicate here, actually had a reasonable quarter, because we have been changing out various aspects in that plant. It's a plant that has been operating since about 1994, and we had to eventually change out the mills. So we put in new mills there, and we did it with minimal disruption, so it's done very well.

Kusasalethu is looking better, despite what you see in the total there. We've been monitoring obviously month to month, week to week. It's starting to show its mettle, and really, the [ore past] issue is now in such a state that we can separate ore and reef, so we'll see an increase in the jump in the grade there. And I mentioned Hidden Valley, which has had a very poor quarter.

Slide 6 is the grade. You can see the plan and guidance of 5 grams a tonne, and the actual at 4.99, so quite a nice increase there in grade.

Slide 7 just talks about some of our recent restructuring. You can see that restructuring has had a massive benefit to Harmony. Bambanani was a big loss maker in financial year 2012. We restructured, stopped operating in the south shaft there. Now Bambanani is the highest recovered grade and the lowest all-in sustaining cost in South Africa, so that's a fantastic effort there.

Kusasalethu, of course, recently restructured, but taking those levels out, those seven levels and operating on five, you can see that that would obviously cause quite a few major disruptions. It's doing better. Alwyn has been doing a fantastic job there.

Doornkop, initially, we stopped the Kimberly reef, and now we've done some more restructuring on the South reef. It's certainly on track to turn to profitability. So, all the indicators are pointing in the right direction.

Masimong, chatted a little bit about that one. We've reduced a lot of the developments, but they are still developing. I think the remaining life of mine we had at the beginning of this year was three years. I'm sure by the time we get to the end of this financial year, they'll still have three years of ore body. They've been doing a fantastic job there for such a low-grade operation.

Just to put all of that together in a table on slide 8, I really don't have to talk about the gold production, but the gold price is worth looking at, those numbers, so down in US dollars per ounce, you can see that the rand price is only 2% up. It helped, but it wasn't -- it really was the gold production that really helped the financials.

And that, you have to go down to look at the average exchange rate, which was ZAR13 to the dollar from ZAR12.08. The financials will indicate a little bit different in the mark to market, because they look at the end of the period.

I think this is a point where I will hand over to Frank and go on to slide 9, and you can talk about the rand per kilogram gold price.

Thank you, Graham. On slide 9, if you look at the rand kilogram gold price, what we've got there is we've got the rand gold price over the last 12 months, and as you can see that it wasn't the full quarter of September we've had the very high rand gold price, and the really high gold price was mainly due to a weakening of the rand against the dollar.

And you can see that in the beginning of the quarter, it was down at ZAR435,000 a kilogram, and at the end, it was actually more than ZAR500,000 rand a kilogram. So the average rand gold price for this period was ZAR473,000 a kilogram, and not the ZAR500,000 a kilogram that we've currently got. So with the ZAR500,000 a kilogram, we expect that our results would look better in the coming quarters.

If we look at slide 11, this is the extract from our income statement, quarter on quarter, in US dollars, the September quarter versus the June quarter. You can see that the revenue has been the same, and 5% higher gold sold during the quarter was unfortunately offset by a 5% lower gold price in dollar terms.

Our production cost stayed really much the same. Our production profit went up to $54m. Amort and depreciation was lower, and this is mainly due to the exchange rate and also due to Hidden Valley, which didn't operate the full quarter.

We had the foreign exchange translation loss. This is because of the $250m loan that we had is converted at the exchange rate of ZAR13.07 and not the ZAR12.16. We had taxation of $3m, and this was a credit, deferred tax. It's left us with a loss of $40m.

If we look at slide 13, we've got a free cash flow quarter-on-quarter comparison. Our cash generated by operating activities, $56m versus $45m, and our cash utilized, which is the capital expenditure, was lower at $46m, so we had a positive free cash flow of $10m this quarter. And if we compare that with the previous quarter, that was a turnaround of $23m. We raised borrowings of $23m. That left us with a cash balance of $107m.

If we look at the debt in rand terms, our net debt went up by ZAR310m, but in rand terms, our foreign -- our exchange rate loss was ZAR426m. That leads us to a free cash of ZAR122m. In dollar terms, our debt went up, but so did our cash, and in dollar terms, our net debt stayed the same, at ZAR190m. Thank you, Graham.

Thank you, Frank. Slide 14, just a pictorial giving you a little bit of where each operation is. Obviously, you can go through the number yourselves, but you can see there's a lot of positive greens there.

The gray negatives are Hidden Valley. That was because of the -- really, the shutting the mine for 33 days after we had a truck accident. Kalgold, talked about the mill change out there. Certainly, it's not disappointing results considering that, and then Kusasalethu.

Again, the bullet point at the bottom, demonstrating that we should be achieving our guidance, and certainly this quarter overachieved by 6%.

Golpu's feasibility study is progressing well. You'll remember that we are in feasibility for stage one, prefeasibility for stage two. Both of those studies are on track for completion in December. We need to go through the review process, of course, after that, and look at that, and then probably release the results early in calendar year 2016. The importance of Golpu is quite spectacular, when you look at what the mine looks like, what we're investing in.

Remember, it's dominantly a copper mine as opposed to a gold mine. The capital costs in the climate are very competitive, because nobody else is building projects, or very few people are building projects, and therefore, pricing of both equipment, as well as the engineering companies and the like, is very competitive.

So we believe there's major upside in the potential of this project. On slide 16, trying to stack here, Kili Teke and Golpu just as an extend of what we have in Papua, New Guinea, so Golpu is over 500 bore holes on it, 300 kilometers of drilling. What is really interesting if you look at the 2005 figures there, 96m tonnes of ore, and by 2014 it was over 1b tonnes of ore.

That's a tenfold increase in that period of time that we found, so the guys have had great success in PNG, and of course, this is a nice high-grade potentially block cave opportunity. And when we get the feasibility study completed, I think we'll be very satisfied with what we see in those results.

Looking at Kili Teke, which of course is 100% owned, it's very early stages, because only 15 holes. We've started the second rig there. You can see the sort of results that we're getting from these holes, and we hope to be able to clear a maiden resource in December for this asset.

It's going very well, and of course, it looks like it's open pit-able. A lot of work to be done still, but it again shows the dedication of our geologists in managing such an operation in Papua New Guinea.

Slide 17 tries to pool these assets together and look at what's happening in the world of copper. There is, of course, quite a few related closures, and we see various companies honestly giving announcements that they'll be producing less copper during the next few years.

That's obviously related to the low copper price at the moment. It's somewhere around $2.40. If you look at transactions of copper companies that have been selling assets, however, and try and track back as to what sort of copper price they used for their transaction, it appears that it's somewhere between $3 and $3.50, somewhere around there, so obviously there's a premium to buying a copper asset right now.

But if you look at this graph, which is a Wood Mackenzie graph, depending on where you look at the supply/demand graph, where they cross, you go back to 2018. If you take out the red area of price-related closures, then you see they're very close to crossing there. Go to 2020, and certainly there's less supply, and there's demand.

So if you convert this back into pricing of copper, we have to remember that we're in a cyclical environment here in dealing with copper, and our prediction would be that the copper price is going to certainly increase post-2020. So a good time to build a mine like Golpu.

So if we look at our investment case as a summary, our strategy is creating value and increasing our margin, certainly get a tick for that this quarter. Our operations, all positioned for profitability, 80% of them made it this quarter. Certainly, we're looking forward to this coming quarter, where 100% of them can make it.

Financial results are good. Certainly, when we get down into the operational area, cash is king. We've been looking at the costs as closely we have production, and the guys have done well on that. The guidance, realistic.

Safety is a major feature of our operations. We've done a lot of work on safety and better space there, and so our guidance is intact. And then replacing ounces. Golpu and Kili Teke are certainly potential game-changers for Harmony, but we've still got a lot of life in our South African operations. So they are still looking very good.

And then we believe certainly that Harmony is a company worth investing in. It's had a good quarter, and it's certainly been restructured to be able to produce the results that we desire.

Thank you very much, ladies and gents. We can open ourselves to questions.

(Operator Instructions).

It doesn't sound like there are questions, so let me try and just finish off with a statement. I think we've obviously had quite a lot of critics. We're in a position where I think the critics have been proved wrong, especially for this quarter.

We're optimistic, and really, the guys are doing well in operations, so we'll continue to improve our production performance. Our grade performance has improved. Our underground operations are producing nice money, and our costs are being well managed, so we're on track to achieve our guidance.

The rand per gold price is certainly assisting us. As Frank pointed out, if it sticks around at ZAR500,000 a kilogram, that will be certainly improvement and improve the margins. It will enable Harmony to be able to repay its debts and continue to finance the development of Golpu.

Ladies and gents, thank you very much, and I hope you have a great day.

Thank you. On behalf of Harmony Gold Mining Company Limited, that concludes today's call. Thank you for joining us. You may now disconnect your lines.