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Executives

Graham Paul Briggs - Chief Executive Officer, Executive Director, Member of Corporate Social Responsibility Committee and Member of Information Technology Communication Committee

Frank Abbott - Chief Financial Officer, Financial Director and Executive Director

Analysts

David Leffel

James Hayter

Harmony Gold Mining Limited (HMY) Q1 2014 Earnings Call November 8, 2013 8:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the International Conference Call for Harmony Gold Mining Company Limited First Quarter Financial Year 2014 Results. [Operator Instructions] Please also note that this conference is being recorded.

I would now like to turn the conference over to the Chief Executive Officer, Mr. 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 in the world. A very warm welcome to you for our Q1 financial year '14's results. A pleasing set of results from my point of view, and I'll take you through the presentation. Certainly, hoping you've got the presentation downloaded or maybe you're just watching it on your screen.

Slide #2 is about our Safe Harbor statement. And you'll notice there's a bit of a change there from previous ones because we've now got a Form 20-F out and new integrated Annual Report, which, of course, you can also download on our website. As far as the agenda goes, I'll be talking about measuring up, I'll be talking about quarterly results. Frank is here to help me with financial results and then we'll conclude. And if there are further questions of any other nature I have Jaco with me, so we'll be able to answer pretty well any questions that you care to throw at us.

Slide #5, this is our asset portfolio. It consists of mines which are all acquired mines, and I'll take you through that in the next slide as well. And our intent is to really get those mines that aren't in steady-state production into a steady-state production. Those mines are typically mines we spent a fair amount of capital on, sinking shafts and the like, and getting them into steady-state production.

And of course, we will be not talking so much about Wafi-Golpu. There's a little bit of a note in the quarterly. Essentially, what's been happening there is more drilling has been happening on the orebody, but also looking at infrastructure, in other words, potential shaft sites and the like. And that's really the drilling activities that have happened on sites. In the offices, more studies, and we're still hoping that, by June next year, we'll be able to give you a revised estimate of capital expenditure production and the like. So there's still quite a bit of things happening there.

If we look at Slide 6, just to let you know, as you well know, of course, mine development at Kusasalethu, this is a new mine where shaft is sunk -- shafts are sunk, and we're now starting to mine that orebody. Small amount of the tonnage comes out from the old mine. Shaft sinking at Phakisa and Doornkop completed, and those are the ramp-up projects. The decline is sunk at Tshepong. We went through a bit of a lulling grade at Tshepong. That's on a path to recovery. And in progress at Joel, which is really an extension to this original 7-year life, now taking it to a 14-year life. And the Bambanani, the decline there, which will enable us to take out the ore from their pillar [ph]. It is starting to ramp up, but the decline is being equipped as we speak.

The whole mining industry has really been talking about reducing costs. Our way of tackling this, of course, is not only to reduce costs, but improve productivity and increase gold production. So those 3 have really been going all hand in hand. Most of our capital expenditure has been spent in South Africa. There's still, obviously, quite a bit of maintenance capital going on, mainly in development. We do have a strong balance sheet, and I've shared a little bit about Golpu, but it's still one of the fantastic orebodies of the world.

If we go to Slide 8, you can see the ounces produced increasing 12% quarter-on-quarter and also from the previous quarter. We've separated out Kusasalethu so that you can see that there's actually increase in production in other units and not really just getting Kusasalethu back into operation. Slide 9, this is a -- it shows -- demonstrates a 7% decrease in cash operating costs, on the right-hand side there, the blue dot and the green dot. And then we've stacked this up in cumulative production versus rand per kilogram.

Better probably to look at Slide 10, which is in dollars. So left-hand slide is in dollars per ounce, bottom is cumulative production. And this, remember, is at a cash cost level where you see 11% decline in cash costs there on the cash cost basis. What we're reporting now is happening in the realm of all-in sustaining costs, the World Gold Council method. The first being I'd like to bring your attention to, on Slide 11, is that we're talking about gold sold as opposed to gold produced.

For international purposes, let's go to Slide 12, which is the same as Slide 11 except we're talking about dollars per ounce here and gold sold, again, is in the sold category as opposed to produced. The lines there, operating costs; local economic developments; share-based remuneration costs; corporate, administration and other costs; rehabilitation, accretion and amortization costs; on-site exploration, capitalized stripping and underground development. Most of our cash -- our sort of money is spent on underground development in South Africa; and then sustaining capital. That's really big capital equipment, ropes for hoists and big pumps and the like. So you can see that all-in sustaining costs quarter-on-quarter have gone from $1,551 an ounce to $1,264. That's a $287 per ounce reduction. That is quite a significant reduction quarter-on-quarter.

If you go to Slide 14, all-in sustaining costs, there's a drop. These are 19% lower in -- quarter-on-quarter. But you can also see that we've got several operations above what the gold price was that we received, and that is really the area that's going to require for a lot more focus. If you were to look at this quarter-on-quarter, you'd see that Hidden Valley has declined quite a lot, and that's good news as their crusher is now in progress, and therefore, using the conveyor. There's been some modifications in the plant. We've been looking at sort of restructuring the management and the like on that area. So there's big progress there. Optimistic that it will come down further.

Kusasalethu has not yet got down to its former period before the labor issues. That, hopefully, will happen during this quarter. Phakisa is doing well where it is. There is still quite a bit of capital that's being spent there. So that's where the big difference is in Phakisa. More work required in Target 3, getting to the Basal reefs and mining more from the Basal reefs. Doornkop, disappointing performance from Doornkop, as well as Masimong, so there's a lot of focus on those 2 areas. In Doornkop, of course, there's a bit of a grade issue with the Kimberley reefs. We will be looking and focusing a lot on those areas, so all the way down really to Tshepong. I'm expecting better results from Tshepong this coming quarter as well.

Slide 15, just to show you the grade increase. There's, obviously, detail in the quarterly operation by operation where we are in the grade. And you can see that grade increase with our sort of forecast for the year as well. Going to the quarterly. I think the highlights of this quarter was certainly the 2-year wage agreement that was very successful. A lot of cooperation between the mining companies to be able to get to that. The highlights of the quarter, of course, that a significant increase in gold production coming out of the increasing tonnes, increase in grade and of course, good cost control. And the reduction in quarter-on-quarter costs, I think we've basically covered that.

The final and net results, and Frank will take you through some of the cost figures, but the 55% increase in operating profits in rand terms; in dollar terms, 46% increase. And that's mainly due to the slight change in dollar-rand exchange rates, and that can be seen on Slide 18, where we look at the group operating results. Very pleasing there in the changes -- percentage changes. Everything is positive, except for the gold price in dollar terms. And that comes about, if you look at the bottom line there, a ZAR 9.96 versus ZAR 9.45 in the previous quarter. But very pleasing that everything else there is in the positive territory.

Slide 19. We have -- between Harmony and Sibanye, we've been looking at synergies in the Free State, that really is the adjoining mines of Joel and Beatrix. There's 2 areas that Beatrix can mine that we won't be mining, and there's 2 areas that we can mine up theirs that they won't be mining. So that's a fairly simple sort of swap of ground which makes sense. And then there's further areas which Joel can mine out of Beatrix, and for there, we are -- have agreed to a 3% royalty on gold revenue. This deal is subject to the Department of Mines', basically, Section 102 approval.

I'd like to hand over to Frank to take us through the financials.

Frank Abbott

Thank you, Graham. If we look at Slide 21, this is extracted from our income statement in rand terms. Our revenue increased by 15%, and this was based on higher sales on the back of 12% more gold produced during the quarter. Our increase in production costs of 6% was largely due to the increase of electricity of ZAR 140 million because of the winter tariffs that we have in the September quarter. Operating profits went up by 55% to ZAR 1,037 million. Amortization and depreciation increased, and that was because of the higher production during the quarter. The exploration expenditure, you can see we've been lowering our exploration expenditure at Wafi-Golpu, and we had a net profit of ZAR 13 million compared to a loss from the previous quarter.

If we look at Slide 22, we've got extracts from our income statement in dollars. You can see the revenue went up by 9%. The 13% increase in gold sold is offset by the exchange rate. Our production costs were in line with the previous quarter in dollar terms. Operating profit went up by 47% to $104 million. Amortization was pretty much the same as the previous quarter. Exploration expenditure was $14 million, a reduction from the previous quarter because of lower exploration expenditure. And you can see that we had a profit compared to the loss from the previous quarter.

If we go over to the next slide. In dollar terms, our higher production equals stronger margins. We've got revenue of $403 million, which is 9% higher than the previous quarter. Cash operating costs of $299 million, giving us a cash operating profit of $104 million. And if we take off all the sustaining costs, including capital of $81 million, we had all-in sustaining margin of $23 million.

Thank you. Graham?

Graham Paul Briggs

Thanks a lot, Frank. In conclusion, and I'm on Slide 26 here, I think our view of the long-term gold price is still very bullish. However, in the short term and short to medium term, I guess, in the next 6 to 12 months, we see a static gold price, in which case we're going to continue focusing on costs, productivity and producing more gold. And we think we are in a good place to meet these challenges, so we're certainly quite pleased with that.

I think on our strategic advantages, we have an increasing grade. We've been talking about that as our new assets bring in and -- bring out the tonnage that will increase the grade. We're still the lowest cost-per-tonne producer in South Africa. A lot of our capital is spent on our South African operations, and so it's the case of bringing those into production. Free cash flow we've got. We certainly don't plan to do any hedging. That's not in our nature to hedge at all no matter what happens to the gold price.

Balance sheet strength, and we're certainly geared to South African currency. You can see that in these results now, where probably 85% of our costs are really South African-based. The other -- the balance is really equity with the dollar and if you look at chemicals and maybe steel products and the like. And we've got earnings growth.

Thank you very much, ladies and gentlemen. Now I'd like to open ourselves for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from David Leffel of Deutsche Bank.

David Leffel

Just going on from your last slide, strategic advantages. I mean, you've highlighted, in the last couple of periods, the -- you're being the lowest rand per tonne cost producer in South Africa. How do you take advantage of that strategic advantage in your view?

Graham Paul Briggs

David, I think if you look at all our operations being acquired, I think that the trick is that you can acquire somebody's assets which they can't sweat anymore and you can actually sweat them over longer and get better life and make a profit out of them, where, possibly, a competitor couldn't. So I guess that's where the strategic advantage lies.

David Leffel

But I mean, recently, Graham, maybe a follow-up, we've seen you more of a disposal -- disposer of assets in South Africa, in regards to Evander and some other assets. Do you think there's opportunities out there for you to become an acquirer?

Graham Paul Briggs

Yes. I mean, the Evander -- really, we haven't disposed of much at all, David. But we must be moving closures. Evander was disposed of for a particular purposes, and that was that it has a 10-year life at shaft. But beyond that, it requires big capital. That big capital is going to be -- was seen to be in direct competition with the potential spend on Wafi-Golpu, and therefore, we didn't want to get in that situation. Our shareholders are really giving us the message that spending more big capital in South Africa at that time was not a good thing and diversification into Golpu is probably a good thing. So we haven't been a seller of many assets. But all our assets, as I said, are acquired.

Operator

[Operator Instructions] Our next question is from Davide Barbuscia of Debtwire.

Davide Barbuscia

I would like to ask about your financing plans. Basically, I understand that you had a revolving credit facility with Nedbank of ZAR 850 million that is maturing in December. I'd like to know if you plan to renew it or to renegotiate it? And in addition to that, also, about your term loan with Nedbank and another RCF of $300 million, I mean, what's the plan? Are you raising additional funds soon or you're waiting until 2017?

Frank Abbott

Thank you. If I can answer that. The term line with Nedbank, we are in the process of renegotiating that. But we haven't really drawn down on that. I think we owe about ZAR 400 million on the -- in rand. We've drawn down $270 million on the other loan, and that's repayable in 2 years' time. And we do not see that we need to renew that at this stage.

Graham Paul Briggs

If I could just complete that as well. I think the intent of, certainly, this management team is to have minimal debt, but enough facilities that, if you need them, you can use them. But certainly, as far as the net debt goes, we'd like to have an absolute minimum. Now there's no reason why we should have a lot of debt because we paid most of our capital, and our capital has come out of our operating profits. So without having a real need to go out on a big borrowing, we don't have a way that we can spend money. Yes, I guess just on a sort of strategic level, we don't like to have a large amount of debt.

Operator

[Operator Instructions] Our next question comes from James Hayter of Rossport Investments.

James Hayter

Just quickly on Wafi. I know the focus is on the South African operations. But is there a timeline to any announcements that we can expect, or an update that we can expect on the drilling and the positioning of -- the potential positioning of the shaft? I'm just looking for some details of when we might see some news on what the plan is there.

Graham Paul Briggs

Yes. James, good question. The plan on the site is actually doing a small drilling, and that is including looking at infrastructure and shaft sites and so on. At the same time, we have a team working on looking at the sort of, basically, the feasibility and information to try and get an update to you on what we plan to spend there, what sort of production level it's going to be like and so on. And that is sort of on the understanding that the previous pre-feasibility study under these sort of market conditions is not going to go ahead -- big capital, long payback and so on. So the intent is this modular-staged approach, where we have much lower capital for a smaller mine, building up in later years to a bigger mine, a modular sort of expansion. My hope is that by June next year, we'll have a lot of that work done. So we'll be able to try and give you an update shortly after that.

James Hayter

Okay. So we could expect an updated feasibility study early second half next year, so the July, August time next year, tentative?

Graham Paul Briggs

Yes. I think it's more likely to be an updated pre-feasibility study.

Operator

Gentlemen, there are no further questions. Would you like to make some closing comments?

Graham Paul Briggs

Yes. Thank you very much, and thank you, everybody, for dialing in. I think between us, management here, sitting in the room, pleasing day that we've been able to report these much better results with the higher production, the lower costs, and obviously, that's gone down to the bottom line of better profits. So I think we are facing the future quite optimistically. There's still work to be done. There's always work to done. And I've given indication of which operations are going to get the highest focus in the next quarter. But we certainly illustrated, in the last 2 quarters, that we can -- well on the way to manage the situation and do better. Thank you very much for phoning in.

Operator

On behalf of Harmony Gold Mining Company Limited, this concludes today's call. Thank you for joining us. You may now disconnect your lines.

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