Harmony Gold Mining Company Limited (HMY) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Harmony Gold Mining Company Limited First Quarter Results for Financial Year 2015 Ended 30 September 2014 International Conference. [Operator Instructions] Please also note that this conference is being recorded. I would now like to turn the conference over to Mr. Graham Briggs. Please go ahead, sir.

Thank you very much. It gives me great pleasure to present the first quarter financial year '15 results to you. With me, I have Mashego and Frank. So if you have any questions, they can -- are capable to answer them. Frank is also going to help me with the presentation. Hopefully, you've got the presentation in front of you or on your iPads. Slide #2, Safe Harbor statements, worth noting there are some forward-looking statements. On the agenda, those are the agenda items that we are going to go through. Brief overview of the company and the results of the quarter, talk about our efficiencies. Frank will talk about the balance sheets and finances. We'll talk about mining and exploration in the 2 economies that we work in, in Papua New Guinea and South Africa. A little bit of an update on Golpu, and then I will conclude. Starting on Slide 5, quarter-on-quarter results. A very pleasing quarter from the production guys, 6% increase in gold production, 8% in production profits, and that's because of a slight change in the gold price during the quarter. Grade continues to increase, 4% improvement in underground recovered grade. And this was on the back of a 5% improvement in recovered grade for the year. So we've had 3 years of consistent increase in grade. 18% increase in revenue to ZAR 4.4 billion or $412 million. The net debt reduced from just over ZAR 1 billion to ZAR 771 million, and that is $68 million. Frank will give us more information on the net loss, but that was reduced by 78%. Slide 6, the operation results. The variances are made quite clear. You can see the 6% improvement in gold produced. The gold price fairly flat, slightly down in dollar terms, slightly up in rand terms. Cash operating cost, slightly up for the quarter. That was due to some one-offs as well as some increases in the payrolls, increases going through the 1st of July. So this is the first quarter we have some small increases there. And then the electricity winter tariffs affected that one as well. You can see that the underground grade that we've got and the production profit has increased as well. Slide 7, the mine-by-mine blow of where they were last quarter, this quarter and the sort of waterfall diagram. In all, a lot of pleasing results there. And the one area which we're still very concerned about is Kusasalethu, and we're working hard on that one to get that one right. But some pleasing results from most of the other operations. And even into this quarter, it's looking quite optimistic. And so the guys are really focusing on increased production, keeping tabs of their costs, but there is a good morale on the operations as well. Number 9 -- Slide #9, attempting to show you some increases in productivity here. This is one of the ways that we measure productivity in grams per employee. So this is total employees. This is including the contractor numbers. You can see that they have been coming down and the productivity has been increasing. We plan to keep going with many programs to assist in this and looking at sort of employee attendance, productivity measures like making sure that the working places are nice and cool underground, so people will work better as well. Slide #10. That's the grade picture. You can see financial year '12, '13, and '14, and now Q1 '15. And Q2 '15 is probably going to be in a similar region as Q1. I'm now going to hand over to Frank to talk about the balance sheet and financials. Frank?

Thank you, Graham. Let's turn to Slide 12. We put our capital expenditure. On the left-hand graph is in rand, the right-hand graph is in dollars. If we look at the shaded bar, our guidance for the year was $280 million. Our expenditure for the first quarter was $56 million. You can see that's well below the average quarterly expenditure of $70 million. We are trying to preserve our cash, and we are looking very careful at all our capital expenditure. We'll turn to Slide 13. You can see that most of our operations had a positive cash flow. This is off the capital expenditure with Bambanani and Target 1 doing the best, on the left-hand side. And on the right-hand side, you can see Doornkop is improving from where it was, and Kusasalethu has still got a negative $48 million off the capital expenditure. If we turn to Slide 15, low net debt quarter-on-quarter in U.S. dollars. These are extracts from our cash flow statement. What was really pleasing in this quarter is the cash flow from operations, $106 million. This was $57 million better than the previous quarter. And the main reason for this was we produced more gold in this quarter and we also sold more gold in this quarter. Exploration expenditure stayed the same. Capital expenditure was down in this quarter compared to the June quarter. The net increase in cash and cash equivalents, this is our increase in cash of the bank for all our expenditure was $30 million. And you can see that increased our cash balance, our current cash balance is $202 million versus $172 million in the previous quarter. Our debt stayed the same at $270 million. And that gives us a net debt of $68 million. And that's a $30 million improvement from the previous quarter. If we turn to Slide 17, we've got an income statement quarter-on-quarter in U.S. dollars. On the revenue line, we can see that there's been an increase of 15%. This was due to higher -- more gold produced and also more gold sold in that quarter. Our production costs increased. Cash operating cost increased by 8%. And this was mainly in the September quarter. As Graham mentioned earlier, we've got electricity, high electricity costs because of winter tariffs. We also got our wage increases. And we've got lead pay provisions, which are a once-off but which go through during the September quarter. Inventory movements, $15 million. This is because we sold more gold in the quarter than we produced. Some of the gold we didn't sell in the previous quarter was sold during this quarter. Amortization, depreciation increased by $10 million, and this was due higher production. And we've also got new plants at the beginning of July. Exploration expenditure, very much the same as the previous quarter. Foreign exchange translation loss is a calculation of our U.S. dollar loan of $270 million, converted to rand right at the end of the September '14, the rand exchange rate was 11.32. And we had to put through this foreign exchange translation loss of $18 million. This leaves us a net loss of $25 million. Thank you, Graham.

Thanks a lot, Frank. If we can go to Slide 19, you may have seen this press release during the quarter on White Rivers' exploration, a joint venture agreement between them and us. This is in a piece of ground adjacent to our Target mine in the Free States. It's on the Western boundary of that. Overturns sediments there would be various economic horizons in them. Very complex geology. We have a 35% interest in this joint venture. And White Rivers will be taking it to pre-feasibility study, and they will fund that as well. And so this is a bit of hope for -- start for the future, and certainly it's -- there's a lot of ground there, but it's fairly difficult and complex geology. Slide #20, you talk about restructuring. We continue to assess our operational performance. You can see that Frank took us through the net cash generated. The 2 that were problematic in this last quarter was Doornkop and Kusasalethu. Kusasalethu is the problem one. And Doornkop, we see some improvements coming through. So at the moment, when we talk about that at the bottom, they're considering an alternative plan for Kusasalethu. We've been giving it quite a bit of help from various technical people, and we'll be able to announce that plan once we've signed-off on it and have had discussions with unions and other stakeholders. Obviously, a big focus on safety and productivity. Target 3 was the other place that we've done some restructuring. That operation is now on care and maintenance. In Papua New Guinea, we've got some exciting results from early exploration in our 100% exploration area, Kili Teke. Mike Humphries is out there doing some good work, getting sampling values of 2.7% copper, 5.2 gram a tonne gold from surface anomalies is excellent. You can see in the photo, there, you can see that green staining is copper staining. On Golpu, new pre-feasibility study, looking at that sort of scalable start-up mine. That feasibility is being finalized now. We'll have those results in December. And really been looking at trying to get the considerations by investors, looking at the return investment, looking at lower capital and nearer-term cash flow. But really, focusing on that so that we can adjust that operation in future to survive any gold price, copper price. It is one of those mines that we'll be careful, long time to go. It's a massive orebody. We've given that diagram, the position of it, those looking at Asian copper porphyry gold, gold-copper porphyry deposits. And you can see that it's in one of the higher-grade areas, both on gold and on copper. Just to conclude on Slide 25, our strategy and what we're focusing on. And this is sort of a long-term focus in the next few years. I'll talk about 1 and 2 in the next slide. Number 3, we really haven't done anything on in the last quarter. Nothing of any significance anyway. On Slide 26, safety delivering our plans. We've got an improving safety record. We had a disastrous February, but we're really looking much better in the last quarter and into this quarter. We certainly hope we can keep up that effort. Production has improved, both grade and tonnage. Increasing free cash flow. We improved that high grades, cost contained largely except for the ones that Frank and I were pointing out. Net debt has decreased, now at $68 million. And really, to get some value in our share price from Golpu, because I think most people don't have any value in our share price for Golpu, being able to release that pre-feasibility study will be a major milestone. Ladies and gentlemen, thank you very much. I'd like to open up for questions.

[Operator Instructions] Our first question comes from David Haughton from Bank of Montreal.

Very encouraging to see your free cash flow generation there. I guess that's a couple of different fronts, beneficiary of the weaker rand, but a lot of effort on the cost front. And I guess my question really relates to the principal saving here that we're seeing in the capital expenditure, the slide that showed on Page 12. It's quite stark. And I guess, I'm wondering, to what extent should we be thinking about your sustaining CapEx going forward? Is this the sort of level that you can maintain? Or is this just because of the difficult circumstances that we're in with the metal price?

David, thanks. Yes, good day, and a few things around the capital. And I'll allow Frank also to talk about it. One is that it's often difficult to get quarter-by-quarter fairly flat and to be exactly a quarter. So we do have variations in that. And this really depends a lot on sort of major deliveries that we have on our capital. We have had a lot of capital, basically, finishing, capital projects finishing. Phakisa is one that is costing us a bit at the moment, and that's partially the reason why there's very little free cash from Phakisa. But that would be sort of mostly finished in the last -- next couple of quarters, in fact, I think. Frank's indicating that Bambanani is another one that we near the end of the decline project there as well. So I guess, we're heading towards a situation where a lot of our capital is not growth capital. It's actually, and that's all maintenance capital of which the vast amount is really on development of the orebody. So you have the ongoing development, is the biggest number in that capital.

And Graham or Frank, given what you can see now, once you come off the spending hump of these various projects, what would you see is a CapEx number that you feel comfortable with on the sustaining side of things as opposed to any expansionary aspects?

David, I think if we were to look at it annually, I think, probably from a sustaining point of view, we'd probably be looking at about ZAR 2.5 billion, call it, I don't know, $240 million or so, somewhere in that region.

All right. Another question for you. Clearly, the illegal mining issue is a difficult one. And Kusasalethu is the principal area that you've got the most activity in. Are there other mines where you've got, to a lesser degree, I presume, illegal mining that you need to get on top of?

David, we've had quite a few of our operations at various stages occupied by some illegal miners. We have developed some in-house capacity on security and ways of dealing with these guys and getting them up from underground. A lot of the focus has been on surface infrastructure to ensure that people don't go underground, that shouldn't be underground. On Kusasalethu, what has been really sort of bad for us is the violence that's been going along with it. So lighting fires, for instance, underground is not the sort of thing that one should do. And it's a big risk having a fire in an enclosed area like that. So once our third fire was lit, we realized that we have only one option from a safety perspective, and that was to get these guys up. So we're busy sweeping the mine, basically, and trying to get everyone up.

Okay. Although, it does suggest some sort of network of support for those guys, that is, I suppose, a cultural change that you need to introduce as well?

Absolutely, yes. I mean, they would obviously get supplied, food and water, for instance, by probably our own employees.

Okay. And just heading up to Papua New Guinea. Just if you could just give us a bit of a broad sketch without any, necessarily, specifics, because I know that you're preparing those now, as to what you can see unfolding here for Golpu? Clearly, a smaller, more modularized project is in mind, but can you put anymore meat on those bones?

David, I'll try to do that. Marian will be glaring at me, so that I don't say anything that I shouldn't say. But I think if you go back and you look at the results of the drilling through Golpu, you'll see that, clearly, that's a very wide intersection of orebody that we get, but within that there is some high-grade zones. Those high-grade zones are, in fact, the porphyries. And that's where not only the high-grades, but better recoveries as well. So the latest pre-feasibility has been focusing on getting basically what we could call a starter mine, looking at the higher grade mine, but a much smaller mine. But also, at the same time, have the ability to grow it in the future. So I think if I go back to the last fact sheet, you'd see that we are talking about somewhere from 2.5 million to 5 million tonnes per annum, looking at that sort of thing with that much higher grade. It came then also to looking at what mining method we've used. Mining method, of course, is not only determined by the shape and size of the orebody, but also of the rock strength. So we've been looking at sublevel caving as well as smaller block caving, and therefore, also looking at the plant to fit that size of orebody. So that's the way we've been looking at it. Higher grades, smaller mine, much lower capital and something that we can adapt to future changes in commodity prices.

Okay. And on the commodity price assumptions that you'll include on these feasibility studies, I mean, the gold price has been running against us very, very strongly. Will you be thinking about it even in a tougher gold price environment, so that you've got a range of scenarios that you can present as to what it could look like under prevailing gold, perhaps future metal prices?

We've been looking at this for the last 2-, 3-years, using a sort of single scenario of gold and copper prices. And we have been using 1,250 and 310. So $1,250 an ounce and $310 per pound. And now, I know, of late, the gold prices have gone down below that, but essentially, it has been for a fairly short period. Obviously when we do, the results will have sensitivities around these prices. But I think the starting point for the base case, if you like, is fairly conservative, not at today's gold prices basically, but -- I don't know what distinguishes if the revenues have come from copper, but it's 70, 70%, yes.

[Operator Instructions]

All right, if there are no questions, then I'll just say some concluding comments. I think, from my perspective, a very satisfying quarter. It's good that when the production guys really have some good morale and good spirits and they produce results like this, so it really is helpful. Kusasalethu is the one area that we will give you some news flow during the next few months, but really looking forward to the final pre-feasibility study on Golpu and being able to tell you what that mine is all about. So ladies and gentlemen, thank you very much for phoning in and we'll speak to you soon.

Thank you very much, sir. Ladies and gentlemen, on behalf of Harmony Gold Mining Company Limited, that concludes today's conference. Thank you for joining us, and you may now disconnect your lines.