Harmony Gold Mining Company Ltd (HMY) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Harmony Gold Mining Company Limited conference on the interim results for the six months ended December 31, 2016. All participants are currently in listen-only mode, and there will be an opportunity for you to ask questions later during the conference. (Operator Instructions).

Please also note that this call is being recorded. I would now like to turn the conference over to the CEO, Mr. Peter Steenkamp. Please go ahead, sir.

Thank you, Chris, and also good day to all of you, and thank you for joining us. I actually believe there's quite a few people out there that are listening to the results. We'll go through the results by using the presentation that we've made this morning on the webcast.

Just take note of the Safe Harbor statement that is in the second slide.

We will cover the agenda. We will cover the normal type of agenda. But also in this presentation we've got Johannes van Heerden here. He's the CEO from Southeast Asia, for us. We'll talk about Hidden Valley, so any questions on Hidden Valley, he will be able to field them.

Our key features for the first half of FY 2017, and I say to mine safe profitable answers -- we believe that safe mines are profitable mines, and the better we improve our safety, the better our performance will be. One of the biggest things that we had in Harmony when we started was these unplanned stoppages, many of them through safety stoppages.

We've done quite a lot of work in terms of improving our safety, and then secondly, also improving our maintenance on our major infrastructure. And for that reason, we in actual fact are seeing quite a nice uptick in our production.

The majority of our mines are exceeding or achieving their plans.

Our grade management has really been very good. I'm very pleased to say that the discipline that we have put in place not to mine below cutoffs is really working for us and our grade continues to improve.

And then we've done some -- quite a lot of work as far as growth is concerned. We've concluded the Hidden Valley acquisition. We're dealing with this half of the year. We are actually spending some money on exploration, and we also have done quite a lot of work as far as acquisitions are concerned.

To increase our margins, we remain free cash positive over the time.

Our hedging still there to protect our margins are still doing it very well, and we'll talk about that a little bit later.

We basically repaid all our debt.

We've got a strong balance sheet and a lot of flexibility in the Company.

And we believe in prudent financial management. We're extremely conservative in terms of how we spend the money. We do not have a lot of money on our pocket to burn, as somebody else said this morning. We in actual fact are very, very prudent in terms of where we want to spend the money.

If you look at our strategic pillars, our safety rates improved during the six months (technical difficulty) with an 8% increase in gold production. We talked about the grade continues to go up, and it's sitting at 5.04 at the moment.

We had a 4% increase in all-in sustaining costs in rand per kilogram wise, but 14% unfortunately in US dollar because of the exchange rate we had. We made $45 million from the hedging. We had a headline earnings of $0.11.

We're on track to meet our production target for the financial year, and we paid an interim dividend of $0.04.

If you turn the page then to slide number 8, which gives us our fatality injury frequency rate, you can see that we are probably the lowest that we've been. The six months have been the lowest that we've ever been in Harmony before.

Again, looking at our safety achievements. We talked about being fatality free underground in the December quarter. The Tshepong mine, which is one of our bigger flagship mines, reported 2.5 million fatality free shifts on October 27. That took them to 794 days.

Doornkop achieved over 2 million fatality free shifts on December 17, which took them 872 days.

What is also quite encouraging, if one looks at the last bullet point on slide number 9, is that we had what we call white flag days. The white flag days is really about you've got to go to the beach and there's a white flag on the beach, it's a safe beach. A white flag means there's no -- a day without no -- no injuries at all, not even a treat and return accident.

We had many mines that actually had a full month, calendar month, without any injuries. There's Unisel. Bambanani, they had it in September, November and December, and then also Joel in October. Now, that certainly gives -- underscores the notion that we can actually work injury free. There's zero harm to people, and certainly these operations can do it right, we can certainly get it right and add operations too.

If we look at operational results, and it is now starting with slide number 11. Gold produced was 553,000 ounces, or 554,000 ounces for the six months. You can see, well on our target -- well on our way to get to our 1.05 million ounces as our guidance.

The gold price in US dollar terms has dropped to 7%.

Our underground recovered grades, we talked about it, it's just at 5.04%, up from the previous six months from a 4.883%.

Our production profit has been $177 million.

All-in sustaining costs at $1,136 per ounce.

If go on then and look at the slide number 13, which gives us the operational performance of the different operations in ounces produced, you see all of our operations improved, except for the last three. And the most significant then one is really the Target operation that didn't get to the target. The other two is really on the back of a previous six-month excellent performance. Except for Target, all operations actually made their plans and we are very pleased with that performance.

If you want to turn to slide number 15, which looks at our operational cash flows. This is in US dollar terms. You see all our operations made money, although some Kalgold there's a small lot of money in there. And then Target obviously is the only operation that didn't make it there.

On slide number 16, we look at the underground recovered grade. We look at the last three years and we see where we are now in terms of our first half of the year. And we can see we had a quite fairly good improvement in grade and a consistent improvement in grade over the last few years.

I'll now hand over to Frank to talk about the financial results.

Thank you, Peter. If we turn to slide 19, we have got extracts from the income statement, and this is for the first half of the 2017 financial year. This is the second half of the financial year 2016 in US dollars.

So if we look at the revenue there, you see the revenue there was $706 million versus $625 million. This was a 13% increase on the previous six months. This was because of a 6% more gold sold. Although we produced 8% more gold, we only sold 6% more gold and also a 7% increase in the gold price.

Our production costs went up. What we've done is we've split it, because we've now got 100% of Hidden Valley. So a portion of Hidden Valley was not included in our costs before, so our costs were $570 million versus $424 million the previous six months. This was largely due to the exchange rate. The exchange rate, the rand strengthened against the US dollar with 1%.

In rand terms, there was 11% increase on the six months, and this was largely due to the normal salary increases and electricity increases and also because of more production during the December six months than the June six months.

If we look at the amortization and depreciation, it basically increased to $91 million. We are amortizing Kusasalethu quicker now because we shortened the life of the mine, and that does result in more amortization.

Exploration expenditure went up to $10 million, and this is in Papua New Guinea. This is at Kili Teke where we had two drill rigs.

We had a foreign exchange gain of $51 million. This consists of $10 million, which is the translation difference on the US loan to rand terms because of the strengthening of the rand. It was $42 million of hedging profit from our currency hedge, of which $28 million is realized and we received the cash, and $40 million was unrealized. So that added up to the $51 million.

Then we've got a gain on bargain purchases. This is where we report Hidden Valley, and I'll explain it on the next slide.

Our taxation was $34 million.

Net profit of $111 million, versus $89 million in the previous six months, and when we add back the exceptional item, which is the gain on the bargain purchase from Hidden Valley, our headline earnings is lower this six months than the previous one at $47 million.

If we page to slide 20, gain on purchase. The accounting standard IFRS3, the business combinations require that the acquired assets be recorded at fair value on the effective date of control. So what we did on the day we acquired the 50% assets from New Crest, the 50% of Hidden Valley, we fair valued those assets at $39 million.

They paid us $22 million toward rehabilitation, and that adds up to a gain of $61 million. Because we only paid $1 for the acquisition, we had to book the gain on purchased assets of $61 million in our income statement.

I'd like to page now to slide 22. This is a slide over the 12-month period from December 2015 to now, over the 12-month period, and you'll see our net debt in December 2015 was $162 million. We paid a dividend, which increased the net debt position. We had some other related expenditure which would have increased it further, but then we generated a lot of cash from the operations, $170 million, and we had these hedging gains during this period; $28 million from the currency hedged in the six months, $5 million we actually had from the currency hedge from the previous six months, and then $17 million from the rand-gold hedge. That adds up to $50 million.

So you can see that our net debt has come down to $21 million, from $162 million in December 2015 to $21 million in December 2016.

If we page over we just look at our EBITDA. This is on slide 24, US dollars.

We can see the EBITDA for the period was $175 million, and at the end of the year 2016, we had two parts. It was $49 million the first six months. So this is substantially more than it was in the corresponding six months. And in the first six months of the 2016 year, we had an EBITDA of $212 million. And we've got $175 million now for the first half, and you'll see where we get to in the second half. If the gold prices can stay where they are, we should have a good second half.

I'd like to turn to page 25, slide 25, which just shows our currency hedge, and you can see here what we did. We had a floor and a cap. The blue line is for the floor and the green line at the top is the cap. And you can see the yellow that we're putting in (technical difficulty) the floor price, where we actually got paid.

So the first bit before June 2016 we got the $5 million, and in this period from June to December, we actually received $28 million. And at the end of December 2016, the unrealized portion of this hedge was $41 million. So if we were to go to the bank today, they would take in closest position, and they would give us the $41 million.

We page to slide 26, this is our gold hedge, which is the rand gold hedge. We can see the line, the black line, and what looks like steps. This is our rand gold hedge, and this runs through September 2018, and we are able to -- since it's a very good price. I think the stock will be about ZAR700,000 per kilogram on average. For this period, or to receive on this hedge, realized was $17 million, the regular part, and the unrealized mark to market value at the end of December was $116 million.

If we page over to the slide 28, what we show here is just our capital expenditure for the next few years. You can see that in the year 2017, the blue portion is the additional capital, and that's capital we're spending at Hidden Valley. That is to do the cutback for 5 and 6, Stages 5 and 6, and in year 2018, we will spend further capital on Stage 5 and 6, after which the mine would be producing at just over 180,000 ounces per year of gold going forward.

Orange is the capital we will be spending on Golpu after we've completed the permitting phase.

If I can ask Peter to take over, thank you.

Thank you, Frank. I can also ask Johannes here maybe just to talk us through the Hidden Valley project.

Thanks, Peter. So on slide 30 we basically give an update on where we are in terms of the plan. During the quarter, we acquired Hidden Valley. The effective date of control was October 25. From that period onwards, we mobilized the team and focused on commencing Stage 5 waste stripping. That's obviously critical.

As part of that process, we acquired additional equipment and we also recruited additional people to man that equipment.

You will see that the plan basically amounts to treating waste as well, or doing waste stripping and then also treating all stockpiles and Hamata ore for a period up to June.

After that, there's going to be a five-month mill shutdown, which allows us to do some refurbishment on the plant, as well as to generate enough ore to feed into the plant for startup.

Then on slide 31, we talk to some of the parameters that we've included in the plan.

We believe we've got a robust plan that's built on conservative parameters, on the outcomes that we've achieved in the past at the mine, so we're very comfortable in our ability to deliver to this plan.

As Frank has noted, once we've completed this pre-strip phase, the mine will be in commercial production from financial year 2019 onwards and generate about 180,000 ounces of gold and approximately 3 million ounces of silver per annum.

The mining rate as well as the milling rate is a very achievable target. And you'll see all of the above will generate, or will allow us to produce gold at an all-in sustaining cost of between $850 and $950 per ounce on average.

On slide 32, we basically demonstrate what the Stage 5 and 6 cutback looks like.

As you see, we're mining 1.4 million ounces of reserves there, but the opportunity is to in future potentially do also a Stage 7 cutback. That would allow us to mine an additional 1.3 million ounces, expand the mine life by a further five years. Key parts of that study program would be looking at additional tailing storage facilities, as well as a drill program to confirm the grades in the Stage 7 ore body.

As part of this expansion or growth opportunities, we've also started up a regional exploration program proximate to the mine.

Thanks, Johannes. I will then continue. I think we revealed a little bit on our strategy. Our safety is improving. We've repaid most of the debt that we set ourselves out to do in the beginning of the year. I'll talk about this calendar year.

We have shareholder returns. We have two dividends of ZAR0.50 for full years since each in the past 12 months.

We've got growth opportunities. The Hidden Valley acquisition adds 180,000 ounces by FY -- by financial year 2019 onwards.

We have a lot of brownfields explorations that we're doing in the areas, both in South Africa and also in Papua New Guinea, and the Golpu permitting is progressing well.

We are still pursuing acquisition assets, and we've got a team that work on that constantly.

If we look at the value uplift in Harmony, first, safer and more predictable ounces. I am very glad to say that we are very proud of what we achieved as far as that is concerned.

We will maintain the increase in grade. We are on track to produce in line with the guidance that we set up at the beginning of the financial year. We've got robust margins. We've got a strong balance sheet which allows for dividends. We've got growth in our portfolio, and a share price uplift that should continue from there.

Thank you very much. We're prepared to take any questions you would like to pose to us.

(Operator Instructions). Sir, it would appear that we have no questions in the queue at the moment. Do you have any closing comments?

Yes. I think just first of all, thank you very much for being on this call. We certainly, from Harmony's perspective, both operations, both in South Africa and Papua New Guinea, are maintaining their momentum. We are very proud of the momentum that we created there, and we delivered our annual guidance of approximately 1.05 million ounces that will be achieved at a cash cost of $1,100 per ounce.

I think we've got a very strong performance of the team. The team is very motivated to do well going forward and will maintain us in a good space, as I said before, so I think we can continue with the strong operational performance. Thank you very much for joining us on the call.

Thank you very much, sir. Ladies and gentlemen, that concludes this conference, and you may now disconnect your lines.