Harmony Gold Mining Company Ltd (HMY) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Harmony Gold Mining Company Limited Full Year 2018 Results Conference. (Operator Instructions) Please also note that this call is being recorded.

I would now like to turn the conference over to Max Manoeli. Please go ahead.

Good day, everyone, and welcome. My name is Max from the Investor Relations team. Harmony has today released its FY '18 results, and I am joined by Harmony's CEO, Mr. Peter Steenkamp, and our senior management team to share the Harmony story with you.

Over to you, Peter.

Thank you, Max. As discussed, we will go through the presentation that we had this morning. So please bear with us. So we'll be presenting the results of the year ended 30th of June 2018.

On Slide #2, we've got the safe harbor statement. Please take note of that.

Moving over to Slide #3, which is really about delivering on our strategy and our objectives in FY '18. The highlights of FY '18 is that we -- Hidden Valley we delivered safely, on schedule and within budget. We're very proud of the project that we just delivered on Hidden Valley, especially on the safety performance. We did the whole project without any lost time injury during the term. So I mean, it's quite a feat if you think about how many contractors came on site.

We also just obviously in course of the year acquired Moab Khotsong and successfully integrated that into the Harmony operation with 8% increase in underground recovered grade and the 13% increase in gold production. And we improved our all-in sustaining cost from ZAR 517,000 a kilogram to ZAR 509,000 a kilogram.

On Slide #4, we just remind everybody what are strategies. First of all, safe, profitable production ounces and increasing our margins and reduce it in 3 strategic pillars, which is operational excellence, cash certainty and also effective capital allocation.

On Slide #9 is really our delivery journey since I started with Harmony at the beginning of FY '16. We -- just in FY '16, we embarked on a stabilizing South African operations at about 1 million ounces. If you recall, at the time, we had lots of unplanned stoppages and things and that happened to production in Harmony. And we really got to down -- the South African operation down to 1 million ounce produced safely and predictably delivered those ounces.

[It was] our growth strategy of -- to get to 1.5 million ounces, with all-in sustaining cost of at least $950 an ounce by FY '19.

In FY '17, we acquired 100% of Hidden Valley and reinvested $180 million into that -- to recapitalize that mine. We delivered the safety, and we delivered during the course of the year, safer and more stable and predictable production outside of African operations, and we repaid our debt.

In FY '18, we acquired and integrated Moab Khotsong, delivered the Hidden Valley reinvestment on schedule and on budget, and we kept -- maintained that momentum on all of South African operations. So all in all, it's been a very good 3 years, and we've done everything that we wanted us to set ourselves out to do.

Safety stays a top priority. If you look at our performance on Slide #7, you can see that our group lost time injury frequency rate is about the same as it basically done before, the 6.23. But unfortunately, we regressed as far as fatalities are concerned. We had 13 fatalities during the course of the year, of which of notably was 2 multiple fatalities, one with that -- we lost 5 of our [pillars] and another one a double fatality.

So key aspects of our safety approach is on Slide 8. The first thing is we have to stop these significant unwanted events. And there, we're really focusing on critical control management, and we embarked on quality process to identify all the critical controls and have management systems in place to manage these critical controls and ensure they always are in place.

We also believe that through active leadership and proactive culture, we were able to bring our safety performance or improve our safety performance. We embarked in the beginning of 2016 on the 4-layered risk management process rollout in all of Harmony. That's typically the similar thing as run down in all best practices on all different operations. We -- by the end of this calendar year, we will be in a situation that we've actually covered all our mines and we actually rolled out our 4-layered risk management process on all the different operations.

Obviously, asset management is a big component of improving our safety. And the move towards engineering controls that -- rather than admin controls, engineering controls do manage our safety. And obviously, engaging our workforce and commitment to compliance by all. And we must say that we have a huge amount of support from all our stakeholders as far as that's concerned.

A culture transformation is not a area that we focus on improving our safety. And really we talk about employee engagement, safety awareness and training. And we spend enormous amount of time with employees on the mines in terms of improving safety, talking safety to different leadership groups in organization.

And obviously, we are a quite a lot -- a big labor force. But we've got really good systems in place to do that. And obviously, we're also focusing on positive behavior and reinforcement. And then implementing systems to improve risk management, this is really about being proactive. So we improved our monitoring systems and analysis. We got a perfect system, as we call it, that is working fairly well with us. We also use learning from incidents to ensure that we are proactive in terms of our process as far as safety is concerned. And we also review the effectiveness of all our controls and what we're doing on all different operations through the second level of audit process.

We can then move on to Harmony delivers operational excellence. On Slide #10, we're really looking at our performance as far as our grades are concerned. And we see that we have now for the sixth consecutive year managed to increase our grade. If you look at the last bar, the 5.2 is the rest of Harmony without Moab Khotsong, and the 4 months that we had Moab Khotsong in our portfolio increased our grade to 5.48. So that's quite a significant improvement in our grade overall for the Moab Khotsong operation.

If then we look at the Slide #11, we talk about the track record of delivering our guidance. And you can see, what -- easily have been able to achieve our guidance. It's the third consecutive year in a row that we've done that. And we actually, due to the operational excellence philosophy, delivered safe, predictable ounces and also flexibility in our operations. Asset management and maintenance approach reduced unplanned stoppages and in grade management, which is key for Harmony operations.

On Slide #12 -- and I'm really going to go to slide 13, which is actually dollar per ounce slide. If you look at that graph, we got about 90% of operations were the profitable operations. We obviously -- if we just go to the -- Bambanani is the most profitable operation. You can see that Moab Khotsong and Hidden Valley coming in the new year will add a lot more production. The cumulative growth -- production growth is at the bottom of the X axis of this graph. You see that, if we move more further to the right, I think we have a full Moab Khotsong for the year and the Hidden Valley also for the full year. Hidden Valley only had 2 months of production in [this year] because the rest of time it was in the capital, the reinvestment cash for that. So that will -- all of that will move to the right.

If we look at those 3 operations, those are currently not profitable. Unisel, we restructured in the beginning of this year. We're talking about the calendar year. We completed that during the course of the 6 month, and Unisel in last month, so we're profitable. Certainly, we're looking forward for the profit of Unisel. Joel, we're still -- we're deepening that operation. The areas that we had to move to, as you all recall, at a time at the (inaudible) plant intrusion, so there was no gold in that area. And we're currently mining below infrastructure, which is creating a very difficult operation at this point in time. We completed the project over the deepening. We are busy with the foothold development to create flexibility for ourselves. And Joel, end of this financial year, will be that way normally is at a good performance.

And in Target, we know that we have to recapitalize Target and actually move the clashes away from the areas that we currently operate in. And that process -- we know the process of deciding what we're going to do as far as that's concerned.

If we look at the Hidden Valley, just to talk about that again, excellent project delivery is really for us, very safe, fatality free with no LTI in FY '18. So a fantastic performance as far as safety is concerned, was below budget, budget was $180 million for -- to do the reinvestment, we did -- came in with $175 million. It was on schedule. We reached our commercial levels of production in the June month of 2018. And our outlook is in line with investment plan. I mean, we still guide a 200,000 ounces per annum with all-in sustaining cost of less than ZAR 515,000 a kilogram.

On Slide 15, we really look at Moab Khotsong's impact on the last -- on our operations in the last -- in this financial year. Remember, Moab Khotsong -- we only had Moab Khotsong for 4 months in our operation, not for full 12 months. So if you all look at underground recovered grade, it's 5.48 versus if we haven't had Moab Khotsong, it would have been 5.2. The gold production was 1.228 million ounces, this is 1.118 million ounces if we haven't had Moab Khotsong. The all-in sustaining cost, it came from ZAR 517,000 to ZAR 508,000. That's really the impact that we have with this really high-grade operations we currently have with us. And operational free cash flow went to ZAR 860 million versus the ZAR 400 million we had without it.

The next few slides really talk about the quarter performance and why it's important is that we actually want to show you we had the full Moab in the June quarter. Remember, we bought the mine on the 1st of March, so we had it for a full quarter, we had Moab in. And you can look at what we have. If you look at the first slide, which look at the quarter-on-quarter kilogram production, you see that we are very close to a 12 tonne of gold production now per quarter. That was running at about 9 tonnes per quarter. We're now running at 12 tonnes per quarter. So that is a huge and significant increase in terms of production that we had in the quarter.

Our grade, that's very close to 6 grams a tonne. And we used to be just over the 5 grams a tonne, so a significant increase in our grade. What's important about this is that, that is very close to the 6-gram-a-tonne operation. And I never thought of Harmony being a 6-gram-a-tonne operation in my lifetime few years before.

And then if we look in at the all-in sustaining cost, we had ZAR 486,000 a kilogram versus the other ZAR 500,000 that we used to have in the past. So again, we look here at a quite significant improvement in all-in sustaining cost.

So I'll hand now over to Frank to talk about cash certainty and effective allocation.

Thank you, Peter. If we turn to Slide 21 -- Slide 20 is in rands. The Slide 21's key financial features in U.S. dollars. If we first look at the gold production, we can see at 1,227,000 ounces, we are 13% more than last year. And of course, this year, that productions can increase further when we have a full year of Moab's production and also full year of Hidden Valley's production. Our production profit increased about 27% to $416 million. Then we had impairment of $396 million (sic- see slide 21, "$386 million"). I will explain the impairment on another slide, that's on Slide 22.

We had gains on derivatives of $8 million. Then there was translation loss on the U.S. dollar borrowings, $52 million. And net profit was a loss of $320 million (sic - see slide 22, "$321 million"), and this was mainly due to the impairment of $386 million. If we add that back, you see that our headline earnings was $59 million.

All-in sustaining cost was $1,231. In rand terms, our all-in sustained cost actually came down to ZAR 508,000 a kilogram. But the dollar cost of $1,231 is a function of the exchange rate (inaudible). If we change that exchange rate to (inaudible) to the current exchange rate, our U.S. dollars all-in sustaining cost at today's exchange rate would be $1,132, $1,132 per ounce. Cash generated by operating activities, $300 (sic - see slide 21, "$302 million"), and year before, it was $280 (sic - see slide 21, "$280 million"). And then our net debt went up to $356 million. And this was the result of the acquisition of Moab. It gives us a net debt to EBITDA ratio of 1.

Remember, when calculating this, when we look at our EBITDA, we look at the current year's production. So that excludes the full year of production from Moab and also Hidden Valley. So when the production of those pits is coming, actually this net debt to EBITDA ratio is going to come down. Then you also see the exchange rate.

If we move to Slide 22, where we try and explain our impairment. What we do on a yearly basis, we look at the value of all our assets and we present value that, and what we've done is we've used a conservative gold price of ZAR 535,000 a kilogram, and we applied that in our life-of-mine models. And the result of that was that we had the impact on our margins of ZAR 3.5 billion. What we've also done is the resources which we actually calculate or value based on multiples, we changed that estimate to better reflect the current values for resources sold in South Africa. And that's also resulted in an impairment of the resources that we own. So in total, our total impairment was ZAR 5.3 billion, and that was -- and that equates to $396 million -- (sic - see slide 21, "$386 million").

If we page over to Page 23 or Slide 23, you can see these were our gold prices in year '17, '18. You can see the rate, that was the gold hedge, that helped us to get to about ZAR 570,000 a kilogram in year '18, also ZAR 570,000 a kilogram. In dollar terms, we achieved, in year '18, a gold price of $1,380, thanks to the gold hedge. On top of that, you can see the currency hedge. We did have hedging in place on the end of June 2018. For the following 2 years, we have a portion of hedging, and we do reflect that on the schedule.

If we turn to Schedule 24 or Slide 24, this is for the year '17 and '18. We want to show you what we have done with our capital. First, we've seen loss, of course, we bought Hidden Valley for ZAR 2.7 billion. We acquired Moab Khotsong for ZAR 3.5 billion. And then we spent capital on the other operations, which we call stay-in-business capital, of ZAR 4.8 billion. At Golpu, we spent ZAR 0.5 billion. And we rebuilt our central plant, South African (inaudible). And then we paid the dividend of ZAR 0.6 billion preceding this meeting. And so all of this capital allocation intention was to grow our ounces from 1 million to 1.5 million ounces at a better margin.

If we turn to Slide 25, year '17 and '18, this is our funding sources. You can see the ZAR 7.7 billion comes straight from our cash flow. This is for the 2 years. This was cash generated by operating activities. We did go into the equity market for ZAR 1 billion, our shareholders helped us. And then we just raised the debt for ZAR 3.5 billion.

If we look at Slide 26 and we look at our net debt to EBITDA ratio, you can see the black [bar], that's Harmony, sitting at 1. The green bars of our South African gold peers, as the 3 large companies, you can see where they are sitting. And then the gray bars are the international gold mining peers. We're quite comfortable with the ratio where we're sitting. And we do believe because of the higher production from those 2 operations, we would be moving to the right-hand side of that graph in the next year. And it's also our objective to buy back our debt in the next 2 years. Thank you.

Thank you, Frank. And looking forward on Slide #28, first of all, our strategic pillars and what we're going to do for the next year. On operational excellence, we're obviously going to look -- or we are in the process now of working very hard on improving our safety. Safety is key to us, and it's important that we deliver on the safety performance and we improve safety performance. And we have to realize the synergies of Moab Khotsong operations. We're not fully integrated yet. We believe there's still some upside of that and obviously also looking then of the full year in our operation and in our results, Moab Khotsong will make a huge difference in terms of our performance. And then deliver on the Hidden Valley plan. We've built the mine out. We processed, we've started the mine, we're quite happy with the startup. We're hitting the ground running. And we aim to deliver on the plan this year.

As far as the cash certainty is concerned, the biggest way of doing that is to exceed the operational plans and generate free cash flow. We will focus on repaying the debt, as Frank has said. And we will continue with the hedging strategy when the opportunity avails itself. We think it has served us well in the past and we will continue with that.

As far as effective capital allocation is concerned, it's important that we secure the Wafi-Golpu permit this year. And our target is by June that we should have done that. And then also sort out the funding plan for Wafi-Golpu and execute some clarity in the market in terms of how we will fund that. We will also evaluate organic growth opportunities when they arrive.

The -- if we look at Slide #29, which really looks at our profile going forward, and you can see, we now are a 1.5 million ounce producer, we used to be a 1 million -- 1.1 million ounce producer. We obviously see a area there that we need to focus on to improve our production. These are ounces. The rate part of that is the Wafi-Golpu gold equivalent. Although, it is similar, the kind of production is obviously -- the half margin is much higher on that side.

So we've got quite a few organic opportunities that we are pursuing. First is the Tailings retreatment expansion, and certainly the low-hanging fruit there is to bring in some extra retreatment in Moab Khotsong and really the Mispah Tailings Facilities that we bought, we can bring that into play. We're busy with that feasibility study at this point in time.

The Great Noligwa pillar extraction that is both the shaft pillar and other pillars. And both of those, we are in the process of finalizing it. The shaft pillar, the extraction plan will probably be finalized by December. And then we will start with that, and then also obviously we were busy with the investigation into other pillars in terms of how to reproclaim and actually mine them. Our Kalgold exploration is quite an exciting project for us. We found some very good grades and we had a presentation of that in the market a few months ago. And Kalgold certainly is something that we still need to do some drilling. But we are excited about the prospect of actually improving Kalgold to making a much bigger mine in Canada East.

And the Hidden Valley extension is a real possibility. We are busy with the feasibility at this point in time. That can impact Hidden Valley's production for 200,000 ounces per annum up for another 3 years, and certainly something that we believe that is doable. And -- but we're currently doing the feasibility study as far as that's concerned. Zaaiplaats is another big operation that we see now in -- on our things.

Just a point, all the best type of operations is not a lot of capital that we need to actually bring that into production. It's actually much lower levels of capital. Zaaiplaats obviously is different capital fees. It's going to -- if we bring that forward, we obviously will need some capital to do that. But Zaaiplaats, we're busy with the feasibility study as we speak. And then obviously, we'll also focus on other value-accretive M&A activity during the course of the year.

Then on Wafi-Golpu, just in terms of -- it remains a game-changer. We updated the feasibility study during the course of the year. It's a 18.6 million ounce gold deposit and 8.6 million tonnes of copper deposit.

It's a steady-state production that will do 161,000 tonnes of copper and 266,000 ounces of gold. So in excess of 1.4 million ounces of gold equivalents, that's a massive mine. It's going to run for 28 years. It's high-average recovery grades, gold close to 1 gram a tonne, and copper at 1.27%. And we'll be at the lowest cost -- one of the lowest cost copper production -- producers in the world, with the all-in sustaining cost of minus USD 2,127 (sic - see slide 30, "USD 2,128") per ounce in gold production terms.

And then importantly, it is very close to the city of Lae, which makes the execution of the project quite relatively easy compared to other operations. Lae is industrial hub. It has got a large cargo port. And it has got a airport that will one of these days be an international airport.

We always -- with Wafi-Golpu is on Slide #31. What we've done this year, we submitted the supporting documents with the SML. And we've also submitted the Environmental Impact Statement in June. The granting of the SML by the government is now currently outstanding. We're working on that. And that's just in key things for FY '19, and also securing the funding solution is important. And then obviously after that, we must have the final investment decision by Harmony and Newcrest Boards.

So finally, we are on track to deliver a sustainable production performance. We are driving down unit cost by producing quality ounces. We're delivering on our strategy of increasing margins. And our cash flow to be effectively allocated to growing opportunities, those things are going to make us a different company going forward. And we've done that. We directed some of that cash flow at Hidden Valley or to Moab Khotsong and now Wafi-Golpu going forward.

So certainly, we think we're in a good state. We are looking forward to the year of FY '19 because we believe it's going to be increased performance, certainly with the Moab Khotsong in there for a full year and also Hidden Valley delivering for the full year in our production. We'll take any questions.

(Operator Instructions) Sir, it would appear we have no questions.

Can I just then wrap up please?

Thank you very much, and thank you for joining us. I see there's quite a few people on the line. Thank you very much for joining us. Again, we're looking forward to FY '19. We believe it's going to be a very good year for us. We certainly are very happy to have these 2 new mines into our portfolio, and looking forward for a good FY '19. Thank you very much for joining us.

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