Harmony Gold Mining Company Limited (HMY) Q4 2015 Earnings Report, Transcript and Summary

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

Thank you very much, and good afternoon or good morning, depending on where you are, to the conference call. It's my pleasure to present the fourth quarter for 2015 and also the year ended results and also, give you a bit of insight into the future and where we are taking Harmony, so that we will do during the call. With me are Frank and Herman and Mashego and the awesome IR ladies, who've done a great job today. So I'll be taking you through the results, and I'll hand over to Frank for the financials. I'm hoping that you've all got the presentation, and slide 2, of course, is the Safe Harbor statement. At the moment, it's still dated June 30, 2014. We're busy with our annual report and 20-F and the like, so that comes out in the next few months and you'll be able to see a change in date there. On the agenda, I'll talk about our strategy, our operations, financial results, the financial year '16 guidance, talk about replacing ounces, and then I will conclude, and then we'll go into questions. Slide 5, on our strategy is quite simple. Our focus has to be on improving margins, and that is by producing safe and profitable ounces, with the emphasis this year certainly on those two items, safety and profitability, generate cash flow, repay some of our debts. Golpu is a key to our future. We are now busy in the feasibility study for stage one, the pre-feasibility for stage two, and we are negotiating with the government on a predevelopment agreement. You'll have seen that we've got - we've advanced some environmental studies, but it is key to our future. So it is very - although I don't talk about it in this presentation, it's certainly very important. And we need to find the value in our underlying assets, and that value needs to be reflected in our share price. On our operations, slide 7, a little bit on safety and health. A good year for safety performance. Of course, there's always more work to be done in the South African industry. So we could do better, but certainly the best year we've had for a very, very long time. On the health side, we've changed our strategy to a proactive health strategy and it's certainly making some big advances and affecting people's lives in a positive sense. There's a decrease in absenteeism, which of course means probably better productivity for us, more people at work. Hospitalization and medical mortalities are down. Hospitalization, I think at the current time is about 50 to 60 people in hospital, not from safety issues, but mainly from health issues. We're making good advances there. Decrease in tuberculosis rate. I think that's probably halved in the last five years. HIV and AIDS, although that exceeds the national average, we're having some great advances on people actually looking after themselves on that. And there's been good participation in the whole working group to address occupational and lung diseases. As I said earlier today, that's a presentation all on its own. On the operations, Bambanani is still the lowest-cost underground producer in South Africa. We've done some successful restructuring at Kusasalethu to Masimong, Doornkop and Hidden Valley. Kusasalethu and Doornkop still need to show the effects of their restructuring, and I'm certainly hopeful that that will happen during the next 6 months. Underground grade remains stable year-on-year at 4.75, and in our cost efforts, we need to keep all our costs below inflation and for that, it's not just looking at costs of labor, but all our costs, input costs, and understand them better and try to get the best deal. On slide 8, this was the quarter-on-quarter results. You can see gold production is up. Essentially, the gold price in dollar terms is slightly down, in rand terms it's 1% up, so it's virtually flat. All-in sustaining costs, close to flat, a change in the exchange rate there and that obviously changes a few of the rand and dollar translations. If you look at the financial year-to-date on slide 9, a disappointing year from a gold production point of view, mainly due to Kusasalethu. If Kusasalethu had performed as it should, it could have been a very different year. So the restructuring I guess was a little bit overdue, and really, what we need to do is get that asset producing again, and that will really turn the fortunes of the company around. Slide 10, a little bit on electricity and everyone's read a lot about Eskom. If you look at this period that we're looking at on the chart here from financial year '12 to '15, Eskom imposed 81% cumulative price increases during that period, and we managed to save a lot on usage, and we limited that increase on electricity to 23%. So using less electricity, using less in peak times, has meant [ph] we've managed to reduce the cost of electricity. A lot is being talked about right now on wage negotiations, and I'm on slide 11. We've tried a distinctly different approach on wage negotiations. We've been talking about sustainability. We've been talking about the economic realities of each company, in fact, every asset in our company. And as far as the unions is concerned, we've talked about job retention as well, and so instead of a normal positioning, bargaining, starting off low and the unions starting off high and meeting somewhere between the two, we've really put on the table our realities, that we're now in a situation where we're going to be discussing this in the CCMA, which is under the Department of Labor and they will try and mediate a resolution there. But really high increases for us would place most of our operations at risk. So those discussions are ongoing and we'll continue to give information into the market as and when it happens. I'd now like to hand over to Frank to talk about the financials.

Thank you, Graham. If we page over to slide 14, this is the extract from our income statement, quarter-on-quarter, in US dollars. We've got the first column is the June quarter, compared to the March quarter. Our revenue for the quarter was 10% more than the previous quarter, and that was largely due to we sold 12% more gold during the quarter, and as Graham mentioned earlier, we produced more gold also during the quarter. Our production cost increased by the cash operating cost by 5%. This is mainly due to electricity increases, consumable increases and maintenance at Hidden Valley. We also had a negative inventory movement of $10 million, and that's because we sold more gold during the quarter than we produced. So our production profit also T2 [ph] compares with the $55 million in the previous quarter. Amort, $52 million, the same as the previous quarter, and then we have the impairment of assets of $287 million. The largest portion of this is at Hidden Valley. I've got a separate slide to explain that, and then also Doornkop. Our loss on scrapping of property, plant and equipment, $5 million. We have a credit to taxation of $47 million, and most of this credit is due to the fact that our deferred tax - tax rights changed, reduced, on our life of mine plans, as we used lower commodity prices in our life-of-mine models. So we posted a loss of $261 million. If we add back our impairments and other adjustments of $277 million, we actually had a headline earnings of $16 million for the quarter. Just when we look at the impairment of assets, the $287 million, we used the average exchange rate for the quarter of 12.08 to calculate that. When we look at the annual income statement, we used a different average exchange rate, that we used the average exchange rate for the full year. When we - this is what we call convenience translation conversion, when we do our financials at the end of the year, we will do a full conversion. If we turn over to page 16, we've got extracts from the income statement year-on-year in US dollars. The first column is the current year, and compared to the previous year. You can see that our revenue came down in this year, and this was largely due to 5% less gold sold, and then also our gold price was lower during the year. Our production costs reduced by 4% and this was because the rand, dollar exchange rate, the rand weakened against the dollar, and that resulted in our production costs reducing compared to the previous year. If we look at the production profit, that's $245 million compared to $367 million. Amort, slightly higher than the previous year. Our impairment of assets is $303 million for the year. As I said, we used the 11.45, which is the average exchange rate for the year, to convert the impairment to rand back to dollars. Employment termination costs of $22 million, compared to $26 million the previous year. Exploration expenditure reduced, because since the beginning of January, we have been capitalizing the expenditure at Golpu, and this is after the pre-feasibility study was approved by our Board. Loss on scrapping of property, plant and equipment $43 million, and these were certain rise lines at Masimong and also at Kusasalethu that were written off. Foreign exchange translation loss $32 million. This is on the $250 million loan that we have and it's because of the weakening of the rand against the US dollar. Our tax was $61 million credit. It resulted in a net loss of $396 million, when you add back the impairment and other adjustments, we get a headline loss for the year of $72 million. We page over to page 17, we've got the detail of the impairment. As you can see, our total year end impairment was ZAR 3.4 billion, converted to dollars at ZAR 11.45. That works out to $303 million. Hidden Valley was the biggest, ZAR 2.1 million, $185 million, and this was due to the reduction in US dollar gold and silver prices, and also the high sustaining costs and a reduced life of mine. Doornkop, ZAR 1.036 million, $90 million. We have a new life of mine plan. This resulted in the reduced recoverable value for Doornkop. In Phakisa, ZAR 278 million. This is really also due to lower commodity prices and cost basis. If we page to slide 18, we've got two columns there. The first one is rand, and the right-hand column is dollars, and I'd like to just take you through that. We try to explain our cash flow movement during the year. So on operational cash flow level, we made $209 million, but our operational capital expenditure was $228 million. So our operational cash was negative by $19 million. It means that we spent $19 million more capital than we actually earned from our operations. We had a restructuring cost or retrenchment cost during the year of $22 million and we put $29 million into Golpu and exploration, and the foreign exchange translation difference was $14 million, and then we made a loan to Rand Refinery of $10 million. We add that up, we get increase in net debt of $94 million, and that adds up to the net debt balance we had at the end of June 2015 of $192 million. Thank you, Graham.

Thanks a lot, Frank. I'd like to go to slide 20, and talking a little bit about our planning process. We believe we've got some realistic plans on the table right now and again, we're going to focus on safe production ounces. The planning assumptions we've used here in South Africa, at ZAR 450,000 a kilogram. I believe today's gold price and exchange rate translates into about ZAR 463,000 or so. We've identified certainly all those risks and those issues that we've had problems with in the last year, tried to remove all those bottlenecks, look at optimizing development, equipping, ledging, and of course, most of our capital in the growth capital scenario has been spent. We've done some right sizing on our operations. Bambanani is certainly going to be the biggest cash contributor, and the growth in ounces is really coming from those three operations, Kusasalethu, Tshepong and Phakisa. Just to talk a little bit on those assets, Kusasalethu, a big jump in the grade production there. It's due to us taking out the waste and really focusing on the higher grade lower mine resulting from that restructuring. There's going to be some further reductions in electricity costs in the future. So those are the sort of issues that are key to getting the Kusasalethu plant to work. On Tshepong, Tshepong has had a good year in financial year 2015. It had one quarter which was a bit of slippage. But certainly, the focus on the sub 66 decline is really what's driving the improvement, and some good teams on that mine and very productive teams. Phakisa, if you look at the back of the quarterly booklet, you'll see the production results for the development, and they've really been achieving a development target which will go well to build up the production in the future, and that's really where the biggest focus is. Slide 24 is the capital in rands millions, and then if you go to slide 25, in dollars. This is South Africa, and you can see that most of the growth capital is behind us. What growth capital we have going forward is really mostly focused on the decline at Joel, and then, the rest is maintenance and ongoing capital development on the various operations. Slide number 26, we give you some guidance there, adding up to roughly 1.1 million ounces. This is barring, of course, any dramatic changes or restructuring and so on. We've given a range for each of the assets and we've given you a bit of a range of the cost plus capital. This is not all-in sustaining costs, so it excludes those sort of corporate’s and non-cash items. And give you a rough guide as to dollars per ounce, as well and here, we've used an exchange rate of $12.50, and we also give you the life of mine of the assets. So that's a bit of guidance. And then on slide 27, we look at the mineral reserves, the reconciliation from June '14 to June '15. The 1.2 million ounces that were mined during the year, a slight change on surface sources. The restructuring, and of course the restructuring resulted in some of the impairments, as well. So those two subjects are interrelated, the 4.4 million, and then the gold equivalent of course is Golpu. On our reserve grade, we don't get a huge number of questions on this, but we have had them in the past. So we've got a sort of adjusted reserve grade there of 5.53. During the last year, we've mined at 4.75, and we're planning this year to mine roughly at 5 grams a tonne. And I've given a little bit of a rating there of below 80%, with the red crosses, green crosses above 90, and above and also the sort of orange crosses, which are the 80% to 90%. So you'll see that grade has really been okay. Phakisa building up, so that's where we haven't achieved, and then Kusasalethu has been a poor performance. Graphically, that's displayed in slide 29, aiming for the 5 gram a tonne in financial year '16. Now, I'd like to talk a little bit about replacing ounces and the detail on Kili Teke, on slide 31. I just need to illustrate you a little bit. This is now the mountains of Papua New Guinea and the east west structures there are the sort of big thrust faults that you can see. Typically, in PNG, where you get these transverse structures, so the sort of structures in red that cross those structures, that's often where you get these ore deposits. So you can see Porgera, Mt. Kare. On the right of that diagram, you can see on the transverse structures. You can see Frieda River, Ok Tedi on a similar structure, with Star Mountains, as well. Kili Teke, guess what, is also on one of those transverse structures. You can see some of those in those boxes are the grades and the sort of tonnages of copper and gold in those assets, and you can see the gold and copper values from Kili Teke there just for comparison purposes. So trying to compare Kili Teke with Golpu, Kili Teke, 13 holes have been drilled, roughly about 6,000 meters. Golpu is over 500 drill holes, 300,000 meters of drilling. The copper mineralization at Wafi gold, as it was called in the early days, was only discovered in the 95th hole. That would be WR095, and the current Golpu resource of course standing at 1b tonnes, and we give some grades there. Initial intercepts in Kili Teke are highly encouraging. So if you look at the values and compare them either to the other assets or to Golpu, they are highly encouraging. And then at slide 33, a bit of oblique section there, you can see the extent of it, 700 meters deep. It's outcropping at surface, 600 meters in width. In depth, it's about 250 meters, and you can see the various bore holes. Still a lot more to be drilled here and we'll see what we find. We are very encouraged about that. Let's just talk a little bit about the conclusion and our future. So slide 35, the source of this is really looking at company reports and looking at the market capitalization per reserve ounce, you can see we are completely undervalued there at just over $13 an ounce compared to other mining companies. Slide 36, really for the information of people other than shareholders, more that you'll see that we spend a lot of our money on wages and salaries. A fair amount on capital and exploration, electricity spend and consumables in stores and so on. And you can see what's missing on that line, of course, is dividends during this last year. This is a little bit of a wakeup, I think, to a lot of people who criticize us for just being for the benefits of shareholders here in South Africa, and they need to also have a look at our financials, which is something we've tried to take people through in our wage negotiations, as well. So on slide 37, I think I've dealt a little bit with our strategy, really looking at increasing our margins, our operations. We believe they are positioned now, restructuring is done. Of course, there will always be little bits of restructuring that we do. When you go to the operations, there's a big focus on mining for making a profit. We've given you some guidance for financial year '16. And safe and profitable ounces are the order of the day. As to replacing ounces, there is not many companies that are doing exploration like we have been doing, Golpu, a fantastic asset, Kili Teke has got lots of potential. So I think we get a tick there, and really, Harmony we believe is a company really worth investing in. Ladies and gentlemen, thank you very much. I'll now go for questions.

I guess, thank you very much, everybody, for listening to the presentation. If there are any questions, please don't hesitate to send an email to Marian or Henrika , and they will gladly either organize a conference call or try and answer the question or get me to answer the question. And so thank you very much for listening to the call, and I hope you all have a great day.

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. You may now disconnect your lines.