Harmony Gold Mining Company Ltd (HMY) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Harmony Gold Mining Company Limited second quarter for the financial year 2016 and six months ended December 31, 2015 results conference. (Operator Instructions). Please also note that this call is being recorded. I would now like to turn the conference over to the Chief Executive Officer, Mr. Peter Steenkamp. Please go ahead, sir.

Good afternoon, ladies and gentlemen. With me I've got Frank Abbott, our CFO, and his team of financial people, and then I've also got Marian van der Walt and her team of investor relations. And I've also got Mashego Mashego, which is an executive director of Harmony Gold.

We're going to talk on the presentation that I think you all should have. So I'm pretty sure you've got it, so we'll start on the first slide. And then if you look then at the agenda, we're going to talk about growing our margins. Frank will take us through the financial results. We also then look at creating the future value through exploration, and some conclusion remarks that I would like to make at the end of the presentation.

So if we firstly move on to the growing margins, which is on page -- slide 4, I think we're very pleased to announce that we actually ticked all the boxes. Our grade improved by 7%. Our production, on the back of a very good quarter in the previous quarter, we actually improved a further 2%, so we're very proud of that. Our all-in sustaining cost has been down 7%, production profit up by 84%. Headline earnings are ZAR74m, and our net debt reduced and our all-in sustainable cost margin is 17%.

Just talking about delivering the results, first of all I think our restructuring that we started some time ago has now paid off. We keep on focusing on what we can control, which is the safety, production and grade. The higher rand per kilogram gold price is simply a bonus for Harmony.

If you look at the results quarter on quarter, our safety parameters improved. We are still working to zero harm. We are not 100% there, but we are working towards that.

We had a 7% increase in our underground recovered grade, a 2% increase in our production. I said that was on the back of a very good quarter the previous quarter. Our all-in sustaining cost is down by 7% to ZAR434,000 a kilogram, and in US dollar terms we are 15% down to $950 per ounce. An 84% increase in production profit to ZAR1.3b, and in dollar terms it's $91m. Headline earnings is $5m and the net debt reduction was $29m for the quarter.

If we move then to the next slide, which is slide number 6, we can see that the four quarters that we have in our production. So we had three consecutive quarters of increasing production, and we're at the moment also exceeding our annual guidance for the year.

If we move on to slide 7, if we look at our grade, our South African underground recovered grade improved dramatically. We had a 5% increase from FY2015 to the first quarter in terms of FY2016 and a further 7% improvement. That is against a great guidance that we've put out in the market of 5 grams per tonne, so we had quite a kick-up in our grade.

If you look at -- and really we're looking at -- I'm going to skip slide 8 and go to slide 9, which is actually the US dollar per ounce. I think we can see that although the US dollar price came down, with the exchange rate that most of our cost is in, we in actual fact saw quite a dramatic improvement in our cost.

So, cash operating cost together with our total capital cost went down dramatically. And if you compare that in terms of the price we've got and also where we are at this point in time in terms of the exchange rate, there's quite a headroom now between our cost and also then the -- and the price that we're getting in US dollar terms.

I'm going to move further down to -- if we also look at the all-in sustaining cost, and I'm really going to look at slide 11, which we look at the dollar price, we can see that where we've -- at one stage we were not making it as far as the price is concerned. With the exchange rate and also the cost concerned and also improved production, we are now in a much better place. There's a lot of headroom between our sales and our cost and also the price that we received.

I move on to slide number 12, and that is really the net free cash flow that we had in rand terms of all the different operations. And this is really the first quarter. The previous quarter is not a quarter that we report on. You can see where we were. If you look at then what the -- the improvement that we saw between the different operations, how we -- all the operations improved as far as net free cash flow is concerned, and that is on slide 13.

We still have two operations that didn't make it. It's Kalgold and Kusasalethu. Kalgold, we had quite a problem with our crushing systems there and we have bad results. In Kusasalethu, we're still busy with some work on infrastructure and to improve the production in that particular mine.

If we move on to page 14, actually shows that if you plug in yesterday's rand per kilogram gold price, all operations on last quarter's or this quarterly report on production, you will see that we are in actual fact making profit in all the different operations.

I'll move on then to page number 15. You can see the performance of our share on the JSE. And you can see if you compare to all the indices and also the US dollar price, gold price, and also the South African rand gold price, you can see the leverage that we find in our share price due to the fact that we are exposed to the South African rand.

I will then ask Frank to just go through the financial results.

Thank you, Peter. I'd like you to turn to slide 18. This is the extract from our income statement quarter on quarter in US dollars. The first column is the December quarter and then we've got the September quarter.

If we look at the revenue line, our revenue was $321m. Not a big difference from last quarter, although our gold sold was 3% more, the dollar gold price was 2% lower and a very small difference in the total revenue figure.

However, when we look at the cash operating cost of $226m, that was substantially lower than the September quarter. Now, a portion of that was because of the low electricity cost in the December quarter. We do not pay the winter tariffs. But in the balance of it, the biggest portion of it was because of the exchange rate. As the rand weakens against the dollar, the amount that we convert back into dollars is much smaller so our costs have reduced in dollar terms.

If we look at the production profit, our production profit was $91m. It was 68% more than the previous quarter. Amortization and depreciation, very much in line. The exploration expenditure went up slightly. This was because of the second drill rig at Kili Teke.

Our foreign exchange translation loss, $26m, this is because of the weakening of the rand against the dollar. But during the quarter we started buying back our dollar line, and currently it's sitting at $200m. At the end of last quarter it was $250m. And we had taxation of $4m and we had a profit of $5m.

Thank you. If we page over to slide number 20, we've done this slide here. We indicated the reduction in net debt quarter on quarter in US dollars, and this is an extract from our cash flow and our balance sheet.

If we look at the opening balance there in the debt column, $298m, that was the total debt we had end of the previous quarter, and that consisted of the $250m loan, US loan, and then the other $48m was from South African debt. We had cash of $107m, so that gave us a net debt figure of $191m at the beginning of the quarter.

We generated $33m of cash from operations during the quarter. This was from -- our profits were $73m. There's our capital expenditure of $40m, so that gave us the net cash of $33m. If we take that off the opening balance, we get a closing balance there of $162m net debt. So the net change has been $29m, where our net debt was reduced quarter on quarter.

If we look at the debt balance of $218m, $200m is still the US dollar loan, and the $18m is what's left of the South African rand loan. And we've got $56m of cash at the end of the quarter. That gives us the net debt figure of $162m, $29m lower than previous quarter.

Thank you, Peter.

Thanks, Frank. Next, I just want to cover some of the issues or some of the things that we have in terms of our future and our exploration. The slide that we have there on the heading is actually where I was in Papua New Guinea, and that is a lady geologist in Papua New Guinea that took me through this report. And it was a very exciting trip for me, because it's really a world-class exploration team that we have there.

If we move on to slide 22, this is what we've -- the whole Kili Teke reserve we actually announced in November. We believe that we had the right address and the right geological setting. The maiden inferred resource for Kili Teke has been declared and it's at 128m tonnes at a 0.4% copper and a 0.3 grams per tonne gold. On a gold equivalent basis, this equates to about 4m ounces of gold.

The resource shell has been cut off at 0.5% copper and remains open at depth under further development. And you can see in that area, both to the north and the south of the resource, there is still opportunities to find more and also obviously at depth.

The extra drill rig that we added, the extra drill rig into the resource is actually trying to firm up the results. It is very difficult terrain in that area and we have been able to -- a second drill is probably the best that we can do. And we believe there's probably around about two years of a drilling program ahead of us. We continue to see good results and we're very excited as far as that is concerned.

If we then move to the next slide, it's just the Golpu study that's currently under final review. The feasibility study of Golpu stage 1 and the prefeasibility of stage 2 has been completed in December and has been presented to the different JV partners, so both boards need to approve it. We believe that by the mid of February we'll be in a position that we can actually share that result with the market, and we will come back to you as far as that is concerned.

We also continue discussions on finalizing the pre-mine development agreement, which is the prerequisite for us to actually start this project. If we don't have this agreement, we will not continue. We're hoping -- I met the Prime Minister and the Minister of Mining in Papua New Guinea whilst I was there in the beginning of January, and both of them indicated that they're very keen for this project to continue so we believe that it's actually imminent that we will get that agreement in place. So we're very confident that that agreement, we'll get it soon.

In conclusion, just some observations since I've been there. First of all, I would just like to thank Graham Briggs, the previous CEO, for all the hard work he's put into Harmony. He led Harmony through a very difficult time. He certainly has taken some very good leadership in Harmony and certainly the things that he initiated are the fruit that's becoming the seed today, and we'd like to thank Graham for that. Graham is still available for consulting work, but he's actually now moved on to retirement.

I spent five weeks on the operations, and what I found -- and I went and visited most operations. I think there's only two outstanding I still need to visit. That's both of them in South Africa. I've met with the senior management. I've met with the unions. I've met with all the leadership on the different operations and also [briefly] with our board, and it's my early taste that we have very competent teams. I think I have to congratulate Harmony in terms of the development of the teams. We've got good leadership on all the different operations; I'm very satisfied with that.

I've got a -- I believe that our ore bodies are very good. We still in many cases are undermining the ore body where we don't get to the average grade of the reserve above cut off, and I believe there's some opportunity to improve that. There's also opportunities through synergies and also to develop certain other areas, that we can de-bottleneck some of our operations and get better volumes.

I certainly believe that we should focus on the basics of mining, that we focus on the grade, we focus on the volumes, we focus on the cost, and don't let us run away with the price and don't go and high-grade or low-grade the areas simply because you can make money out of it now. So we certainly are focusing on that.

Obviously the March quarter we believe is not going to be -- typically in South Africa, we had another very good March quarter because we have two very long periods of long weekends during this period. We also take that in account of annual guidance. Our investment case I believe is still very strong.

If we then go to slide 26, and I believe our profit drivers are intact, with safety underpinning everything we do. The Company's strategy is to create value for stakeholders by increasing its margins and generating cash to develop Golpu in Papua New Guinea and ensuring a positive shareholder return in the long term.

If we move to the next bubble there, which is operations, each of our mines has to be positioned to deliver safe, profitable ounces. This continues to be our focus. The mine is not profitable at a rand gold price of ZAR450,000 a kilogram. We will consider various options, ensuring that all our mines perform under that price. We control, if we can, grade, production and cost.

Look at the third bubble there. That's really about the financial results. I believe we have a solid balance sheet and we'll continue to repay our debt in the short term, ensuring financial flexibility that will enable us to fund our share of the Golpu project.

If you look at our fourth bubble there, our guidance remains intact and it takes into account the weaker March production quarter.

Our fifth bubble there is really about our future, and we're looking at replacing ounces with both Golpu and Kili Teke. I think both of them are exciting projects. We certainly -- at this point in time, we are trying to pursue both of them, and so they are very exciting projects and one is obviously much further down the line than the other one.

So Harmony is still a company worth investing in.

Then move to the next slide, which is the Safe Harbor statement. Please take note of the Safe Harbor statement, read it and take note of that.

And then we get to the final slide, and there's just -- that's the end of our presentation. Now, if there's any questions that we can answer, we will do that.

(Operator Instructions). David Leffel, Deutsche Bank.

Yes. Yes, welcome aboard, Pete. I guess one thing is we always look at South African producers, and you highlighted it slightly. Could you tell us how many shifts you actually worked during the December quarter and how that compared to September and what you're budgeting for the March quarter?

I can't offhand give you that information. I'll let Marian get it through to you in terms of how many shifts we have, but we obviously -- we are planned accordingly. So that's why our guidance is in line with where we want to, because we know that we're going to have -- in the January quarter we're going to have less shifts because obviously we know what times we're going to have the public holidays and long weekends in advance.

We always know that in the first quarter we'll have the Easter weekend and we also have the Christmas break has got the biggest impact in that period of time. I don't offhand know precisely how many shifts we have and the number of shifts, but we'll get it through to you, David.

Okay. Thanks. And I just glanced in the headlines this morning. I haven't been through your results in detail. I see some commentary that you're looking for acquisitions. Given the, I guess, continuous state of the South African asset base, I'm a bit surprised to see that headline out after one quarter of profit. Can you just explain where that might be -- where that came and what context?

I think Frank was quoted out of context a bit there. Somebody asked him if he would be interested. We have no plan at this point in time to find anything. We don't have nothing on the table as far as acquisitions is concerned. Obviously, with the free cash flow our first focus is to pay our debt. That is our first focus. Obviously -- and at the end of the year we'll certainly consider a dividend, if there's a dividend available, and we will consider that. If the price keeps where it is, there's obviously a good chance of that.

But we are not in the moment looking for any or actively pursuing any acquisition. What we -- our plan is still the same, that we're focusing on what we can get in terms of making free cash flow and see if we can fund our Papua New Guinea project, which is in the pipeline going forward.

Just one last follow-up question. So the intention is to have a balance sheet that can finance and follow the PNG project?

That is the intention, yes.

Okay. Thanks. Best of luck.

Thank you, David.

(Operator Instructions). Sir, it appears that we have no further questions. Do you have any closing comments?

Yes, just thank everybody for being on the call. We certainly appreciate that. And we obviously are very proud of our results in the last quarter and we hope to see that going forward. Thank you very much.

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