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Harmony Gold Mining (NYSE:HMY)

Q3 2013 Earnings Call

May 03, 2013 3:00 am ET

Executives

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

Marian van der Walt - Executive of Corporate & Investor Relations

Analysts

Anna Mulholland - Deutsche Bank AG, Research Division

Allan J. Cooke - JP Morgan Chase & Co, Research Division

Adrian Hammond - BNP Paribas, Research Division

Andrew Byrne - Barclays Capital, Research Division

Graham Paul Briggs

Good morning, ladies and gentlemen, this is the quarter 3 results of Harmony for the financial year '13. I have with me here, Frank Abbott, as well as Mashego Mashego. Henrika and Marian are also in attendance, so we obviously can hopefully deal with any questions that you might have.

It gives me pleasure in giving this presentation, it's a fairly long presentation, so we'll be going through slides at a reasonable pace. I hope that you all have the presentation, hopefully, from the webmail. And if there are any questions, if I go through something too quickly, please bring me back at the end of the presentation, and we will try and answer the questions.

So we have our Safe Harbor statement that you should read through. Obviously, it talks about forward-looking statements. As far as the agenda goes, and I'm on Slide 3, I'm going to talk a little bit about the gold price. I'm not a good -- my crystal ball is probably as cloudy as everyone else's on what's going to happen in future. But I do want to talk about the gold price. And we'll then talk about the quarter 3 results. And then, we'll talk about finances, and Frank will do that section. We'll go to Papua New Guinea, talk around Papua New Guinea exploration, Wafi-Golpu and the like. And then, we'll talk a little bit about our mining communities and what we're doing around the mines and then, conclude.

Let me start off by talking about the gold price. And Slide 5, just captures the gold price as it has been for the 9 months to March 2013. We compare it to March 2012. And you can see that the gold price in rand per kilogram terms increased by 10% there. In the U.S. dollar, it's slightly down to USD 1,672. Obviously, exchange rate differences there. However, towards the end of the quarter, price dropped dramatically. So in April, we were sitting at a situation, at one time, where the gold price was around $1,400 an ounce. In rand terms, somewhere between ZAR 410,000 a kilogram to ZAR 420,000 a kilogram. What we did, then, was to implement some actions to reduce costs and, in a way, forward -- looking forward, we are going to certainly apply a relatively conservative ZAR 400,000 a kilogram to our plans. And that's been labeled Project 400. There are quite a lot of 400s in this and you'll see why.

Turning to Slide 6. In South Africa, curbing some costs in South Africa, and this is from our financial -- prediction on financial year '14, we believe we can reduce, reprioritize about ZAR 400 million worth of capital from that. And then, take a further ZAR 400 million out of our costs, looking at corporate costs, services costs, looking at suppliers, contractors and the like, various labor initiatives. So that will amount to, we believe, about ZAR 400 million. Obviously, those plans are in process and we'll be able to give you more clarity when we finish our plans. We don't have any shaft or mine closures envisaged at the present.

Slide 7 talks about Papua New Guinea. Firstly, Hidden Valley. There's basically 3 areas of focus there. The first is the crusher and everything around that crusher. Remembering that the overland conveyor has been not performing very well. The reason for that is, really, that the rock that has been put onto that belt has often been slabby and too big for the belt because remember, it is a pipe conveyor and has been tearing the belt. So the crusher is being replaced with a gyratory crusher, and this will ensure that no big rocks get into the belt and we should be able to utilize that belt to its fullest. This means that we will be able to take all the trucks that are busy trucking the ore from the mine down to the plants. Take that out, that's a huge cost and obviously, we'll get better supply. That's the first initiative.

The second one is looking at all the plants, the equipment, and that includes looking at metallurgy and better recoveries there. There's quite a few initiatives in that. Getting a more consistent feed will, obviously, help with the plant performance as well. Third measure is, basically, taking cost out, and the Hidden Valley mine has been geared up for slightly higher tonnage, and so we need to take that cost out. And so the plans for financial year '14 is, really, to get this mine back into profitability. There are savings and capital in PNG, and most of those savings in capital, will come from Wafi-Golpu. And I'll expand on that a little bit further on when I'm talking about that project. But basically, there's about ZAR 1 billion worth of savings there.

Slide 8, talking about our capital and year-by-year, we have a prediction of our capital. We manage our capital fairly well, we believe, and we try and come in fairly close to what we predict. And if there are any poorer performers, then we obviously try and reduce our capital to that performance. So you can see, in financial year '13, our capital prediction at the moment is ZAR 3.8 billion. We predicted at the beginning of the year, and you got those numbers in August at ZAR 4.1 billion. And that's in rands.

If you look at the next slide, it's looking at dollars. And I caution you here, if you're looking at dollars, please look at the exchange rates that we're using at the bottom because it can get a little bit confusing if you don't use the same exchange rates. But certainly, you can use the rand numbers, which are probably a little bit tighter, certainly, tighter on the South African operations, and use it for your own conversion if you want to do a prediction.

Slide 10. Again, looking at capital expenditure. There are 2 graphs here, one is in dollars and one is in rands. Let's focus on the rands. The gray bar is the guidance that you were provided in August 2012. ZAR 4.1 billion for this year, that's the same as the previous graph, you will remember, ZAR 4.1 billion; now predicting ZAR 3.8 billion. So the red line is the prediction going forward. So at the moment, for 2014, you can see that we're giving you, in August '12, a prediction of ZAR 5.1 billion, that's quite dramatically down now. And it's down for '15. However, I have to caution you again that the final plans on all these assets and the capital expenditure is in progress. That gets completed by the end of June and normally, the company is ready to give you this information in detail somewhere around about August.

Let's go to the quarter 3 results and look at those, and I'll start off with safety on Slide 12. Regrettably, we had 2 fatals during the quarter. And when you talk about fatals, often difficult when we talk about good performance as well in the same slide. But if you look at that fatality frequency rate, and this is per million man-hours, you'll recognize that 5.15 is the sort of performance that you would get from any international Western mine, whether it be North America or Australia. I'm talking underground operations now. So in general, our safety performance has improved dramatically over the last few years, and there's a graph here that's backing that up. And there are some highlights from different operations. Huge amount of focus on safety. We continue to look at safety in detail and have a large number of initiatives on this, on safety.

On Slide 13, the highlights. I've talked about the first one, which is safety. Evander transaction is completed. I'm sure you may have some questions on the finances there, as to what that works out to in the financial statements. Frank will be here to help you. A decrease in underground grade, a little bit skewed by the Kusasalethu issue but also really skewed, I think, about the March quarter, which is traditionally, a little bit of underperformance in grade and also gold production. Gold production decreasing by 15%. A lot of that is Kusasalethu, which basically produced nothing for the quarter. But as -- in Phakisa, I'll talk a little bit more about Phakisa. And then, the balance is really talking about the Christmas break. But I will compare 9 months a little bit later and then, you can see what the performance is. Headline loss per share of ZAR 0.47. Operating profit is lower at ZAR 821 million. And then, Kusasalethu, of course, dominated last quarter and this quarter. But the watershed agreement that we signed there in the middle of February, labor is then coming back, commencing to come back from that time. We now have about 90% of the labor back and they're all signing these documents as the individuals come back. So it's an agreement not only at a major sort of structure, union level, but also individual by individual.

Slide 14. Just looking at sort of the history of the March quarter, looking back at the sort of seasonality of things. And this is, really, the festive season. Sometimes Easter also falls in this quarter. And towards the end of March, that happened I think, this year as well. We've just taken Kusasalethu out of these figures just to give you the comparison. So really looking apples-with-apples, the Kusasalethu, of course, does skew the figure somewhat. But that gives you an idea of the seasonality of the quarters that we have.

Grades, we've had a few quarters of improving grade. This quarter, a little bit disappointing, but there's no concern from our side on the grade. We are managing it well. We need to improve it, obviously. It's still destined to go up.

And on the next slide, which is Slide 16, I demonstrate to you some of the development grades and this just goes to show that the guys are developing in the right places. And remember that in underground, we're never really [ph] stopping. This hole that we are busy developing at the moment will only be coming out and stopping in 18 months to 30 months time, so it's sort of 18 months, 1.5 years to 3 years time sort of period. And so all looks well for the improvements in the grade. It is plotted versus a reserve grade here.

Looking at Slide 17, really, some of the detail quarter-on-quarter. December being a good quarter and March being a poorer quarter, down by 15% we've chatted about that. Gold price slightly down at around ZAR 470,000 a kilogram. Costs dramatically up here, mainly because of the lower gold production. I will show you some of the figure stripping Kusasalethu out and you can see the effects there and then, operating profits, obviously, affected operating profit.

If we look at the group operating results on Slide 18, and here, we're looking at the total, you'll see gold production down by 1%. Of course if you put Kusasalethu back in there, about 2.5 tonnes of gold loss at Kusasalethu during the last quarter, as well as the previous quarter, that will obviously dramatically change that production number and that's why we gave you the revised guidance last quarter. But you can see all the other numbers there, rand per kilogram, for instance, skewed again because of the cost of Kusasalethu but not the production of Kusasalethu. You can also see the underground recovery grade.

If you look at Slide 19, this is now excluding Kusasalethu, so we had stripped out Kusasalethu from both periods. The 9-month up to March 2013, that's in the highlighted area and the 9 months to March 2012. And you can see that, basically, the operations besides, of course, excluding Kusasalethu actually improved by 8% in production. The gold price was slightly higher from about ZAR 420,000 to just over ZAR 460,000 a kilogram, improved by 10%, operating costs were down by 10%. Grade improved from the 4.2 to the 4.66, so that's all good news. So basically, operations are performing well, obviously, and getting Kusasalethu back into production will really dramatically change this picture. I think the measures that we've done at Kusasalethu are already setting us up for the long term.

Talking on Kusasalethu, I've given you some numbers here, Slide 20, I'm on. 90% of the workforce back at work. We probably are getting about 50% of our tonnage there. For the quarter, we've got a prediction of about 50% of our gold production for the quarter. So just around plus 800 kilograms of gold coming out of Kusasalethu. And that means towards the end of June, we will be expecting to get sort of back into the normal production. Obviously, it won't affect at all -- they won't be for the whole quarter, but just towards the end of the quarter.

Code of Conduct signed. The relationship has been established. It's obviously, got a lot more AMCU members now are 60% of the Kusasalethu workers are AMCU at the moment and in total Harmony, that's around about 10%. We continue to engage employees and this is an area where we have a monitoring committee so that any issues that come up are dealt with, in a way, rapidly. And so we prevent it from getting to any boiling point at all.

Phakisa was an underperformer this quarter. There are some ventilation issues there. The ventilation is normally returned via Freddies 3 shafts. It's a shaft where part of the shaft lining has collapsed in the clear [ph] rocks, which is shale, and has been collapsing. And we're busy attempting to repair that now. The repair is certainly going to take some time. At the moment, we have a prediction of end of December to get that back in. So it is producing, but it's not building up as predicted. So that ventilation constraint is preventing us from building its -- building up further production at the moment.

22, a slide we produced on looking at total costs. We look at cost plus capital. Again, this graph is very skewed by Kusasalethu. But that's the graph so a very much narrower margin in the last quarter.

Slide 23 is equivalent in dollars. And then, I'm going to hand it over to Frank talking about the financials. So we'll start off with Slide 25.

Frank Abbott

Thank you, Graham. Slide 25, this is a graph which shows the net cash, net debt position of Harmony and some of our gold peers. The net cash, net debt position as shown in U.S. dollar millions, as at the end of December 2012. As you can see, the first 2 companies there have a positive net cash position. At the end of December, Harmony had $16 million cash positive position, surplus cash more than debt. At the end of this quarter, that has increased to $62 million. The next 3 bars are South African gold companies and then, we've got an Australian company and the blue ones are the North American companies. What we want to show you is that Harmony has actually got a very strong balance sheet, and we've got now gearing. Thank you.

Our cash flow summary, quarter-on-quarter, in rand. Our cash flow from operations reduced to ZAR 361 million in this quarter. This was mainly due to the ZAR 800 million lower cash operating profit because of the lower gold production. Exploration expenditure stayed pretty much the same. Income and mining taxes lowered because of lower profitability. We received ZAR 1.264 million from Evander. We also, during this quarter, received a distribution from Evander of ZAR 210 million. If we add this up, we've received the ZAR 1.5 billion which we sold Evander for. Our capital expenditure was lower at ZAR 855 million. There was lower capital expenditure at Kusasalethu and some of the other operations. We paid a dividend of ZAR 217 million during the quarter. If we look at our surplus cash after debt, it was ZAR 574 million. If you look at our cash balance, you'll see that increased from ZAR 2.5 billion to ZAR 3.099 billion in the quarter. Again, this is in U.S. dollars. Can we skip this?

Our income statement, quarter-on-quarter, in rand. Our revenue was down 24%. 22% was because of lower gold production and 2% because of the lower gold price. Our production costs were lower, with 9%, and this is mainly due to -- at the end of March, we actually increased our gold inventory compared to the December quarter where we decreased our gold inventory. Operating profit, lower at ZAR 820 million. Amortization, lower because of lower production. Exploration expenditure, in line with the previous quarter. Taxation lower because of lower profitability. Our profit from discontinued operations, ZAR 143 million, includes a profit on the sale of Evander of ZAR 102 million. That gives us a net loss of ZAR 124 million and the headline earnings per share loss of ZAR 0.47. This is our income statement, quarter-on-quarter, in U.S. dollars.

Income statement, 9 months year-to-date, rand. Our revenue was very much in line with the -- was 11% more than the previous quarter. Our gold production was in line with the previous quarter. Our production costs went up by 18%. Our operating profit was lower at ZAR 3.8 billion. Amortization was slightly higher. Exploration expenditure, this is more expenditure in Papua New Guinea. Taxation was -- the previous year, there was a deferred tax credit which doesn't make the comparison right because the ZAR 416 million is actually tax paid in this year. Our profit from discontinued operations, it was mainly from Evander and also, the profit that we made on the sale of Evander. And it leaves us with a net profit of ZAR 1.130 million for the quarter -- for the 9 months and a headline earnings per share of ZAR 2.34. This is in dollars, can we skip that? Graham?

Graham Paul Briggs

Thank you very much, Frank. Talking about Papua New Guinea, a slide here of a drill rig with a lot of mountains in the background on Papua New Guinea. I'm going to talk little bit about Wafi and Golpu and there's a few slides on this. Firstly, our plan on Slide 33 here, a plan of the area showing you Golpu, Wafi and in circles there in the yellow dashed lines, various boreholes and areas of interest which are, at the moment, poorly defined and therefore, not necessarily continuous. So during the quarter, a lot of drilling has happened in Golpu. I'll take you through some of that. But just looking outside of Golpu, and the one we focus on here is the eastern margin WR457, and you can see the sort of gold grades there, that's a significant gold grade hits and in an area which is -- mineralization which is more similar to Wafi. And so this is an area that we don't understand yet. There'll be a lot more drilling that happens in and around this area to understand it better, but it's certainly all good news.

If you go over to Slide 34, the diagram is a little bit difficult, so let me try and take you through it. The dark sort of orange, goldy color is the grade shell at 1.5% copper and this was from the 2012 resource. So the 2012 resource modeling you can see was that dark color. With the latest information and you can see some of the drill holes on that slide, you can see the sort of pinky color which is around that, that's for leapfrog modeling at the moment. At the same grade cut-off of 1.5%. So it looks -- and it's apparent that there is a much bigger ore body here and it's more continuous. You can see that there's a gap there where it says Expanded 1.5% grade shell. You can see that sort of gap looks like it's going to be filled. And what has happened here is that the pour [ph] fee amount has also increased.

The other area on the map is that blue area. This is the argillites, which is a High Arsenic Zone. That actually looks like it's less than we predicted in the past. So this is all pointing to good news. What we have on it is also the infrastructure as planned from the feasibility study, and you can see the sort of shaded gray area, which is the -- which was the indicated Lift 1 area. So Lift 1 is looking better. On top of that, there have been better recoveries from the metallurgical test work that we've done. So this is all looking very much more optimistic in Lift 1 area.

Turning to Slide 35. This is now talking about Lift 2. Again, some more drilling that's happened, although, a lot of the drilling has been focused around Lift 1, some of it, obviously, has gone through to Lift 2. And we've certainly seen some very spiky grades, and this is good news. Spikey on the low side is bad news, but spikey when you get gold grades up to 110 grams per tonne is very good news. So we are looking at, hopefully, better recoveries here and better grades in Lift 2 as well. And so this is all quite optimistic for Golpu going forward.

So what does all of that mean? And on Slide 36, I'm trying to describe it in the slide. The partners have decided to do some more project optimization work. This follows on, basically, almost 10 kilometers of drilling since the close of the pre-feasibility study. We're looking at something now which is probably a more modular and much more of a staged approach. Looking at sort of optimization of these projects, it looks like we've got a project which we can stage differently to what we were anticipating before. So project activities during the next year are going to be focused on better project definition and obviously, while that continues, we're going to not spend money on what would have been something which is looking at the previous, sort of, design and mining of it. A lot of hard work going on there, think tank sessions and planning and budgeting sessions, and so on. Technical guys are working hard on it to complete this by June. And then, we will be able to give you better numbers post the closure of the -- and the signing off of the budgets.

New metallurgical and geological information, obviously, coming in new information on the technical side, geotechnical side, a lot of work has happened since the close of the pre-feasibility study. So in finality, the project schedule, first production, we'll look at all those as we do this optimization work and get back to you when we have the information. But generally, it looks like a lot lower expenditure plan for financial year '14.

On Slide 37, looking at the whole of PNG, you can see the blue areas of the Morobe joint venture, Wafi-Golpu, Hidden Valley on there and all the exploration areas. And then, the red areas, basically, looking at the Harmony 100%. We've got a good look at Mt Hagen. We've done quite a bit of drilling there. At one stage, we're very optimistic. We've decided to withdraw that and it's -- there are snuffs [ph] there but we're not finding anything economic. We've now started some serious work at TARI, and that exploration has started with the drilling. And there's also quite a bit of work happening at Amanab. And there's a bit of information on that, certainly, in the quarterly booklet, as well as here. On TARI, you can see on Slide 38 a nice picture there. You can see a drill rig in the foreground, the Lake Kopiago in the background. Again, this is an area which is basically in the highlands of Papua New Guinea, certainly, in very optimistic geology. We're looking at the geology that's not too dissimilar from Ok Tedi here and you can see the words limestone mentioned in some of the geology. That would indicate that we're probably in a terrain which is not too dissimilar from that.

Going over to the next slide, adding value to mining communities. This is a picture of Masimong 4 hostel, very neat units here, apartments that we're looking at of various sizes. A few 1-bedroom ones, mostly 2-bedroom, 3-bedrooms. A couple of bachelor ones as well. You can see it's really based on green theme. You can see that the -- solar heaters on the roof and so on. Really, a tremendous project. And so with the success of this one, we are now going into our second one, which I'll go into.

Slide 40, we are talking about multipurpose sports courts here. We've got several now scattered around the country. These are in schools and the multipurpose sports courts really seem to be working quite well. You can see why they're called multipurpose from the diagram. So we've been sponsoring quite a few of these, keeping students happy and really, being able to give them the facility to be able to play sport and improve in that way.

On Merriespruit 3 project, I'm on Slide 41. This is a project which, although, we haven't done -- finished the complete planning, I believe approximately 500 rental units will be available here. The one thing that you should understand about both Masimong and Merriespruit 3, this is not necessarily housing for our employees. This is housing for the community. So that's why we call them rental units. We have managed to negotiate some units for our own employees. On Masimong, we managed to get 25% of the units for our own employees. But this is a cooperation between the government, the provincial governments, certainly, between the local municipality and ourselves. And so we've put 120 hectares of land into the local council. We're really focusing again on the green theme when it comes to water and power. And the complex has got a whole lot of facilities, including church and recreation by areas, crèche and so on. Total value for this project, at the moment, is estimated at ZAR 350 million. So that would include the buildings and the land and all the money that's going to be put into it to improve it. So this is a project which is going to take some years to complete, but it's certainly quite an exciting one. We did talk to you, I think, last quarter or maybe the quarter before on some other projects which we're also looking at. But this is the first one -- first cab out of the rank.

I just want to conclude now, and on Slide 43, what are we working towards? Improved safety. We've done all the disposals. We've done all the restructuring that we planned to do. Evander, Rand Uranium is gone from our portfolio. We have net cash -- Frank took us through that. Capital expenditures has been funded by our own operations, by our own cash flow. We haven't had to borrow to do that. We have implemented these austerity measures and the reason I call them austerity is that they are deeper cuts than just simply cost savings. We committed to our social responsibilities, we've indicated that by looking at both Masimong and the sports courts, as well as the Merriespruit 3. And we're obviously very leveraged to the gold price.

Final slide on our strategy. Focusing on these main themes. Obviously, with the title intact, that's optimizing operational delivery, that's safety, delivering our projects, operational plans are very important. Our guys back on the operations are very, very focused on this and doing some planning at the moment. When we talk growth, we're talking about, certainly, growth in production that's been planned. Remember that we have spent most of the capital for this -- for these projects but also, growth in profits, is really what we're looking at. Sharing our rewards, not only paying dividends to our shareholders but certainly, in sharing our profits with the stakeholders involved in us.

Thank you very much, ladies and gentlemen. I think what we will do first is to get questions from people on the line. And then, after that, those that have sent questions via electronic media, Marian will probably read those out if we get them.

So thank you. Let me hand over, firstly, to questions.

Question-and-Answer Session

Operator

We have a question from Anna Mulholland from Deutsche Bank.

Anna Mulholland - Deutsche Bank AG, Research Division

I've got 3 questions, please. The first, hopefully, is a relatively quick one. Just looking at the grade drop at Tshepong mine and wondering what the specific reason was for that, if we can expect a recovery in the following quarters? The second question is on exploration costs. Are you specifically looking to turn back on the exploration side of things. I'm not sure if you're including that cost in your ZAR 400 million target. And if you're not, are you looking to take a significant chunk out of exploration as well? And finally, under what circumstances would you actually look to close mines and shaft? I mean, you're saying that that's not on the cards at the moment, but what are your sort of benchmarks for an environment in which you'd have to start considering that?

Graham Paul Briggs

Okay. Thank you very much Anna for those questions. On Tshepong, yes, it's been a poorer grade performance. I think it's a -- most of the new, better grades is coming from the southern side of the mine from the decline area and it's a case of getting that up to full production. The guys are working hard at it. Development is looking good. It's not a long term issue. We need to get that grade up into the area of, sort of, the 4.5 to 5-gram a tonne mark. Exploration costs. Yes, we have had a look at the exploration costs. The areas of the joint venture have been looked at quite extensively. Most of our exploration costs is in PNG. I would expect that there's probably going to be somewhere around a 15%, maybe even up to 20% cost cuts in exploration costs. It's a case of relooking at everything we do around exploration, not only the costs in the ground but the administration, the helicopter charges and so on. On closing of mines, the underperforming mines at the moment are those mines that are building up in production. And certainly, if we didn't believe in the ore bodies, we would have a good look at those mines. But at the moment, we've got no planned closures. The next mine to close is really quite a small one, and that's Steyn 2, I think that's probably in the region of 12 to 18 months time. But I mean, that's been mining it's shaft pillar and that's planned for closure. But we have got nothing else planned at the moment. We believe all our operations can be profitable at this gold price.

Operator

Our next question comes from Allan Cooke from JPMorgan.

Allan J. Cooke - JP Morgan Chase & Co, Research Division

Graham, Frank, just a question on your CapEx, let's say [ph], the ZAR 400 million. Could you indicate briefly where you're taking that CapEx, which mines are you taking that CapEx, that ZAR 400 million in aggregate out of the facility?

Graham Paul Briggs

Allan, sorry, I did get the question but not very clearly. I think your question was about the ZAR 400 million savings in South Africa and where does it come from. It comes from various areas. It's really looking at the total CapEx build in South Africa. So it comes from a multitude of areas. It's really looking at that CapEx that would be classified as sort of shaft and growth capital. The development capital, which is the substantial part of the capital, is continuing unabated. And then, the other part of capital, obviously, we need to look at carefully is what we call sort of AEs or bigger replacements and so on. But most of that is -- has to be performed because it is of maintenance capital form. So our forecast in capital, I think, is reasonable looking forward. As I said, we are busy with the plans. At the moment, that sort of ZAR 400 million is an objective, and it's something we believe we can take out.

Allan J. Cooke - JP Morgan Chase & Co, Research Division

You stated that when the crushers are in them and you move back to more normal production at Hidden Valley, your costs will come down some 20%. Is that on this quarter's cost, just to put a number to them? And what is your expectation for production at Hidden Valley, with the crushers in.

Graham Paul Briggs

Yes. I think what is going to happen -- I mean, the crushers are busy going in at the moment, as we speak. I would expect that, certainly, during the next month, we'll have -- we'll be going through the full commissioning phase. So as from the beginning of our financial year '14, we should see normality in the crusher and also the overland conveyor. The big cost that comes out of there is the cost of hauling. Cost of hauling is phenomenal. When you're hauling that rock down to the Valley, 5 kilometers and you got to take the trucks back up again. So that's the big cost there. Also, getting good performance out of the overland conveyor with a period of no slabbing rocks and no tears to the belt. So that's going to be quite a massive change. My expectation is that in financial year '14, we'll see Hidden Valley back in a profit situation. But actually, achieving the planned outputs, which is somewhere around, probably, just over 100 -- say, 110,000 ounces for the year, financial year '14. A bit of an estimate, as I said, at the moment but we haven't finished our plants. But that's what I would guess it's looking like at the moment.

Allan J. Cooke - JP Morgan Chase & Co, Research Division

And then, just finally, if you could update us on your planning for wage negotiations, and what you see for Harmony as a group? And Kusasalethu, in particular, where you have that 60% AMCU representation, are you still committed to the chamber process? How do you see things unfolding? And potentially, could you be negotiating wages on a mine by mine basis, for example, at Kusasalethu where you have that high AMCU representation?

Graham Paul Briggs

Yes. Good question, Allan. It's going to be an interesting process, call it interesting, difficult process. I think the different parties in the negotiation, it's certainly going to be the interesting part of it. Remember that there are different parties, not only from the union side, but also from the owner side because we have -- there's been several transactions in the last couple of years, which now include Pan African, Gold One, Village into that bargaining process. And also, Sibanye and of course, with the split of Gold Fields and Sibanye. So there are some interesting dynamics that are going to happen. AMCU, of course, is a complication for us because as you rightly pointed out, it represents Kusasalethu, really, and not the rest of our operations. We are not 100% sure whether AMCU will be in on the chamber process or not. But irrespective of that, obviously, they're going to have to be included, somehow, in these wage negotiations. As to the what's going to happen in the quantum, certainly, Harmony, the last time around, managed to negotiate a profit share. That profit share has worked, I think, well for us, as well as well for employees. The focus has been on profits as opposed to just production targets. So that is helping us. It's certainly a process that we would like to continue, in other words, continue to have a variable portion to our salaries, which we can all see the benefits of. So it's difficult to give you a quantum, certainly, on what's going to happen at the negotiating table. My sort of assumption going forward is that the quantum on the basic pay will be conservative and hopefully, the upside will be on the variable portion.

Operator

Our next question comes from Adrian Hammond from BNP Paribas.

Adrian Hammond - BNP Paribas, Research Division

I have 2 questions. First one for Frank. Frank, with regards to Slide 10 and the outlook for CapEx. Could you split those numbers for the revised guidance out for SA and Papua New Guinea? And then, my second question, on Slide 16, you indicated reserve grades and development grades. Could you indicate where the company is sitting at right now in terms of where it's mining at?

Graham Paul Briggs

Yes, let me try and answer both, if you don't mind. So the capital expenditure, on Slide 10, that we're giving you the financial year '14 forecast, we deliberately haven't split out there, Adrian, because we haven't got the final figures on it. So it is an estimate and we will revise this as we get our new plans in. But I guess, we are indicating that ZAR 1 billion is probably going to come out of the Papua New Guinea plans and that's basically mostly on, probably, Wafi-Golpu, but a bit of it is probably on Hidden Valley. And then ZAR 400 million of it is coming out of South Africa. So that's Slide 10. Your next slide number was 16, I think. So these are development grades, in the black line, of all the operations and this is the reef development and this is the grade. So in the red line, we've got the life-of-mine reserve grades. That's the number that you will see in the Appendix, and Slide 47 also, 47. And you'll see that, that is the mineral reserve grade June 2012 in the red, and our development grades here. So we've related them back to centimeter grams per tonne. In other words, the width multiplied by the gram per tonne. What it does say is that we are actually developing grades which are higher than our reserve grades at the moment. There's detail on that, mine by mine, in the quarterly. Does that answer your question?

Adrian Hammond - BNP Paribas, Research Division

I was just trying to kind of find out where you sit right now in terms of mining grades in centimeter grams per tonne?

Graham Paul Briggs

Yes, I can't give you that figure, unfortunately, because I don't have it. But I can certainly -- we can arrange to get it for you.

Operator

Our next question comes from Andrew Byrne from Barclays.

Andrew Byrne - Barclays Capital, Research Division

Just 2 questions, if I may. The first one is on Phakisa. Is there any chance you can maybe give us an update post the fire last week, kind of, where we're at and what we should expect for the remainder of the year? And then, the second question is -- this may be a bit of a broader one and maybe you can expand on it, it's how should we think about Hidden Valley, realistically, over the next 2 to 3 years? Because obviously, kind of, you've made a large investment there, plus as well, you've also kind of used it to demonstrate your social licensing and almost got a license to operate in Papua New Guinea. Do you feel that if you were to close that mine at some stage, if that was the deal, split decision made, would that jeopardize your ability to develop Wafi-Golpu? And how do you think around those or should we treat them as truly mutually exclusive?

Graham Paul Briggs

Yes, 2 very interesting questions. The first one on Phakisa fire, and I think you've probably seen some of the news flow on that, that the Section 54 has been basically lifted on both those mines, Tshepong and Phakisa. It does affect what's called Section 117 on Tshepong, which is in the -- basically, in the chimney areas of fires so we can't get into that, so Tshepong is probably not mining about 14 panels or so. So it's affecting a little bit on Tshepong's door. And on Phakisa, we've also lost some panels there because they are in areas where we can't ventilate them. So production is not back to normal yet. It will only get back to normal once we've cleared the fire. The readings of gases are coming down. We believe the fire is basically out but smoldering. And you can't really open that thing because once you open it, of course, just like any smoldering fire, you create -- you fan the flames. And so we have to basically monitor that thing and see how long it goes. We just don't know how long that fire will continue smoldering. And at the moment, we have a slightly reduced production, but the guys are doing what they can to get production up from other places. So it certainly will affect this quarter, but I don't know to what extent. On Hidden Valley, yes, I guess, the correction is, we do have a social license to operate in Papua New Guinea, and I think it would be a dim view of everybody if we close this mine because we haven't been able to manage it properly. It is a mine, I believe, that can operate at a profit and that's what both partners believe, and there are a lot of areas that we need to improve in this -- on this mine. And I've indicated that I believe we can get it back into profitability during 2014. So that's the intent going forward. Obviously, it needs to make much better profits going forward. So -- but in 2014, I think we'll get it back into a profitable situation. So no intention of closing that operation and certainly, it is a mine that deserves to operate.

Andrew Byrne - Barclays Capital, Research Division

Sure, okay. Just one very last question. Apologies if I've missed it somewhere. What is your guidance now for FY '13 in terms of production and costs?

Graham Paul Briggs

Yes. So you've got 3 quarters. I think we've given you that number on the 3 quarters and so there is that and then, you just need to put in this quarter. What is this quarter going to be? We haven't put any predictions out there but essentially, we are saying Kusasalethu is going to get up to around about 50% of its production. And I'm talking gold production. So that's going to happen and that was in our previous quarter's prediction. And the other operations should be operating normally, except for a little bit of loss of production on Tshepong and Phakisa. But -- so we can expect a fairly strong quarter this quarter coming up.

Andrew Byrne - Barclays Capital, Research Division

And kind of quarter-to-date, have you seen a recovery in grades or is it staying kind of relatively flat on Q3? That's obviously instrumental to the investment case with yourself, a good bulk of the growth to 1.7 comes from the grades.

Graham Paul Briggs

Yes, it comes from grades as well as volumes. The grades are always a difficult thing to predict until you get to the end of the quarter because the guidance that we have is the daily belt grades, the daily plant grades. But they don't actually produce the final sort of recovery grades and certainly, for the gold. We are only 1 month into the quarter and therefore, it would be very bold of me to give you an exact sort of declaration of what the grade is going to be at the end of the quarter. However, having said that, I mean, our grades are looking much better at the moment. So I'm predicting a much better grade towards the end of this quarter.

Operator

Gentlemen, we have no further questions from the conference line.

Graham Paul Briggs

Okay. Let's see if we've got some questions from the web. And I'll ask Marian, if you don't mind, to read them out.

Marian van der Walt

Yes, sure. Good morning, to everyone. This question comes from Mike Schroeder from Alt Mutual. There was a report last week that full-time union representatives are no longer paid by the mines. Can you confirm that, and how many people would that be in the case of Harmony?

Graham Paul Briggs

What I can confirm is that this is an issue that is being discussed with unions and it, certainly -- the intent is to stop the practice in the future. A lot has been, sort of, written in the press about this and sort of giving the bad side of it. But remember, this practice was started, and I think it was probably towards the end of the '80s. And this was meant to give unions more exposure to, sort of, bringing them up to an improved sort of negotiating status. So it was made post the sort of 1980s, I believe, in the area of education and training. So people have sort of they haven't -- have missed that side of what has happened here, it's an area which -- and really, the intent is not to continue it in the future. I don't know the exact numbers in Harmony, but it's not a huge number. Sometimes a regional representative may come from another mining company, sometimes from Harmony. One can accept that probably most of the regional representatives in the Free States are probably ex-Harmony or Harmony employees whereas, when you get into the head offices number, they're probably not. But I can't give you the exact number, I'm afraid. And it's not because I'm hiding any subjects, it's just that I don't know. We can attempt to find that number out.

Marian van der Walt

Of course. And then, Mike had a second question, perhaps, aimed at you, Frank. Congratulations on the timing of your Evander sale. Will you pass on these proceeds with your next dividend?

Frank Abbott

Thank you for the question. When we look at dividend, we take all the different things into account. We'll be looking at the gold price, the capital expenditure before we make a decision on the dividend, but it certainly helps our balance sheet.

Marian van der Walt

Thank you, Frank. And then, the last question comes from Steve Shepherd. On Golpu, Graham, if the gold price stays at or below $1,500 an ounce, and considering your increased balance sheet, which you highlighted, may they be mirrored in inviting a third global diversified mining partner into the project?

Graham Paul Briggs

Yes, nice question, and remember that Golpu is not just about the gold price or the gold content because there's a lot of copper. The copper grades are what really makes this project a different category of project. So it's a combination of what is going to happen to the gold price and the copper price in the future. Remember the planning that we've been doing on various studies, pre-feasibility studies and the various studies we've done and really been looking at the gold price of around about $1,250 to $1,400. Frank can correct me if I'm wrong. But in that range, we've been looking at the gold price. And then, we've been looking at copper prices in the range of, I think, $270 to $350. So we've had various ranges of them, and they haven't been looking at the spot price. So it's a project, it's -- because it's going to have such a low cash costs, it's going to be a project that produce a significant amount of cash. It's one of those mines that will survive even in the lowest commodity price cycles. And that's the beauty of the project. So it deserves to get built. It deserves to get built as quickly as it can, but as properly as it can as well. So it also needs to be built right. To invite a third party. No, there's no intention of bringing a third party in. Remember that the government is potentially the third-party there and potentially, they can get 30% that would dilute Harmony down to 35%, which is probably enough dilution anywhere on a project like this. No, there's no intention of that.

Marian van der Walt

Thank you, Graham. And that concludes all the questions from the webcast participants. So I think we can conclude with this.

Graham Paul Briggs

Okay. Thank you very much. Thank you, Marian for reading those. Yes, so I guess, our March quarter was a tough quarter. What's happening in the gold price, we've already started a process there of reducing costs. Austerity measures, as I call them, although, governments normally use that terminology. We have really been able to fund our capital. So in the past, funding our capital, funding our exploration is what we've done, that we don't do on borrowings. And we've got cash in the bank as well. So we're in a strong situation. The guys are optimistic on operations. It looks like we're doing all the right things on the operations, producing the results. Obviously, the guys need to keep focused on those plans because that's really what's going to make Harmony a successful company. Thank you very much for listening and enjoy your day.

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Source: Harmony Gold Mining Management Discusses Q3 2013 Results - Earnings Call Transcript

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