Harmony Gold Mining Company Ltd (HMY) 2011 Q4 法說會逐字稿

Good day and welcome to the Harmony Gold Mining Company fourth-quarter financial year 2012 international analysts' conference call. All participants are now in listen-only mode. And there will be an opportunity for you to ask questions after today's presentation. (Operator Instructions). Please also note that this conference is being recorded.

I would now like to hand the conference over to Graham Briggs. Go ahead, sir.

Thank you very much. Welcome, everybody; it's afternoon here in South Africa. good morning to the US listeners.

I have with me Frank Abbott and Mashego Mashego, so will be able to answer any questions that you care to throw at us.

I am going to go through the presentation. I am going to go through it fairly briefly to allow us lots of time for questions. I'll stress where I think I need to. And, hopefully, you have the presentation -- either been given it, or downloaded from the website.

Slide 2, of course, an important slide. That's our Safe Harbor statement. I'm sure you've all read many before.

We're going to talk about the Harmony of today, and then talk about the operational and financial results. Frank will certainly help me with the financial results. We'll talk a little bit about exploration and the projects, and then conclusions.

On slide 5, I talked little bit about the Harmony of today. And this is really to emphasize that we have basically got a different Harmony to the one of yesteryear. We've created a good platform of excellence here in South Africa. We've got great mines. They are starting to produce more and more gold as they ramp up. And we're very happy with the work that has been done on those operations in the last few years.

On the operations, we've got great teams. We've got good management teams, dedicated executive teams; and, really, everyone is very focused on achieving their plans and doing the best we can in Harmony. And so I'm very happy with that. Recently, we had a visit to one of our operations in Free State. We got some good feedback. And people were actually surprised at the advancements that we've made.

Safety is obviously a very big thing in the underground environment in South Africa. We have achieved some great safety results. Obviously, there have been fatals, and we need to make sure that we have operations in the future which simply do not have fatals. There's a lot of focus going into that.

We've got empowerment here, and we talk about 43% previously disadvantaged South Africans, versus the Charter requirements of 40% in 2014. We're now getting into position at Harmony where, over the last years, we've brought in junior technical people and managers. And these people are now becoming really quite well-qualified and well-experienced. And so we're almost beyond the point of complying with the law. But actually, it's reached a sort of dimension of its own where people are really proud to be in good management positions, and everyone gets their own merits. I put the empowerment just as a proxy for the various issues that are happening in the Company; whether they be the local emphasis, the sort of move of nationalism, where you have to look at the communities and so on. I think we're doing some great work on that. And Mashego may answer some of that if you have any questions.

We've got some world-class assets, both here in South Africa, and, of course, we'll talk more about Papua New Guinea.

Company changing exploration projects -- we've really got a lot of big focus on exploration. Of course, Wafi-Golpu features there, but other areas as well.

Frank will also be talking about our debt and our available facilities. Low debt, facilities available; and so, financially, we're looking good. And we're generating some robust margins and earnings.

Slide 6 -- we've got two slides there on safety. We could've put various other graphs on it. All those slides and all those graphs are tending us into the better part and improvement in safety. And I will say, this is one of the big focuses that we have in the Company.

Slide 7 is -- there's two sides there. Really the top one in rands, and the bottom in dollars. But it's got net debt. And you can see, our net debt is close to USD5 million so almost nothing. Facilities, undrawn facilities, USD274 million at present. So it's quite a healthy situation to be in, as a Company.

I'd like to go over to slide 9. Slide 9 is the dollars per ounce. It shows cash costs. The gray is really a combination of the various maintenance capital we spent; development mainly, but also maintenance capital. And then in green is the growth capital that we spent, in dollars per ounce. But you can see, on a cash costs basis, a nice USD554 per ounce. The margin there, if you look after all capital -- that's including our growth capital -- USD215 an ounce margin. And that was for the last quarter. But if you look at the last year, we've had good healthy margins for the whole of the year.

Slide 10 gives you the headline earnings. I'd like to look at the bottom part of that graph there, headline earnings per share. But we've also put next to it, the dividends per share. So you can see, in financial year 2009 and 2010 we paid a ZAR0.50 dividend, so it's 50 South African cents. In 2011 it was ZAR0.60; and in 2012 it's a total of ZAR0.90. So the Board has just approved a ZAR0.50 dividend. And that was on top of an interim dividend of ZAR0.40.

On slide 11, I've got the same graphs in dollars and US cents. I haven't put the dividend there, because it probably doesn't make good sense with changing exchange rates.

I'd like to now talk about operational, and then go to financial results. Quarter on quarter -- this is slide 13 -- operating profit increased by 24% at ZAR1.4 billion, or USD171 million. Gold production increased by 14% to just over 320,000 ounces. Cash operating cost decreased to USD1071 an ounce. And basic headline earnings decreased to ZAR0.11.

I've put in the explanation of the headline loss there, because it actually needs some explanation. Frank can elaborate if there any further questions on this. A new business plans indicate that we are going to be much more profitable going forward; and, therefore, there's going to be an increase in tax going forward. And our tax rate is going to change roughly from 24% to 26%. And, therefore, there's increased deferred tax rate. So that's actually good news -- well, it's obviously good news for the tax man. But it's good news for Harmony, because it means we're going to be more profitable going forward.

There's an increase in exploration expenditure. For a fairly small entity, we are spending a lot of money on exploration. And then there's increase in depreciation/amort because we offset a better quarter. The change in estimates of lock-up, the bank will give you the actual figures there. But there are two plants mainly behind us; that is the Santeldena plants and the President Steyn plants. Those are plants that are almost cleaned up. And nearing the end of it, they will certainly be cleaned up completely in the next 12 months or so. But we've got a new estimate on the gold. Basically, we thought there was more gold in those plants that we're cleaning up. And after all of our estimates and, obviously, the actuals, is there is actually a bit more -- less gold.

Year on year, operating profit increased by 80%, and that's in rand terms. If we look at, in year-on-year in dollar terms, operating profit increased in US dollars by 62%; and the gold price actually increased by 23%. So a good leverage there with an increase of gold price of 23% to get a 62% increase in operating profit.

There's issues there -- obviously, we talk about the cash costs and so on. Frank can, again, talk and elaborate on any of those. We'll talk about the financial -- the final dividends that we've declared, as well.

On slide 15, quarter-on-quarter results there, you can see the production up 14%; cash operating costs down, positive by 5% in rand terms, or 9% in US dollar per ounce terms.

Year-on-year results on slide 16; again, the gold produced slightly down in year-on-year gold produced, but close to 1.3 million ounces. The gold price very favorable in rand per kilogram terms, but also pretty good in dollar terms. So, up 23% there, as I've said, in dollar terms; up 36%, and that's because of the exchange rates between the rand and the dollar.

Cash operating costs, in dollar terms, from -- only poorer by 8% in the last year. So some very good numbers there, especially when you look down at the operating profit line.

I'd like to hand it over to Frank. And I think you'll be commencing on, probably, slide 18.

Thank you, Graham. If we look at our income statement, quarter on quarter in US dollars -- this is slide 18. If we look at the June quarter, our revenue went up to USD495 million. That was a 16% increase. Our gold sold in this quarter went up by a full 22%. But there was a 4% reduction in gold price, and that resulted in the 16% increase.

If you look at our production costs went up 11% quarter on quarter. And we can actually split that production cost of the movement in our cash operating costs, which went up by USD22 million. This is mainly due to the increases in electricity in this quarter, because of the tariff increases, and also because of the winter tariffs. And there was also quarter-on-quarter gold inventory movement of USD9 in the quarter. You can see operating profits went up by 29%. amortization and depreciation for the quarter went up; and this is in line with 18% higher gold produced in the quarter.

Then we've got our gold inventory adjustment. This is due to the change in our estimate of gold in lock-up in the two plants; Santeldena plant and Steyn plant. And also the there was a small portion which came from the Kalgold stockpiles.

Exploration expenditure -- USD20 million; USD18 million of that USD20 million was spent in PNG. Our deferred tax rate increased in the quarter, as Graham explained earlier. And the reason why the tax rate increased was because of the higher profitability of our [Wafi] mine models, which we do at the end of the financial years -- the ability to write off tax increase.

Profits from discontinued operations; this is from the Evander operation, and it includes profit on the sale of the Twistdraai and Evander 6 operations, which were sold to Taung.

Less tax, we had a net profit of USD6 million, which is much lower than the previous quarter. But the previous quarter was, of course, enhanced by the deferred tax credit of USD84 million. Our headline earnings per share, or loss, was USD0.02. And you can see our exchange rate -- the rand weakened against the dollar by 5% during the quarter.

If we page over to page 20, we've got the income statement, year on year, in US dollars. Again, if we look at revenue, that went up 18%. The gold price increased by 23%, but then -- this was reduced by 4% less gold sold during the financial year 2012. Our production costs went up by 5%. And if you look at the bottom, you see our exchange rate strengthened or weakened with 11%. So the increase in production costs were mainly because of the -- in rand terms, our expenditure at Hidden Valley, and that is because of the exchange rate strengthening of the US dollar came out towards the rand. And they also -- there were some of the operations were still capitalized in 2011, which were now expensed.

The operating profits went up to 54%. Our amortization and depreciation also went up. The reason for that is, as we ramp up our projects, we will incur more depreciation.

Again, exploration expenditure; 19% of that was in Papua New Guinea. Profit on discontinued operations -- USD75 million for the year; this is all from Evander. When we classified Evander, that we're going to sell Evander, we've been showing it cyclically as a discontinued operation.

Net profit for the year USD333 million. And headline earnings per share in US cents, USD0.71.

Page over to page 22. This is our cash flow summary in US dollars. You can see, our cash flow from operations, before exploration, was USD606 million; and that is USD220 million more than the previous year. Exploration expenditure -- we paid for our exploration expenditure with our cash flow. We also paid for our capital expenditures of USD414 million with our cash flow. We paid a dividend during this period of first a USD0.60; and then a USD0.40 interim dividend. And there you can see our net debt position has improved from USD128 million to USD5 million. You can also see our cash balance was USD216 million as at the end of June.

Thank you, Graham.

Thanks a lot, Frank. If we can go to exploration, and I'll start on slide 24. In the small -- in the sort of Huon Gulf there, you can see a small map of Papua New Guinea. And the highlights of the area; the MMJV, that's Morobe Mining JV joint venture. That's the main highlights -- in the main part of the map showing the lower part, where there is Hidden Valley and the various exciting exploration areas. The Garawaria one in the south, and we talk about that in the trench sampling and regional exploration. And then, of course, Wafi-Golpu in the whole Wafi transfer is still very interesting. And we'll talk more about that on the next page, which is slide 25.

This is talking mainly about the Golpu area. What we decided to do in the latter part of the study is actually to spend a little bit of effort on drilling some of the shallow part of the ore body, what we classify as lift 1 on Golpu. So that's the upper portion of Golpu. And, really, to understand the grades a little bit better there; because, historically, we've had lower grades in the upper portion, and increasing grades in the bottom portion.

However, when you look at these results, and you see, at 178 meters, of 2.17% copper, and nearly 1 gram a tonne copper (sic -- see slide presentation, .097 g/t Au); and 190 meters at 2.57% copper and 1.15 gram per tonne of gold, you know that these are really quite exciting results. And in the shallower portion of the body, unfortunately these results won't have made it into the prefeasibility study that we will reveal on the 29th of the month. But you can see that there's some exciting stuff there.

There's also a further gold zone that we found, called the Northern Gold Zone. And you can see the values there -- some interesting values there. It's open in all directions.

So, some exciting stuff still happening at Wafi-Golpu. As I said, we'll have the results of that pre-feasibility answer to the market towards the end of the month.

Slide 26, this is our 100% areas in PNG, focusing on those various areas. The one I'd like to focus you on is TARI, and we'll page over -- in the excitement there, we've done an helicopter-borne magnetic radiometric survey, that's 3614 line kilometers worth. So quite an extensive area that's identified a major intrusive zone. You can see the size of it, it scaled on the map, 4 kilometer diameter. It's got all of the sort of signatures of major copper-gold porphyry. And there's a picture in the photograph there of the geologists with some very exciting rocks.

So that's all very good stuff that's happening in Papua New Guinea.

In conclusion, I've listed on slide 29, various things that people might be unaware of. And they're certainly trying to illustrate that the Company that we're talking about, Harmony Gold Mining Company, is a different Company to the one in the past. So it has got various awards, again the Govan Mbeki human settlement award. And this is for projects in the Free States; basically a housing project, a conversion of a hostel, which is now quite an ideal unit -- high-rise units -- or, high rise up to three floors. And it's really quite an exciting area.

We won the SAMREC, which is the Mineral Reporting for Resources and Reserves. This was for the end of last year. But the award is obviously given after the end of the year.

In the recent MineSAFE competition, we won six out of the seven safety awards for gold mining companies. We -- on Nedbank's carbon disclosure, we qualified for the Nedbank BGreen Fund. On the JSE, we got into the Socially Responsible Index for the sixth consecutive year. Another safety award -- Wafi Golpu, of course, is exciting in international areas. And our geologists have been invited to various international forums to present on that.

And then, from an insurance point of view, this is quite significant, obviously, because insurance of late has been quite an expensive thing; and, therefore, to get a rating above the global average of estimates is quite an achievement.

Slide 30 -- we'll deal more with the strategy on the 29th of August. But, really, the areas we will continue to focus on is growth, exploration and really optimizing our delivery.

Slide 31 is really a bit of a plug for the 29th. And you can see a sort of time slot, hopefully, that you'll be able to phone in and listen to some of our plans for the future.

With that said, I would like to open as to any questions. There are various other appendices attached to this, giving some detail on operations. And I won't go through those. But if there are questions, we can certainly take them.

Thank you very much, open for questions.

(Operator Instructions) John Foster, Debtwire.

Hi there, how's things? Yes. Really, really nice presentation. You know, lots of lovely pretty pictures. I just want to ask you a little bit about your debt and your cash flow, and also about the Evander process.

When you first hear on Evander, what stage is that? I know Pan African is sort of trying to raise some money buy that off of you. And I'm wondering when that's going to close. And secondly, you've got a lot of undrawn debt and a lot of cash on balance. And obviously if Evander goes through, you're expecting another ZAR200 million coming. So you're not really going to be needing to borrow. And are you going to be spending all this cash on?

If I can answer it. It's Frank Abbott. Yes, I must say I like the idea of having a lot of cash on the balance sheet (laughter). And we do believe that the transaction with Evander would be concluded by the end of October. And we would see the money soon after that.

We -- if we look at -- on the 29th, we will be talking about gains through, for next year. So it would be handy to start off with a good balance sheet; with very low debt, and a lot of money on the balance sheet with our capital program, you know, starting next year. So that's -- I think we will show you on the 29th what we're going to do with that money.

Okay.

And -- sorry -- if I could just add, the big day is obviously going to be expenditure on Golpu going into feasibility study, as well as some early work. I think if you look to the Newcrest presentation, they were planning to spend AUD100 billion in the next year. And we will probably be having the same estimates. We'll try and give some estimates as to the future requirements of Wafi Golpu as well.

(Operator Instructions) David Leffel, Deutsche Bank.

Good morning guys; or afternoon, I guess. Graham, you speak very confidently of the teams you put in place. And I'm looking at some of the grades that some of the mines are reporting. It looks like there's been some reasonably good progress made in some of the mines. I mean, there's still a few shafts or mines that look like they're lagging against expectations.

I guess the question is, are you comfortable that you have the management systems in place to know when shafts or facilities are not meeting their objectives? And how are you managing that, going forward?

Yes. Thanks, David. Good question. You know, we've been focusing, in the last probably eight to maybe 10 months, on what we call standardization. But it's really a case of making sure that the reporting system we have is fairly standard and generic amongst most of our operations. And, therefore, we're able to pick up these things a little bit quicker; and with a bit of, you know, you don't have to re-learn the spreadsheets that you're getting from a particular operation, because they're all the same.

And so, what we have got is a real focus on that. And the standardization, of course, works in many ways; not just, for instance, on grades but it also works on safety procedures and the like. So it enables us to sort of get to grips with these things very much quicker; understand, then report to them more in a sort of a even fashion. And so we've done that sort of process. We -- I guess, aren't happy with some of the grades that we're getting. Tshepong is one of those mines which is underperforming the grade, and has been for a while. We will see mines like Masimong starting to bounce back now, that we sorted out the ore boss issues.

Some mines continue to mix waste with like [casalsilator] with the ore. But having said that, casalsilator, you know, if you do the sort of numbers, you'll see that casalsilated grade from the ore would be pretty good. And two, expectations.

We have been in a lot more areas now, but we've still got some work to do.

Just maybe to follow up -- I guess maybe to follow-up questions. First Doornkop, I mean granted is ramping up a bit. But the grades? I mean, are they going to improve going forward? Or should we expect, at this sort of time, that the grades remain at the sort of levels?

Doornkop is a mixture, remember, of the Kimberley Reef and the South Reef. The South Reef should be recovering around about 5 grams per tonne. And the Kimberly Reef should be closer to about 2.8 grams a tonne. So the mixture of those two gets you closer to, sort of, 3.8 grams a tonne or thereabouts. So it's performing in line with the grade. That doesn't mean to say we can't get improvements from the grade, as we build up more tonnage from the South Reef. So it, at the moment, is in line with it.

I guess what is a little bit disconcerting is that, remember, Doornkop traditionally has a fairly low reserve. And in our mine, life of mine plans, you'll remember that we talk about converting resources. Year on year, we've been increasing that reserve. You'll see more reserves during this coming year, when we declare, again, on the 29th. But it's a little bit disconcerting, because you can't see the benchmark properly. You can't see the actual real reserve grade. But it's performing in line with where it should be. That's one mine that certainly is producing in line with it.

If we could have 12 or 24 months, what sort of grade should we expect from the total complex?

Next year, our plans are to get to 4.68 gram a tonne.

As opposed to the life-of-mine grade of about 3.8?

Oh, sorry. You're just talking Doornkop?

Yes.

Sorry. Just Doornkop. Doornkop is, you know, I guess life of mine is probably going to be 3.9, maybe 4 gram a tonne. That's where it's going to be in the sort of combination of Kimberly and South reef. It really depends a lot on how much Kimberly we mine. At the moment, I think we're mining close to about 35,000 tons from Kimberly.

Thanks. And maybe one last question. I mean, there's no doubt you spent the last three or four years trying to close down the more marginal shafts. And when one looks at your cost per tonne, and I guess your cost per ounce, there's no doubt that there is quite strong inflationary impacts because of electricity pricing. I mean, if you strip away things like electricity and maybe some other costs, are you happy with your cost control, on average? Or is there work that can be done?

David, there's always work that can be done. On the electricity, as an example, I think the latest 16% increase the we had on 1 April -- I think Frank's figures indicate that we probably suffered about a 15% increase.

Year on year.

Yes, year on year.

It should have been 26%

It should have been 26, yes (multiple speakers).

16 for the quarter.

Yes, yes. So, we actually are winning some of those cost battles by doing clever things on saving electricity, or modernizing, or putting more efficient equipment in.

The salary increases -- somewhere between 7.5% and 8% on average for the total business. The one area where you see a cost increase -- and I think Frank may have alluded to it -- was really two operations. It's President Steyn as well as targets, what we call Target 3. And those two operations were capitalized last year and have come out of capital. So they're now treated as operating costs. So you can see that, the year-on-year figures, you actually have to correct for that. And then Frank did allude to the costs on Hidden Valley, which is both increase in costs as well as exchange rate issue.

David, there's always more work to be done on costs, and all of these things. But I think we can ever say that we've arrived. There is always ways and means of doing it. The biggest effect we can have on costs, of course, is to get more productive, and more out of our people.

Okay. Thanks so much.

(Operator Instructions) Ladies and gentlemen, it appears we have no further questions. Do you have any closing comments?

Thank you very much. Yes, I do. I think when we look back on our results for the year, we're quite satisfied with the hitting in the right direction. Certainly, financially, we see that gold prices increasing and we've been bullish on the gold price. We've managed to benefit in getting much a higher percentage operating profit from the gold price that we've been bidding. And so, we're happy with the progress we've made. And with operations really ramping up now, we're looking forward to the future. It's always nice to be comfortable, and to have paid all your capital goals; your exploration; being able to pay some dividends; and still be in the state where we've got some money in the bank. Thank you very much, everyone, and enjoy the rest of the day.

Thank you, sir. On behalf of the Harmony Gold Mining Company, that concludes this conference. Thank you for joining us. You may now disconnect your lines.