Harmony Gold Mining Company Ltd (HMY) 2022 Q2 法說會逐字稿

Good morning. Thank you for joining us today for the Harmony interim results for the first 6 months of the financial year ending 2022. Presenting today will be Peter Steenkamp, CEO; and Boipelo Lekubo, Financial Director. Once the presentation is done, you may ask questions using the Chorus call directly or on Web link. Thank you very much. Over to Peter.

Good day, and thank you for joining us for the presentation of the half year results for the 2022 financial year. Please take note of our safe harbor statement. I would like to start today with a brief recap of Harmony's strategy, the progress we've made to date and our performance for the first 6 months of the financial year 2022.

Mining with purpose describes our way of operating at Harmony. We believe that this works from the foundation upon which our strategic decision-making process is based. The Harmony strategy is to produce safe, profitable ounces and to improve margins through operational excellence and value-enhancing acquisitions. As South Africa's largest gold producer by volume, we have delivered against our strategy, while positioning ourselves well for the future growth and value creation.

Despite what may seem a difficult set of results in the short term, we continue to success in executing our long-term strategy. While the past 6 months have indeed presented numerous short-term headwinds, we have already addressed these issues and continue to improve safety and increase our production. At the end of our previous financial year, we announced a number of key projects alongside our ongoing safety journey to ultimately achieve 0 loss of life, increase production and drive costs down in the medium term. However, these projects are big and require time. There is a Greek proverb which says and I quote, "Society grows great when old men plant trees whose shade they shall never sit." Many of our projects such as Zaaiplaats will only see their full potential in a few years' time. The challenge is, therefore, to deliver short-term returns while investing for the long-term growth simultaneously.

We have seen continual progress and improvement across all aspects of ESG. Our safety metrics continue to improve. And as part of our sustainable development strategy, we have clear ESG targets. I will provide more information on this later. COVID-19 remains with us and is still considered a material risk to our business. There is continued coordination from all stakeholders, management and employees towards fighting the pandemic in both South Africa and Papua New Guinea. Our vaccination rollout has been successful, and 90% of our employees have voluntary vaccinated, creating shared value for all our stakeholders, evident in the success of 3-year wage agreement, which we signed with all 5 unions in September 2021.

We are also moving forward with our plans to decarbonize and have begun an aggressive renewable energy rollout plan, which will see 167 megawatt of solid power in place by financial year 2025. We had somewhat disappointing operational performance in the first 6 months with production profit down 36% to ZAR 5 billion from the ZAR 6.8 billion. While we delivered our 5% increase in production year-on-year, this was offset by higher cost and lower grades. I must reemphasize that the importance of our large surface operations, which alongside Mponeng and Moab Khotsong have transformed our portfolio. We now have a portfolio positioned for growth. This, we are investing in long life and surface assets, further optimization, development into higher grades alongside cost induction are all key to ensure that we deliver on our second strategic pillar of operational excellence.

Financial highlights include a 2% increase in revenue to ZAR 21.951 billion, while net debt-to-EBITDA has remained steady at 0.1x. As we continue investing in our long-life assets, effective allocation of capital is necessary to ensure that we replace ounces and whilst meeting our growth objectives. I'm therefore pleased to announce an interim dividend of ZAR 0.40 for the first half of FY '22.

We are indeed a very different company with a vastly derisked portfolio from what we had 6 years ago. In financial year '16, the structure of Harmony portfolio was such that free cash was driven by our existing underground assets, which consisted mainly of the free state operations. Since then, our portfolio has changed significantly.

We acquired Moab Khotsong in 2018 and Mponeng and related assets in October 2020. Now only 80% of operational free cash flow is attributed to those older assets. In fact, 63% operating free cash flow in the first half of the year was from Moab Khotsong, Mponeng and the new value, while 90% we generate from surface operations. The first 6 months of the financial year brought numerous short-term headwinds. This contributed towards a lower than planned production. Massive Harmony success over the past 7 decades have been on our ability to manage and learn from these kinds of operating conditions and to emerge not only stronger, but more resilient and determined than before. Of all the challenges we faced in the first half, the most typical remains the safety of our employees. On one of the individual challenges we face with -- entire new to Harmony is -- this uncharacteristic, we experienced them all at once.

The COVID-19-related disruptions such as vaccination of all our crews was essential, but is now largely completed. As COVID restrictions fall away, our highly skilled Southeast Asian team can, again, frequently visit Hidden Valley, thereby ensuring more effective management. This goes a very long way towards the prevention of future infrastructure failures such as what happened to the overland conveyor belt.

The amount of rain experienced in the free state was unlike anything we had faced in the recent memory. Yet despite the rain, our Valley mines all stood firm. The free fall levels are well in excess of what is legally required and ensure the stability of our tailings facilities. This demonstrated the ability to withstand the record levels of rainfall this summer. This is just one example of our stringent integrated risk management strategies prevailing throughout Harmony. Our focus remains on allocating our capital in such a way that we deliver positive risk-adjusted returns and create long-term value regardless of the circumstances.

By executing on our 4 strategic pillars, we will improve the structural profitability of Harmony, creating a high margin of safety and improving returns for our shareholders. Before we unpack the South Africa and Papua New Guinea operations in more detail later in the presentation, let's look at the high-level overview of the 3 production metrics. Our operations now include 10 underground mines and 1 open-pit mine in South Africa, the Hidden Valley open-pit mine in Papua New Guinea. And of course, we have 1 of the largest service retreatment operations globally. Volumes growth have increased by 33% year-on-year to 27.6 million tonnes with a 5% increase in gold production to 34.2 tonnes. While underground grades have decreased slightly, we are confident of achieving our original guidance of 5.4 to 5.57 grams per tonne for the full year. Despite the increase in production and volumes inflated -- inflation-related increases and some production challenges, particularly at Hidden Valley, this resulted in a group all-in sustaining cost being higher than the original guidance.

Although our overall all-in sustaining costs increased by 12%, I need to reiterate our cost increases were in line with plan. The main cause of the all-in sustaining costs missed was due to the lower-than-planned production at some of our underground mines and at Hidden Valley. Capital expenditure for the 6 months was lower than the previous guided due to the value of implementing of the last carry around tailings facility at Mine Waste Solutions. Our approach to spending capital is based on obtaining certain approvals, and we will not commit any capital until we have certainty. Due to the Hidden Valley belt failure in January, we have adjusted our group production guidance lower to 1.4 million to 1.57 million tonnes. Group all-in sustaining cost guidance increased to ZAR 822,000 to ZAR 835,000 per kilogram in line with our recent production update. The South African all-in sustaining cost remains unchanged at ZAR 765,000 per kilogram to ZAR 800,000 per kilogram.

Well, this is the same slide in U.S. dollar and material conversions. During our FY '21 results last year, we shared our key capital projects for FY '22. I am pleased to say that all of our projects are now underway with the exception of carry around tailings expansion. These progress are expected to increase the net present value of Harmony by 30% to 40%, creating value for all our stakeholders. We remain fully committed to each of these projects, both in South Africa and Papua New Guinea. As the global focus on decarbonization increases, we understand that we do have an important role to play to reduce our Scope 2 emissions and reduce our carbon footprint.

We have made the strategic decision to accelerate the rollout of renewable energy of the 3 phases. The first phase is the 50-megawatt through a power purchase agreement in the Free State. Commercial claims for this project is imminent and will generate 75 gigawatt hour of power per annum and we expect it to be completed in FY '24. The second phase of the 137-megawatt will be completed by the end of FY '25 and will be funded internally. The project is expected to cost approximately ZAR 1.5 billion and will deliver over ZAR 500 million in electricity cost savings per annum, and deliver 43 gigawatt hour of energy each year. The third phase of 56-megawatt was still in planning phase for the completion in FY '26. These projects contribute towards the 2045 aspiration of being carbon net zero. We do this gold business while delivering significant economic value to Harmony and improving the well-being of our host communities for many years to come.

Improving our reengineered portfolio and the leverage balance sheet has given us an opportunity for opening the door for the abundance of new opportunities. We have solid building blocks in place to pursue our growth path whilst ensuring we mine sustainably. Our integrated ESG practice, combined with our hedging strategy will ensure that our balance sheet remains strong and flexible. This will deliver positive returns to our shareholders and stakeholders throughout the cycle.

Let us now unpack the performance of our operations. Mines operate under the maintain -- and each time we have a stoppage on the back of infrastructure breakdown or a safety incident, it has a meaningful impact on delivery. It is for this reason, we have 5 key operational areas, which we focus on, mainly safety and health. Production excellence and aimed at enhancing productivity. Capital allocation prioritized to grow margin growth, ensuring infrastructure reliability and active cost management. In addition to these operational focus areas, we have a business improvement initiative called SAFE 300 or S300. This initiative aims to focus on very strategic and operational efficiencies.

We are aiming to ensure on average our crews produced 300 square meters per month safely. And thereby improving their overall productivity and profitability. Safety is and will remain a cornerstone of our commitment to mining with purpose. More than just a moral imperative, safety underlies all we deal as a business. It is our first value and is a leadership priority. Eliminating all work-related safety issues is a key to our successful delivery of our strategic objectives.

We have implemented an integrated number of systemic components to ensure that we have controls and daily safety data available to prevent accidents before they occur. The most important aspect ever is changing human behavior and embedding a proactive safety culture aligned to our 5 values. This humanistic or cultural change is called our Thibakotsi journey. We have built a foundation that empowered our leaders during the first 2 phases of our safety journey and have progressed in Phase III of our four phase model. This phase of those operational specific interventions and ensuring everyone across all levels truly believes in what we are doing to improve safety by changing the hearts and the minds of all our employees.

This is a vitally important part of our journey to ensure of 0 loss of life and a safe working environment at all times. We have seen improvement in our last time injury frequency rate to 5.74 per million hours worked. Our loss of life injury frequency rate is at 0.14. And we are reaching more and more safety milestones such as the first ever loss-of-life-free January in 2022. Our total injury accident frequency rate has seen a steady improvement over the past decade and is now at 6.99 per million hours. This is an important metric, considering the size of the operations we are acquiring over the past few years.

We have grouped our African operations in 3 distinct categories. These are based on the characteristics and life of mine for the purpose of reinforcing the fact that our asset portfolio has been reengineered. Much of our major capital has been allocated to our long-life assets to ensure that they deliver higher grades and better volumes, so we can further extend the life of mine of these assets. 62% of our production in the first half came from these mines, which have a life of mine rising from 7 to 20 years. Many of our renewable energy plants will be aligned along to this long life assets and there's a lot of value to be created through these investments. Our surface sources business consists of retreatment operations and, of course, Kalgold, which all of our combined life of mine is longer than 12 years.

While this is a proved life of mine for our surface operations at 2 million tonnes a month, which is what Mine Waste Solutions is coming process, we could potentially our Free State dumps for the next 80 years. Our short life assets, Bambanani, Masimong and Kusasalethu are in the harvest mode. And as such, we are not allocating major capital in these operations. Masimong has approximately 18 months left, Kusasalethu 3 years, and we have had to take the tough decision to close Bambanani at the end of this financial year for various reasons. I will unpack this in more detail shortly.

Mines such as Moab Khotsong, Mponeng, Doornkop and our surface operations will receive the majority of our project capital. We are investing in these assets to prolong the economic life. The Moab Khotsong operations will expand through Zaaiplaats while we will also mine out the greater shaft pillar. We are conducting studies for the potential deepening of Mponeng and also the mining of the Tau Tona and Savuka shaft pillars, which are subject to further analysis. Our surface operations include Kalgold and the retreatment plants form an important part of our business.

We are investing in expanding the position and capacity of Mine Waste Solutions while conducting studies to understand where else it makes commercial sense to invest in surface retreatment operations. Kusasalethu has been a significant improvement in the production since we moved the processing newer and more -- to the more efficient Mponeng plant. Recoveries are approximately 2% higher at the new plant.

Our higher cost mines, namely Kalgold, Target 1, Tshepong, and Joel all have very clear strategies in place to ensure that production increases. For example, developing into the high-grade sections of our mines such as sub-75 levels at Tshepong, undercutting the recent Joel improved grade and moving infrastructure close to the face of Target 1 to increase production by 50%. While the all-in sustaining cost of these mines seem high, we have been busy with the recapitalization process while at the same time continuing our mining activities. Once these projects are complete, the cost profile at these mines is expected to fall in line with other operations as CapEx reduces alongside the increased production.

Bambanani is a mine that has served us well for many years and certainly has reached the end of its economic life. The last quarter -- last guided life of mine for Bambanani was 3 years, and now only 17% of the shaft pillar remains. Bambanani will be put on care and maintenance at the end of this financial year. However, the rational behind the decision is clear as we are no longer able to mine there in line with our strategic -- strategy of producing safe and profitable ounces. We have seen an increase of large seismic events every month for the last 5 months. We believe that we will only be able to mine this

mine safely up to the end of June 2022. At our -- 1,500 of our employees will be redeployed within the company, and we don't envisage any forced retrenchments. We have also implemented a reclamation program and the rehabilitation of the mine and surrounding areas will commence post-closure. On our differentiated sales through acquiring mines that no longer fit the stages of other companies and creating further value for our shareholders, we call our approach embedded ESG or ESG in action. This chart on the left is a perfect example of the success of our operating model where we extended the life of Bambanani by over 12 years. Bambanani has delivered a total of ZAR 4.5 billion in operating free cash since FY '10, against a capital expenditure of ZAR 610 million.

These returns generated by Bambanani have benefited all stakeholders in many ways. Employees, the communities, suppliers, shareholders, just to name a few have all directly benefited from this value created through Bambanani. This example of shared value is replicated at all our operations through our ESG-focused operating model.

As per our previous updates, the conditions over the past 6 months, has been rather tough for a number of things impacting on production. These included mining geotechnical complications on the eastern wall of the Stage VI cutback, impacting the grade, repair work at the crushers as well as on the overland conveyor and we lost 5 days of production due to a labor-related work stoppage in December. Our operating cost and capital expenditure remain under control despite the addition of COVID-19 cost. As such, the increase in all-in sustaining costs was mainly a function of reduced production.

We have addressed all these operations and issues and are now moving towards a more normalized operating environment. Costs are an element that we're not able to control. Adding the cost of Bambanani-related assets were not unexpected. And although it had an impact on the year-on-year cost, the majority of this was largely offset by the increase in gold production. There were only 3 months of production on Mponeng and related assets in the first 6 months of the financial year 2021 compared with the full 6 months cost in production in this half.

Cash operating cost excluding Unisel, which was closed in the second half of FY '21 and Mponeng and related assets were only up 7% year-on-year. Comparing this half with the previous 6 months, one can see that the real impact on costs have been driven by the labor, consumables and electricity. These items mainly resulted in the 9% increase in cost compared to the previous 6 months ending the second half of 2021. Our business model has succeeded on the basis that gold has always maintained a store of value and indeed acted as a protection against inflation since we started operating 71 years ago. A safe mine is a profitable mine. The various projects and initiatives that we have discussed are aimed at increasing the margins we have seen in our all-in sustaining cost. Yearly, it's the same job in U.S. dollar per ounce. And Boipelo, I will now hand over to you to share the Harmony financial results.

Thank you, Peter. The first half of this financial year delivered a mixed set of results, but we've maintained a strong balance sheet with net debt-to-EBITDA steady at 0.1x. We have headroom of ZAR 7.5 billion or USD 500 million through cash and available undrawn facilities. EBITDA decreased by 24% to ZAR 4.2 billion from ZAR 5.6 billion while net profit declined by 69% to ZAR 1.4 billion from ZAR 4.6 billion. Lower rand gold price received and higher cash operating costs eroded our margins, resulting in a 65% decline in headline earnings per share to ZAR 0.248 since from ZAR 0.713 cents year-on-year. As Peter mentioned previously, cash operating costs against 30 June 2021 went up 9% in just 6 months, mainly as a result of labor, consumables and electricity. Operating free cash flow margin has decreased from 22% to 11% for the period.

As per our dividend policy of returning 20% of net free cash to investors, we have declared a ZAR 0.40 cents or USD 0.027 per share for this reporting period. This is just the same information in U.S. dollar terms. As we execute on our strategy of delivering safe, profitable ounces, it's necessary to make various strategic trade-offs to ensure we would reward shareholders alongside achieving our growth aspirations. When determining how we allocate capital, we assess all options available to us and allocate capital based on where best we can create value and deliver meaningful returns on our capital. We've invested internally through the various key projects, and will consider acquisitions provided beneath our investment criteria. Paying a consistent dividend is a priority and also provided it is paid from net free cash generated.

Delivering shareholder returns while growing our ounces is important. 74% of our revenue is allocated to operating expenditure with capital expenditure being the other large ticket item at 15%. Net cash generated by the business amounted to ZAR 1.3 billion or USD 84 million during the first half of the financial year. Our flexible balance sheet has ensured we have capacity to reinvest internally whilst also declaring an interim dividend. As per dividend policy, 20% of this amounts to ZAR 252 million or USD 17 million, which equates to the dividend declared of ZAR 0.40 cents per share or, as I said before, USD 0.027.

Looking forward, while much of the Harmony investment cases built on the gearing towards the rand per kilogram gold price, we have improved the quality of the portfolio and introduced a higher margin of safety. This chart illustrates how the operational free cash flow changes under various gold price scenarios on the back of our existing portfolio. During the previous planning cycle, we budgeted a gold price of ZAR 800,000 a kilogram into our models. And keeping all the inputs constant for every ZAR 50,000 increase in the rand per kilogram gold price, we expect to see an increase of approximately ZAR 500 million to our operating free cash flow, certainly a position worth noting. At the same time, we continue to hedge responsibly to protect on our cash margins during the gold cycle. And the following is just a similar illustration just in U.S. dollar terms. I will now hand back over to Peter to conclude.

Thank you, Boipelo. There are a number of catalysts that will see our margins improve as CapEx spend decreases. At our surface retreatment operations, the Franco-Nevada streaming contract comes to an end at the same time as the carry around project is completed. That's going to lock on margin of Mine Waste Solutions as the gold will then all be sold at prevailing market prices. We are investing in our higher-grade long-life underground mines and we will see our shorter life assets reach the end of their economic lives over the next few years. We are investing in a margin expansion and improved profitability as we develop into the higher-grade ore bodies and optimizing our production of our long-life mines. The Wafi-Golpu project is a further catalyst that could significantly enhance on this value. Discussions between Wafi-Golpu joint venture and the state negotiation teams are ongoing. We do believe that we are close to reaching an agreement in the not-too-distant future.

Embedded ESG practices will ensure that we maintain our social license to operate, while at the same time, playing a role in transitioning to a greener future, both here in South Africa as in Papua New Guinea. While Harmony has aligned itself to the United Nations Sustainable Development goals, a global and shared responsibility is required to meet these goals as we transition to adjust economy. We are committed to a greener future, have made great strides in reducing the overall environmental impact from our operations. We have increased our water recycle rate by 103% over 5 years. We have also reduced our greenhouse gas intensity by 34%, while reducing 1.2 million tonnes of CO2 equivalent emissions since 2016. Over ZAR 1 billion in total economic value was distributed in FY '21. Another important point to mention is the protection of human rights, which is replicated in our human resources policies, charters, and contracts of engagement.

Ethical leadership equals ethical mining. 50% of our Board consists of highly skilled independent nonexecutive directors. And we have exceeded our purpose for diversity and will ensure we strive for the complete transparency alongside good corporate governance at all times. We believe we are a partner of choice, whether in mining areas yet to be explored, in communities where we are already joined hands with our stakeholders or in a diversified shared portfolio.

Our embedded approach to ESG alongside an exciting growth pipeline will ensure Harmony remains well positioned to deliver positive stakeholder and shareholder returns. We have a strong balance sheet and a portfolio of quality assets providing exposure to the rand per kilogram gold price.

As we deliver on our 4 strategic pillars, Harmony remains a sound investment base. Our objective is remains to produce safe, profitable ounces by doing what we have always done, mining with purpose. I thank you.

I will now hand over to Jared , our Head of Investor Relations, to take any questions first from the calls and then from the webcast. Thanks, Jared.

Thank you very much, Peter and Boipelo. Do we have any questions coming through from Chorus call at this stage?

Yes, the first question comes from Adrian Hammond of SBG Securities.

Peter, for you, a couple of questions. You've begun discussions again on Wafi-Golpu. I assume this is leading to the special mining lease. And are you discussing new fiscal parameters? Or what exactly is holding up the progress of this project? And perhaps you could just give us -- remind us when you expect potential first production and what the revised CapEx on that Wafi-Golpu project is?

Secondly, you've talked about M&A as potential option for growth? And how do you justify M&A in this current climate, given where gold prices are? I see you, you're searching for assets below 1,100. You recently acquired Mponeng with an asset -- with an ASIC of more than 1,700. So are you able to get these assets in line with where you consider your investment criteria? Or what's the story with Mponeng?

And then for Boipelo, have you revised the CapEx for this year? Is that ZAR 7.7 billion on Slide 18 for this year? And I think you previously guided ZAR 8 billion. And just on your renewable energy rollout, could you just perhaps repeat what was said? Did you say 1.5 billion CapEx? Is that what you're going to fund yourselves on balance sheets? And are there any wheeling contracts asking for that?

Thanks, Adrian. Let me take the first 2 questions. Yes, we are currently in discussions with the state negotiation team, as I said on the mining -- the conditions of the mining lease. So yes, we have not concluded that discussions yet. But we're are also currently busy with that. But the good thing is that we in actual fact are sitting down and having discussions. Now I think the process and after we finish with the final agreement is that we obviously have to review that feasibility study. That feasibility study was done in 2016.

The world has changed quite dramatically since then. I mean, even gold prices, copper prices went up, but also, I think, inflationary cost in terms of -- I think so we have to redo that thing and then obviously then take it back to the Board for investment decision. So there's still a long road to go. So I don't want to necessarily put a peg in saying in terms of when will we start building, it is still a process to go.

That said, on the M&A front, at the moment, gold prices here at the moment is, there's not a lot of quite difficult to find the right type of asset to buy. But we're constantly looking, at this point in time, there's nothing on the cards that we certainly would like to do. We're actually busy at the moment building new mines and -- which we think it's the right way to do because we actually have these mines really paid for and we have very, very good projects on the site.

As far as Mponeng is concerned, yes, that was -- on all-in sustaining cost basis, it was outside of our -- that 1,100 that we guided and so thinking about Mponeng, it's really about all the other potential synergies that potentially can come along. The deepening of this mine, making it a very, very long life mine, but then obviously also about some of the very high-grade shaft pillars that can come into the play. I've been to this mine 2, 3 days ago in -- on Thursday to look at the shaft pillars and what we're doing there. And I'm quite excited about the potential that is out there.

But yes, Mponeng is a long-life mine, and it is also a mine that has got fairly good grades, and we are going to mine into better grades going forward in the next year or so. And certainly a mine that we believe belongs to Harmony. It is a natural fit for Harmony. I'll hand over, Boipelo, to you.

So Adrian, that 7.7 that you see is obviously actual for the first half, and then our -- just the forecast for the remainder of the year. I think Peter did speak to it, to the fact that, I mean, all the major projects have started with the exception of Kareerand. So that's where that difference comes in. But we didn't revise CapEx guidance.

Sorry, I'm a bit confused, ZAR 7.7 billion for the H1, I mean I think that H1 you got just sort of ZAR 3 billion.

Yes, ZAR 7.7 billion is the forecast for the year.

For the year? Thank you.

On the green then, Boipelo?

The green? What was the question?

A question on the CapEx of the -- in the renewable energy CapEx. That's the second part of that.

At the moment, we haven't guided on that. Yes.

Apologies, I didn't get that question.

So sorry, are you planning on funding on or off balance sheet, your renewable rollouts?

So the first phase is off balance sheet. The second phase will be on balance sheet, so internally.

The next question comes from Patrick Mann of Bank of America.

Actually, just mostly follow-ups from Adrian's question actually. You said you're redoing the feasibility study for Golpu. Can you give us an idea around time line on that? And then I suppose the second question is also time line-related. So in terms of the shaft pillar potential at Mponeng and again, looking at your slide on Bambanani, that's obviously been quite a lucrative activity for Harmony. So if you can repeat that at further -- is obviously pretty -- and great -- is pretty attractive. And when do you think you'll have a better idea of when you could do that and when you'd be able to give us kind of more concrete project parameters?

Yes. Patrick, maybe just on what we go through this again. So we are currently still have not had an SML, special mining lease at this point in time. So the moment we get that, we will redo that feasibility. So I can't give a time line on that because that's dependent on obviously obtaining the SML. As far as the shaft is concerned, like I said, I've been involved in kind of pillar extraction workshop, which I found very good to go to on Thursday with all the old players. I don't want to put a time line onto that because there's a lot of integrations in terms of potential -- we can -- if we mine, for instance, the pillar of Tau Tona, the Carbon Leader pillar, which is the highest grade part of it.

First, we can potentially sterilize quite a big part of the Blue Block as we call it, Tau Tona block that's left. So there's a lot of integrations there. So a lot of work needs to be done still. But yes, I think we're very excited about the opportunity. It's certainly not something I think will come into play in the next 2 years or 3 years, it's probably after that. But it can be an exciting thing. And obviously, the Savuka, which has got a very good carbon leader grades, but sticky mining conditions. And then obviously the TBC, all blocks also the loaders at Savuka is not very high grade of the VCR. But -- and I mean, they are much better grades than -- the 3 of those intersections. But one of them has got the same grade as Bambanani, but the other 2 has got significantly higher grades than Bambanani. But it is obviously more ticket to mine. And for that reason, we need to find a safe way and also a way of mining it. So there's still a long way, Patrick to really get to when the -- will open. But we'll keep you posted as we continue with the development of the feasibility study.

Okay. A quick follow-up on Golpu then if I may. So once you get a better idea of the financial parameters in terms of a special mining lease, then you would still need to redo the feasibility study. I mean, how long would it take to redo the feasibility study? And then would you begin that initial decline while redoing the feasibility study? I'm just trying to get an idea of if everything goes according to plan, what's the kind of time line from granting of SML to actually producing?

Patrick, I don't have those time lines. It will be a decision in terms of if we do get the SML, we would do like early works type of work. I mean we still have to talk about that of JV partners. We have no idea if we will continue that or not or if we'll do. It is still a very good project. It is still -- given the copper prices moved in the last few years and what the current outlook looks like and then obviously also where gold prices are now, we have to redo that. So I don't want to put a specific time line on that, Patrick. So let us just say that we will do -- move as fast as we possibly can.

The next question comes from Jared Hoover of RMB Morgan Stanley.

Yes, I think a lot of mine have also been answered, but maybe 1 on Hidden Valley, please? Because I mean, obviously, you've alluded to Golpu taking some time and the Tau Tona, Savuka shaft pillars potentially being at least 2 to 3 years away. So in the meantime, you really need Hidden Valley to produce to plan. And it hasn't done that. Obviously, for geotechnical issue, that Stage VI. It looks like you've changed the plan there or you've done a new pit design.

But what sort of comfort do you have that the new pit design isn't going to result in any further issues? Because it looks like the geotechnical issues have been recurrent. And on top of that, do you have a feeling for what the underlying issue value has been with the conveyor belt because I think that's happened a good few times over the last 18 months? I'll leave it there for now, and I'll follow up with 1 or 2 more.

Thanks, Jared. Let me just start with Hidden Valley and what we have as is. What we picked up is that the western wall of the pit was -- we feel tad uncomfortable with the stability of the wall. And we actually did the right -- from a safety perspective, the right issues of time, we actually brought that wall down. It is an area where there's quite a few falls and also issues from dykes in that particular area together.

So it actually are a very tricky part of the Hidden Valley in actual fact mine away a mountain. It's not that we have an open pit, it's actually mining in a mountain. So that -- so we kind of -- knew it's going to be very tricky and then we took the right decision to in actual fact postpone the mining of that bottom part of Stage VI and move mining away from it. That had an impact in terms of our guided grade because we actually, obviously, the other ones were not as high grade as we had, and we also had to bring in some low-grade stockpiles through the plant. That's now been -- we've mined it back.

So we took the wall back. And so we're now in a position to in actual fact mine the grades of the higher grade areas. So we're comfortable at where we are now that in actual fact beginning to stockpile because we can't take it to the plant. As far as the conveyor system is concerned, I mean, the conveyor is a part at the higher end of technology. I think it's probably the most technological challenged application of a pipe conveyor in the world. Having said that, I think we also have some of the best people out there to manage it. Certainly, our engineers there are both -- in the 6 years I've been involved with Hidden Valley, we had a small failure.

I think it's about 6 months ago. And then we had, for the first time, this big one. But this particular thing, in actual fact what is disappointing about it is that we actually did pick up that this specific splice is not a suspect. And it tripped about 2 occasions, but the belt was unfortunately restarted. And then only then, it was in our top system, which triggered an action response plan. We should have been -- should actually come up much -- at higher levels of a decision-making much earlier. And the decision -- was to stop the belt immediately. Unfortunately, at the same time, actually we had this massive failure.

So we are disappointed about that because I think we could have prevented that. But it is what it is, and we have to now fix it. What we've done is obviously to -- I think our continuous monitoring systems are working for us. We just need to react to them properly. But we also, in the meantime, have now introduced a permanent extra machine at Hidden Valley which we didn't have before. We only had it there at times when we wanted to do certain specialized work. So we have it now there, so we can actually do more preventative work. The pipe conveyor itself is also a risk because of the kind of pipe conveyor is not something that is an easy thing to maintain and to run.

But yes, but we had like a good run for 6 years on the conveyor belt, we have to see another 5 year again. Other than that, I think Hidden Valley is in a good shape. I mean, we've used the time now to do all the relinings and everything in the plant to make sure that everything is up and going. And what I'm glad to say that the plant has restarted. And then also the -- you will -- the pipe conveyor will start on the second of March. We're just replacing 1 or 2 small splices which we now iterate and thought that they probably would be better if we also use the time standing to replace them now. So we are doing that. But the pipe conveyor is turning and is going at this point in time.

Okay. So I guess there probably should be minimal production in the third quarter then. That's just a follow-up to that. And then also on Golpu. I mean, as that you said, we can't really get much more on timing. But am I right in saying that all the work teams on the ground are still suspended? So hypothetically, if you have to get the special mining lease tomorrow, it will still take you another 18 to 24 months to reconstitute those teams.

And then very lastly on CapEx. I just wanted to be clear that you haven't actually revised your CapEx guidance. And in the first half, the underspend, was that largely just due to the clearance projects? Or was there also underspend anywhere else, particularly at Tshepong where you've got -- you've had flexibility issues. I'll leave it there.

As far as Golpu is concerned, you are 100% correct, we still -- they don't have nobody on the ground, except for people working on the SML. So we -- and then obviously, the care and maintenance on the plant security, et cetera, that we have on those areas. So we have to restart that -- the teams, when we actually get the go-ahead to start the mine, so we will -- quite a few years ago, a couple of years ago, production ready. And unfortunately, we had to let everybody go.

As far as the capital expenditure is concerned, before we the pillar -- just look at the forecast, I just want to say that, yes, if was Kareerand was like a big issue there. We obviously -- Tshepong, normally when you plan a thing, you have many of the capital projects. When you start the capital project, you don't start from day 1, you have to get the teams going and et cetera. So Tshepong was actually 100% on target because Tshepong was already at the time when -- the start of the year. I think Zaaiplaats is a little bit late in terms of just getting close to start up, but they are all good right now, and they are busy with all the development that we need to do on 1-on-1 level. So everything is going according to plan. So the capital will be spent getting a much higher profile in the next -- second part of the year. I will hand over Boipelo.

Yes. So just to confirm, so we did not revise CapEx guidance. Yes.

The next question comes from Leroy Mnguni of HSBC.

I've got a few questions on the dividend policy. So I think you've previously mentioned that you'd sort of review the dividend policy once your margins are about 25%. If you look at where spot is now in terms of the gold price and what your costs have been for the last half, your cash cost margin is about 29%. So how does that work practically? Do you need to see that for an extended period of time? Or does that mean you're kind of currently reconsidering your policy?

And then in terms of the CapEx for Phase 2 of your renewable projects, how do we -- should we think of that in terms of the way you see free cash flow? So would that kind of be ring-fenced and excluded when you look at the free cash flow to declare your dividend? Or should we be deducting that from your free cash flow to determine what your dividend is going to be?

And then my third question, just on the Bambanani redeployment of that 1,500 employees. How are you sure that, that is going to be -- that they're going to be productive? So in other words, that you aren't keeping costs that will be generating additional revenue? I'll keep it to those for now.

I will first start on the dividend. So our policy is 20% of net free cash, so not necessarily looking at the margin. I think you're confusing it with the hedging where we look at the 25% margin before locking in those hedges. So -- and with regards to the loan, I mean, as I mentioned to Adrian, the first phase is off balance sheet. The second phase will be on balance sheet. We are looking at various sources of funding for that. So I would exclude it from the free cash when you're looking at a dividend going forward.

Yes. In then, maybe on the Bambanani, I think we've got 1,500 employees in Bambanani. That's quite easy to bring them or to integrate them within our organization. We have quite a turnover of employees per month. So we can still be -- we have stopped all new recruits some time ago in anticipation of this. And we obviously always open up for voluntary separations. There's always some uptake on that.

So we don't foresee any issues that we will -- unproductive labor. So we'll, very soon in the things, and obviously, we also have contractors that we can replace. And so we manage it quite well. We just recently -- that the Unisel, we have 2,000 employees of Unisel that we closed down and basically only 1,000 on the pillar, but 2000-over period that we've managed to integrate into our operations. The crews at Bambanani is obviously some of our best possible mining crews that we have. So we certainly would like to hang on to them and make sure that they are integrated into the rest of Harmony. Yes. So we don't foresee any issues with that. And it's also been very well discussed with all our stakeholders and everybody know and understand where we go, we keep everybody very close to our long-term plans.

All right. My apologies, I misunderstood the application of that 25% margin requirement. Maybe just one last question, if I may. So it looks like your surface operations are becoming quite relevant in your portfolio. Has that kind of changed your strategic thinking around that? Would you look to acquire some surface operations? And also maybe some of the mines that have recently closed are going to close in the next couple of months. Are there any opportunities to utilize some of that surface infrastructure for sort of tailings retreatment operation?

Yes. Good question, Leroy. Yes, I mean, obviously, the surface operations are very profitable at this point in time, and they're doing very, very well. As plants close down, where we have less and less -- like Kusasalethu plant at the moment, protected Kusasalethu or to Mponeng plant. That part at the moment is doing what we call mock marginal ore dumps. But it's -- at the moment, that's finished, it will most likely be converted into a retreatment facility.

We still have a little bit of more to do. So we don't make the decision now. But it can easily be transferred or transformed into that. And then obviously, we'll be in the process now of doing the Savuka plant to make it a retreatment facility. Very, very low capital. We about ZAR 36 million small capital, but that certainly something that we can do. And yes, I think the important question is, is there a potential to do something more bigger, and that would be -- we haven't decided on anything like that yet but certainly, in the Free State, we have a huge amount of tailings that -- to our disposal and certainly something that if you could potentially build a brand-new plant 1 day and build on that, you can -- there's a real, I think a very good outcome for that going forward. But having said that, I mean, we're also closing down some of our mines now. It's going to be Masimong, it's going to be Bambanani, so that creates an opportunity in our current plants for more tailings retreatment.

And that concludes the questions from the lines. I'll hand for questions from webcast.

Thank you very much. We don't have any questions on the webcast at this stage. Yes, nothing has come through. So I think we can end there. Yes, just want to thank you all for joining us this morning. It's really good. Hopefully, we can be one of you guys, see you on face-to-face. I hope that this results presentation, that we will be in that position. And we're certainly seeing the world is opening up a bit. And yes, thank you very much for joining us. Appreciate it.