Harmony Gold Mining Company Ltd (HMY) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Harmony Gold Mining Company Limited results for the year ended June 2017 conference. (Operator Instructions) Please note that this call is being recorded. I would now like to turn the conference over to Peter Steenkamp. Please go ahead, sir.

Thank you, Irene, and welcome to the listeners. We -- I think we will start with just taking you through the results. And I hope you got the results presentation in front of you.

So the first slide is just -- the second slide is just our safe harbor statement, which I'd just like you to take note of, please.

Then we begin at Slide 3. We could look at the key features for FY '17. I think that one of the things that we are extremely proud of is that we had a fatality-free (technical difficulty). And we -- [in actual fact], we've had a very good improvement as far as the [severity grade] is concerned.

We met our production guidance for the second consecutive year. We secure our cash margins through a hedging strategy. Had a 35% (inaudible) headline earnings per share. We got a flexible balance sheet that allows for growth. And we've made progress towards this 1.5 million ounce aspiration in terms of results.

We also had a sustainable and inclusive solutions [soon to address our silicosis claims]. We feel very proud of it as an industry. And I think it's a testimony when everybody, and that is all participants and stakeholders, work together to find an amicable solution to this legacy that was over our heads for many years. And we had a 70% year-on-year increase in dividends and paid a final dividend of ZAR 0.35, which bring us to ZAR 0.85 for the year, which is 70% more than last year.

But I think importantly for us is that we made progress as far as safety is concerned but also in creating flexibility in our business as well as predictability in our business.

Slide 4 is just the agenda that we're going to follow. I will talk about growing Harmony. And if you look at what the levels were in FY '17, I just would like to remind you that our strategy is to mine safe and profitable ounces and increase our margins. We do this through three strategic pillars, which is: operational excellence, cash certainty and effective capital allocation.

What we've done in the year past and as far as operational excellence is concerned, I've mentioned our fatality rate's improved. We met our FY '17 production guidance for the second consecutive year. We increased in underground recovery grade and also creating the legacy fund for silicosis claims.

As far as cash certainty is concerned, our hedging strategy secured our cash flow margins for the year, and we have got very low net debt and a [strong -- and has] balance sheet flexibilities going forward.

In terms of our effective capital allocation, we paid a interim and final dividend this year. Hidden Valley, we start with the investment in Hidden Valley, which we are very proud of the performance to date. And also, we've invested a lot in organic growth (inaudible).

I turn the page now to Slide 7. Safety remains our priority. And if we look at where we are, we made huge in-roads as far as safety is concerned and actually halved our frequency rates on the year-on-year.

Page 8, we talk about the silicosis. And now we are very proud of what we achieved as far as silicosis development are concerned in South Africa. Basically, 3 different areas that we focus on.

The first area is to find a solution for all new employees as far as silicosis, [specifically], that we pay a debt of proper compensation to anybody that do attract the silicosis. The second thing is actually to create a -- with the current system that we do, the payments that we should be doing. And then thirdly, to settle the class action, that is through a negotiation process.

And in all 3 of those areas, we've made huge, significant progress. Harmony itself has started what we call the Ku-Riha project. And the Ku-Riha project really focus on getting -- track and tracing all our people and making sure that compensation are paid out to them as it should be done. And we've been very successful in that. And I think something that we've really been -- very well received in South Africa.

We turn the page then to Slide 9, which actually just talk about our guidance. I think, in past, Harmony has been criticized for not really getting to the guidance. We're proud to say, the last 2 years, we, managed to meet our guidance. And I think operations are fairly stable at this point in time.

[But] didn't really have a long-term focus in terms of operating improvements, and you can see FY '17, again, third consecutive year, we had an increase in grade. And we also plan to have an increase in grade in FY '18 that is coming up.

Page 11 actually talks about the grade and why are our grade always improving. I think there's 2 things to that. The first thing is really our grade code, as we call it, the discipline we had as far as grade -- managing grade is concerned. No mining below cut-off, mining to the average reserve grade. And then also making sure that we don't have any dilution.

And we don't actually follow the price as it goes up or down. I think we've been very disciplined as a company not to mine more volumes when the gold price went up and actually to stick to our plans and stick to our long-term grade or long-term gold prices.

But there's also a second leg to that, and that is really that the projects are delivering on the increased grade. And that is really the Phakisa/Tshepong. The declines on that is on track to get to the grades. And I mean, we're actually mining the higher-grade areas.

Kusasalethu, we changed the plan to mine the higher-grade areas, which should lead -- then lead to a lot of [much better] profits. And then also in Mount Bambanani, we're mining the high-grade shaft pillar. And we're also looking forward to Joel. We're actually just in the process of delivering the decline on time, and that, the decline, will actually take us into the higher-grade areas of Joel.

We turn the page to Page 13. When we look at the all-in sustaining cost, and we talked about the difference that the hedging actually brought to us, if you look at the price differentiation between the spot gold price and the hedging price that we received. And we can see that we have more than 80% of operations were actually at spot price, we're making profits. Obviously, at the hedging price, we only had target -- the minimal profit target. Had a very bad first 6 months, we [need report on that] in the first 6 months. [We had a big target] on our back on to track in terms of how it need to perform.

We turn the page to Page 14. I think it's important to understand that Harmony's not only a South African operation. We actually have 9 underground operations, 1 open-pit mine and multiple surface sources in South Africa, but we are also a very big player in Papua New Guinea. And Papua New Guinea is just north of Australia.

There, we have got an open-pit mine that we're developing at this point in time, very close to being completed. And we got the Golpu project, which is a 50-50 JV. We'll talk to that -- about it a little bit later. And then also multiple exploration areas that we are focusing on. And we are a very proud miner in both Papua New Guinea and in South Africa.

Page 15 really talks about our reserve grades. We have a total of 37 -- 36.7 million ounces of reserves. That is gold equivalent reserve. And [people with this reserve] -- the biggest part of our reserve in actual is outside of South Africa. And South African gold is 16.3 million ounces. The Papua New Guinean copper and silver equivalents are actual fact, 13.5 million ounces, quite a big part of our reserves; with obviously the Papua New Guinean gold ore that's close to 7 million ounces there.

Our Golpu copper reserve is a massive copper reserve. It is something that is really, really -- is a Tier 1 asset. You want to look at tonnes, we're looking at 189 million tonnes at a grade of 1.26%, probably one of the higher-grade ore bodies in the world, with over 5 billion pounds of copper available to be mined. And importantly is to see that our gold production, as we develop Hidden Valley in FY '19, will be -- 15% of our production will actually come from outside of South Africa.

On Page 16, we really talk about progress made towards our aspiration to get to 1.5 million ounces by FY '19. We now can safely say that [the South African] operations are stably delivering on the 1 million ounces. South African operations are doing well. We believe that we've done all the work that we had to do to improve operating [capability] and also our flexibility in our operation. And we now can safely say that we will deliver 1 million ounces from South African production.

In the year, we converted [the bulk on our] Central Plant project. And we started with the slimes retreatment. That is a small operation, but it will deliver another 15 million -- 15,000 ounces in our portfolio. The Hidden Valley acquisition, now 100% in the hands of Harmony, adding another 180,000 ounces. Remember, Hidden Valley would have been closed by now and would have been on care and maintenance if we haven't done the reinvestment in.

So the balance, we will really make up through organic growth, exploration and identifying and evaluating acquisitions.

On Page 17, we just talked about the -- how we streamlined our operational structure. Really, the CEO's office at the moment is responsible for the financial reporting with the new business and for [corporate to face].

Other than that, the other things are -- all the others duties have now been dissolved into the South African Exco and the Papa New Guinean Exco. That allows us the opportunity to streamline our head office and to get accountabilities at the areas they are needed to be.

I'll now hand it over to Beyers Nel to talk about the South African operations.

Thank you very much, Peter. On Slide 19, the strategy and the approach of the South African operations is really all about creating an enabling environment. And we're talking about an enabling environment for every working area in the company, every panel, every hinge which we are resourcing. And the strategy is really built on 5 pillars. Those pillars are: safety and health, infrastructure management, grade management, capital allocation and realistic production plans.

On safety and health, our safety campaigns really include improved risk management with our 4-layered risk management process as well as critical control management.

On asset management, we're really very happy to report an improved asset maintenance and asset management performance in the [ISO] operations, which really supported our operations with good momentum. And happy again to show a significant decrease of 36% in unplanned stoppages during the financial year '17.

On grade management on Slide 21, we are -- our development grades are exceeding our mineral reserve grade, which is really an indication of the confidence that we have in delivering on the improvements in grades that we are forecasting going forward. We have improved our grades for 5 years in a row. And we continue to be confident in improved grade going forward.

On Slide 22, we talk about focused capital allocation and priority. It's important to note that the capital and the cost structures are built to fit the production plan. And you'll note that $197 million are planned to be spent next year on capital, the bulk of which, more of half, would be on ongoing development, which is really opening up mineable face.

Into the right-hand side on the graph on Page 22, you'll see that the bulk of the capital is spent on improving our margins on the quality, long-life assets, predominantly Tshepong and Phakisa operations.

On Slide 23, there's a bit of color on the forecast for the financial year '18. And you would see, again, an indication of improved grade going forward. Production guidance of around 1 million ounces for financial year '18 from the South African operations at an all-in sustaining cost of $1,180 per ounce.

I will now hand over to Johannes van Heerden to discuss the Papua New Guinean operations.

Thanks, Beyers. On Slide 25, we basically also set out the pillars that underpin Hidden Valley's performance. As Peter has mentioned, the focus is very much on safe, profitable, predictable production. To that effect, safety and health is our #1 priority. Historically, Hidden Valley had various interruptions to the business as a result of safety incidents. Happy to report that in the current year, there were no safety-related work stoppages.

In the current plant shutdown period, we're doing a lot of maintenance work as well as plant upgrade works. Once again, that is focused on ensuring that, when we recommission the plant, that we will be able to deliver the targets that we've set out in our reinvestment plan. As part of that, significant amount of time and effort is being spent on our maintenance systems and processes.

For the current year, we've basically delivered to our reinvestment plan. In certain areas, we're ahead of our plan. There was a huge focus on cost reduction. The fact that we now have a longer mine life allowed us to come up with longer-term supply contracts which has resulted in a cost reduction of $20 million to $25 million per year.

At the mine, we're focusing on continuous planning to make sure that all the variable elements at the mine is taken into account to still make sure that we get to deliver our production.

On Slide 26, we basically show some of our FY '18 targets. For mining, we're working towards 26 million tonnes annualized by quarter 4. At the end of the FY '17 financial year, we were at an annualized mining rate of about 24 million tonnes. So there's about a 2 million tonne step-up that we have to achieve during the year.

The process plant, we've reduced our shutdown period from 5 months to 4 months. That's just a result of outperforming the mining in the FY '17 year. That will allow us to get to commercial levels of production by Q4 FY '18 compared to the previous plan, where we were going to capitalize most of the production for the year.

Annualized milling rate of 4 million tonnes per annum is targeted after recommissioning of the plant and achieving that by Q4. Once again, in FY '17 year, we've already done 3.5 million tonnes through that plant, and that was on a reduced milling day strategy. So we're comfortable that, that target is achievable.

On Slide 27, we set out what we see the production profile for FY '18 and FY '19 looks like. In FY '18, we're basically still opening up the ore body. To that effect, we are still processing stockpiles, and that's what's driving the proposed grade of 1.16. Once we're in full production, we'll be mining the reserve grades in FY '19, and that will see us deliver about 5,900 kilograms of gold or approximately 180,000 ounces.

Some of the opportunities that still present itself at the asset is the exploration program for satellite deposits. That drill program has commenced in August. In addition, there's also a potential stage 7 cutback, which would extend the mine life by additional 5 years. That will be subject to us coming up with an additional tailings storage facility. That study program is currently underway, and we are to complete it during the current financial year.

As always, safety is a key element. As I mentioned, we didn't have any work-related stoppages in FY '17, and we intend or are targeting to repeat that in FY '18.

On Slide 28, there's update on the Golpu study. As Peter has mentioned, this is a real world-class deposit. What we're very focused on is to make sure that we deliver the study outcome that will enhance the ore body and make sure that we don't constrain it, and that we optimize it as much as possible based on additional work that has been carried out since the previous study result's release.

Key focus of the current study program is deep sea tailings placement options that (inaudible) for that will be completed by the December quarter. In the March quarter then, we'll basically do a review of the various options as well as our stakeholder engagement as it relates to that before we make a decision which option we want to progress as part of our study program.

In addition, we're also looking at self-generation of power to make sure that there's no reliable -- reliance on the grid to progress this project. The optimized business case should be completed by Q3 of FY '18. If there's any study outcomes, will basically result in an amendment to our current special mining lease application.

Now I'll hand over to Frank to take us through the financials.

Thank you, Johannes. If we turn to Page 31, the few excerpts from our income statement year-on-year 2017 versus 2016, we start with the line, revenue at the top. You can see our revenue increased by 12% for the year, but our gold price also increased by 12%. So gold production was in line with the previous year, but the revenue in dollar terms increased from $1,169 to $1,304 per ounce. Why we achieved such a high gold price in this period is because we locked in hedges in the beginning of this period.

If we look at the cash operating costs, that increased by 16% to $1,052 million. A very large portion of this, you can see right at the bottom of that table, 6% was due to the strengthening of the rand against the dollar. And the other 10% was inflationary expenses. And then also the fact that we included 100% of the Hidden Valley costs for a few months where we previously only showed 50% of those costs.

Our production profit was $327 million. Amortization increased to $185 million. It was increased because of the accelerated depreciation on Kusasalethu. There are impairments of $130 million. When we did our life of mine models in this year, and due to the lower gold price, we found that we had to impair some of our assets.

We look at the next item there, gains on derivatives, $75 million. This was the currency hedges that we put in place. The silicosis liability was of $70 million. Peter spoke about it previously, so that's the amount that we provided.

Gain on purchase on Hidden Valley transaction, $61 million. We did talk about this when we published our December results. Our taxation was positive $37 million. These were reversal of deferred tax balances due to lower tax rates. And net profit was $20 million for the period.

If we turn to Page 33, we actually do the reconciliation of our headline earnings. So we start with a net profit of $20 million. We reversed the impairment of $130 million. We deduct the gain on purchase of Hidden Valley of $60 million. And that leaves us with the headline earning of $95 million, which were substantially higher than the previous year's headline earnings.

I'd like to turn to Page 35. These show our cash margins were enhanced through hedging. The gray bars was the spot price during the period. The yellow bar was what we got through the [rand gold hedge]. And then the green on top was the currency hedge. So if we look at the year '17, the dollar gold prices, see, the spot was [$1,250]. And if we look at the total price received, was $1,370.

If we look at next year, this is the year '18, we've planned for a $1,200 spot price, then we've got about $100 on top of that, which is the -- takes us to $1,300. And that is the price that we're planning for the next year.

We turn to Page 36, it shows what we've invested in our growth. This is our capital expenditure. If you look at the bottom part of that graph, that's in dollars. So in year '17, we spent $270 million. And you can see quite a large expenditure on Hidden Valley. That's $68 million plus the $30 million. The $68 million is the new investment we've made then.

And for the coming year, you can see our capital expenditure in South African, which is -- this is ongoing expenditure at Tshepong and Phakisa. And then also a further expenditure -- reinvestment expenditure at Hidden Valley. So our capital expenditure for the coming year is planned to be at $390 million.

The year after that, the year '19, our capital expenditure drops to $229 million, after which -- after when we've completed the reinvestment at Hidden Valley.

We turn to Page 37. What you've got there is -- this is in rand. You've got the gray bar, which represents the EBITDA of the year, for the year. And then the blue is our net debt position. You see, from the year '16, our EBITDA went up; and in the year '17, we are -- we had an EBITDA of $250 million. And our net debt was $68 million, which gives you a net debt-to-EBITDA ratio of 0.26, which is a very, very low EBITDA ratio.

If we look at Slide 38, we compare ourselves with the other gold companies. You can see that Harmony is sitting right on the side on the EBITDA -- net debt-to-EBITDA ratio of 0.3 compared to the others. And as you can see, we've got a very strong balance sheet.

And if we page to Page 39, this is just the new facilities we've just put in place. Let's see, we've got a U.S. dollar facility of $350 million and we've only drawn $140 million from that. So that leaves us with $210 million which we can spend on the Hidden Valley capital and/or on other growth opportunities. On our rand facilities, we've only drawn ZAR 300 million. So that leaves us another ZAR 700 million which we could spend on the rand facilities.

Thank you. I'm handing it over to Peter for conclusion.

Thanks very much, Frank. In conclusion, we just turn the page to 41. And just that gives us a lot of what we do as far as social investments are concerned. We focus on enterprise development, specifically on SMMEs. We're also looking at spending a lot of money on recreation. Here, we believe that our -- especially our bridging school. [This is our flagship projects.] And we're spending money on environmental.

Actually, we're making sure that the areas that we mine are properly rehabilitated. And then also on communities, in particularly we have created a lot of housing facilities in and around our committees that we operate in.

And Slide 42, we're looking -- just looking at the rehabilitation that we've done. Harmony, in the last 10 years, have actually closed down 38 shaft that we've closed down or rehabilitated, creating more than 200 jobs and local procurements through that. And we implemented quite a few water retreatment facilities and then also started what we call a bioenergy plant that actually creates energy for our plants.

And we've been quite well. And we've been recognized by both the CDP Water A list and we're also in the global CDP Climate A list. And we also are a FTSE4Good constituent. So we've been recognized for the work that we've done.

On Slide 43, we get to our investment case. First of all, operational excellence. We certainly believe that we have now more safer and more predictable [allocation]. We're maintaining our increasing grade. We have a strong balance sheet that allows for growth, achieved our production guidance for the second time in the year.

And then also, we -- so that gives us a lot of cash certainty. We are positioned for growth, we got both organic and exploration and also through value-accredited acquisitions. And we believe that our share price's upliftment, this is through our gearing through the hedges and through to the emerging marking exposure, the share price will uplift.

We will take any questions.

(Operator Instructions) Sir, it seems we have no questions on the line.

Thank you, Irene. This is Marian. Thank you, ladies and gentlemen, for calling in. If you do have questions, please let the Investor Relations team know. Have a good day. Thank you.

Ladies and gentlemen, that concludes this conference. Thank you for joining us. You may now disconnect your lines.