Graham Paul Briggs - Chief Executive Officer, Executive Director, Member of Corporate Social Responsibility Committee and Member of Information Technology Communication Committee
Frank Abbott - Financial Director and Executive Director
Harmony Gold Mining Limited (HMY) Q2 2013 Earnings Call February 4, 2013 8:00 AM ET
Good day, and welcome to the Harmony Gold Mining Company Limited Q2 FY '13 International Analyst Conference Call. [Operator Instructions] Please also note that this conference is being recorded. I would now like to hand the conference over to Graham Briggs. Please go ahead, sir.
Graham Paul Briggs
Thank you very much, and good morning, or good afternoon, ladies and gentlemen, depending where you are, of course. I am certainly hoping that you've got the documentation, probably downloaded or are viewing it on the website, and I'll be taking you through the presentation.
I'd like to go straight to Slide #3 just to talk a little bit about the agenda. We'll be talking about our business; our strategy; Golpu, a little bit about Golpu; talking about social investments; and environmental things. The unhedged, low debts tab is for Frank, who is sitting with me. We'll talk dividends, and then a conclusion.
In addition to myself, we have Mashego Mashego here. We've got Marian, Henrika and Jaco Boshoff. So quite a nice team should there be any questions.
Going to Slide #5, our strategy. It's still the same slide that you've seen before, no changes on it. The intent is to achieve the strategy, and we're making good progress on achieving it.
We do talk about an exciting investment proposition, where we are and the various sort of parts of the company. Of course, dominating that is our assets here in South Africa, being some of the large gold mining company or large mining assets. Golpu, big world-class exploration project and getting into feasibility. A little bit about environmental, social, unhedged, of course, dividends and very focused, of course, on South Africa and therefore, very exposed to the South African rand.
Slide #8 gives you a graph of the recovered grades of the last 4 quarters. So improvement quarter-on-quarter for 3 consecutive quarters there. We'll talk a little bit more about grade later on when we talk about Kusasalethu as well.
Slide #10. Despite the low point of Kusasalethu in this last quarter, you can see our gold production is near on flat from 2 quarters ago -- sorry, 6 months' graph, the December 2011 6-month period. But that, of course, is including the small production of Kusasalethu.
Slide 11, Doornkop production profile. March 2012 was when we decided to stop that asset for a while during the January quarter -- the January month of that period to get really a lot of the backlog equipping done. Since then, it's going very well. And this is a quarter that is the first quarter that achieved more than 1 tonne of gold. So improvement there in the grades, improvement in cash cost as well. We have represented on the graph total costs including all of the capital.
Phakisa, again improving trend, flattening out in the last 2 quarters. And we talked a little bit about the Freddies No. 3 shaft, ventilation shaft that we've had a collapse in, and it's going to take us a while to repair it. We both have to go into the shaft, repair the shaft and also remove the debris from the bottom of the shaft. It is a bit of a negative because it's going to stop us from growing the production in the next few quarters. However, by the end of calendar year '13, we'll be back into ventilating that area.
Hidden Valley. Two of the big issues at Hidden Valley is really the crusher and OLC or overland conveyor, and then the other one is the maintenance regime. The crusher installation and commissioning is scheduled for the group June quarter, actually, the April month. Meanwhile, we continue to truck haulage, and that is very expensive. Once we do have that crusher installed, we'll be able to make full use of the overland conveyor, and that should improve dramatically both the costs as well as getting the right amount of tonnage through to the plant.
We have, in the last while, taken over the maintenance of -- previously, there was a MARC contract in place, where we had an external party maintaining the fleet. We're really suffering from bad availability of the fleet. So we've taken over that contract. And initially, we saw some low points, and that was really catching up all the maintenance. That is improving. And while we've had poor tonnage and poor tonnage coming out of the pits, some low-grade stockpiles have also been processed. So it's not a good quarter for Hidden Valley. However, there's a plan behind all these issues to really resolve it.
Slide 14 is the group operating results. This is all the continuing operations. You can see that gold is 9% down. This, of course, is wholly due to Kusasalethu. I'll take you through the other operations, which had a good quarter. Rand per kilogram was up 9% during the quarter. Cash operating costs really went up, and that was because of the lower gold produced and because of the Kusasalethu grade up to 4.77 gram a tonne. And operating profit at ZAR 1.6 billion or $188 million.
On Slide 15, I have here the comparison quarter-on-quarter, excluding Kusasalethu, so excluding the September quarter and December quarter. And you can see that production actually went up by 3% on all the other operations. You can also see that there's improvement in cash operating costs as well, and of course, even better on the grade. Kusasalethu in itself had a poor grade quarter, mainly because of low tonnage coming out from all, but also all the tonnage came out from development as well, which had a dilution effect.
On the exploration projects, Wafi-Golpu. This is Golpu on Slide 17. The focus really has been on the Lift 1 area. On that section, you can see Lift 1 is a fairly small area, so the intent here is to do more drilling into Lift 1 and extend it. You can see that, that sort of extension is quite large from the boreholes that are drilling there. I will show you on the next slides a sort of plan view of that, where those boreholes are focused. There's also a hole indicated there that we've drilled into Lift 3, below -- that's below Lift 2, with a very good intersection of copper grades as well.
Slide 18, a plan view of Lift 1 at the 5,000 meter RL. And you can see that the sort of filling in of the data information from the intersection of those 2 boreholes there. So that's some good news, both in extending it towards the north on this page, as well as filling in some of the detail on those high-grade, low-grade areas. So all is looking good there, increasing the drilling and continuing in the various studies.
On Slide 20, a little bit of a plug here for the industry, especially the gold mining industry. There's a lot been said in the media and so on about mining in South Africa. This just tries to enhance what we're about in South Africa, and that is employing a lot of people, providing a lot of economic developments. Most of our spends is local. Obviously, a lot of that in wages, electricity. But probably somewhere closer to 89% of our spends is in South Africa. Pending foreign exchange, a significant contributor to the investment, infrastructure investments and a substantial contributor to society.
Slide 21, talk about safety. Regrettably, we did have 3 fatals in the quarter. Having said that, we have had good achievements on various safety milestones. And the sort of events we had which created fatals unfortunately should not have happened. The good news is that certainly from a fall of ground position, we are in a very good position. It's quite a long time since we had a fall of ground fatal.
Slide 22 gives a track of the operational free cash flow from Kusasalethu. You can see in the quarters from March '11, it's been a profitable business. That was reversed suddenly in December this quarter that we're reporting on. And that was the unprotected strike, the violence, the sit-ins we had. And you can see that it was certainly not something that we could continue with going forward. And that's why we have embarked on the process that we have.
Slide 23 gives -- puts some numbers to that for the last quarter, 402 kilograms versus the 1,600 kilograms. You can see that in ounces, 51,500 kilograms versus only 13,000 kilograms. And certainly from a rand per kilogram or dollars per ounce, you can see that this is really unsustainable. We needed to draw the line.
We embarked, in Slide 24, a 189 process. We also embarked on some bilateral discussions with unions. And we've been continuing to do that since the 7th of January. The 2 formal consultations with the CCMA, that's the Commission for Conciliation, Mediation and Arbitration, have gone fairly well. We have got into the state where the unions have accepted the rationale for issuing the section 189. We've circulated a draft agreement. That draft agreement really contains the 10 points that we distributed to people on the 7th of January. There is another meeting during this week. And we're certainly hoping that, that is fruitful and unions come back with their comments on the draft agreement and that there's a signing soon of that draft agreement.
Slide 25 is the Sable shaft headgear quartz about to fall over. That's deliberate. We've been doing a lot of rehabilitation and environmental management in the Free State, mainly. A few photos of it show you what it looks like after it's been rehabilitated. There's some good work happening on the rehabilitation.
Slide 26 and Slide 27 puts it into a bit of context of numbers of headgears and rands, probably reduced our liability by somewhere around ZAR 125 million since we started this program, and that was about 2 years ago. A lot of demolitions have happened. It does take a while to rehabilitate the areas immediately in and around the headgear. But that will be preceding, probably takes about 2 years to rehabilitate those areas. And sometimes then, it depends a lot on the vegetation growth as well. The results of this, of course, can be seen at the bottom of Page 27, as to where we sit in the comparison with other companies.
28, recap on the Masimong housing project. That land has been transferred into local council. There are 461 rental units. So this is not only housing for mineworkers, this is housing for the community as well. Total value of that asset is about ZAR 350 million. This is the value of the land, all buildings that went into it. The government in the name of Department of Human Settlements put about ZAR 100 million into it, and we probably put in around about ZAR 50 million or so.
We have launched another 3 projects, and I'm on Slide 29. There are 3 more areas: Merriespruit 3, Harmony 3, Steyn 2. Those hostels have been identified for further development. Conversion cost of each of those is probably around ZAR 150 million per hostel. We will put some money, but a lot of that money will come in from the Department of Human Settlements. It follows on agreement between Harmony, the province, that sort of Free State and the local municipality. And this fits in with all their sort of housing schemes and their extensions to the various municipalities. So it's getting a lot of support and pleased to be able to doing that. I'm going to hand over to Frank now, and starting on Slide 31.
Thank you, Graham. On Slide 31, we see we've got our headline earnings and it shows the upward trend over the last number of years.
With regards to Slide #32, we've got the EBITDA in rand and then next to it, EBITDA in U.S. dollars. If we look at the EBITDA in dollars, you see we started at $120 million in the March quarter, went up to about 130 -- $145 million and up to $165 million in December quarter. And this is despite the Kusasalethu labor disruptions. Higher gold price, better grades and lower cost resulted in this positive EBITDA for December quarter.
We page over to Page 34 or Slide 34. We've got our cash flow summary quarter-on-quarter in U.S. dollars. So our cash flow from operations were $179 million. Exploration expenditure, $18 million. 50% of that was at Golpu, $9 million, and greenfields were --in Papua New Guinea, another $8 million. Income and mining taxes, those were our first provisional payments. Proceeds from sale, released [ph] plant sales, which we sold to Wits Gold. Capital expenditure of $123 million, and that included capital at Wafi of $40 million and at Hidden Valley of $70 million. You can see the dividend we paid the previous quarter of $26 million. And at end of December, we had surplus cash after debt of $16 million. Our cash balance is $295 million. Our debt was $279 million at the end of December.
If we page over to Slide 36, this is our income statement quarter-on-quarter in U.S. dollars. Our revenue is $532 million. That went up by 3% and this was mostly due to the gold price. Our cash operating costs were lower, and this is because of lower electricity tariffs. The previous quarter included winter tariffs. Inventory movements, $185 million, and this is on the gold -- lockup or gold inventory. If we look at the amortization and depreciation, $58 million. Exploration expenditure, $18 million, of which we explained in the previous slide. Golpu was $9 million and greenfields was $8 million. Taxation of $25 million. Profit from discontinued operations at Evander, 25 [ph]. And profit from -- net profit was $84 million. Headline earnings per share was $0.18 versus $0.15 the previous quarter. Thank you, Graham.
Graham Paul Briggs
Thanks, Frank. I've got the good news to talk about now on dividends. On Slide 38, you can see our margin here that we talk, the cash costs with maintenance capital as well as growth capital. The December quarter should have been much better had we produced from Kusasalethu but still a nice margin there. And that's on Slide 38.
Slide 39, you can see it in dollars per ounce. Again the same picture of $607 from a cash cost point of view and $261 from a total cost point of view. So nice margin, prepared to share it with investors. And on Slide 40, we show a bit of a graph on what we've been paying in dividends: in '09, ZAR 0.50; '10, ZAR 0.50; '11, we paid ZAR 0.60; and then last year, we paid an interim of ZAR 0.40 and a final of ZAR 0.50, taking it to ZAR 0.90. And now we've just declared a ZAR 0.50 dividend. A comparison there with earnings and dividends in South African cents.
In conclusion, a good quarter for us. 28% increase in headline earnings takes us to ZAR 1.58 a share. I think consensus is probably closer to ZAR 1.00, so we're beating consensus. Doornkop buildup continues, 1 tonne of gold for the quarter. A 6% increase in underground grades, and this is the third consecutive quarter of increase. Gold production decreased 9%. That was solely due to Kusasalethu. And if you look at the South African operations, excluding Kusasalethu, of course, there was increase in gold production. Operating profit, 16% higher at ZAR 1.6 billion or $188 million. Operating costs improved and we've talked about the housing. We committed to that and declaring the ZAR 0.50 dividend.
Slide 43. Harmony remains undervalued despite being one of the world's largest gold miners, building low-cost, higher-grade mines. Our trend of grades is somewhat different to a lot of other companies. World-class exploration projects. We support meaningful corporate social investments. We're doing a lot of work on the environment. That ZAR 125 million reduction in the environment liability has come at a cost-neutral position for us because we've benefited from selling scrap. We're unhedged, low debt, gold prices good and, of course, we're very exposed to the rand exchange rates. We're paying dividends and we believe we've got a strong management team focused on delivering on the strategy. I'd like to open myself and, of course, my team for any questions.
[Operator Instructions] Gentlemen, it would appear we have no questions. Do you have any closing comments?
Graham Paul Briggs
Yes. Thank you very much, everybody, for dialing in. We have got an appendix to the presentation, which covers some more detail on grade, on exploration in Papua New Guinea, also looking at Evander and Hidden Valley in some detail. And obviously, the guidance, which is the last slide on Slide 56, which we have guided. That guidance, fully intact at 1.2 million ounces, which was modified for the Kusasalethu event. We did modify that at the beginning of the January. Thank you very much for listening in. And as I said, we're very pleased with the quarter and hopefully that we are delivering on the strategy. And if we see you soon, whether it be here in South Africa or in your hometown, we hope to see you and discuss these results further. Thank you very much.
Thank you very much, sir. On behalf of the Harmony Gold Mining Company Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.
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