Graham Briggs – CEO
Hannes Meyer – Financial Director
Bob Atkinson – Executive, New Business and Projects
Allan Cooke – J.P. Morgan
Steve Shepherd – J.P. Morgan
John Fryer [ph] – Alexander Profit [ph]
Harmony Gold Mining Company Limited (HMY) F2Q10 (Qtr End 12/31/09) Earnings Call Transcript February 8, 2009 8:00 AM ET
(Starts Abruptly) We're going to look at the operations, operations overview, and with the different operations, a little bit of detail on that, not too much. Hannes will take us through financials. And talking about exploration, exploration in PNG, and hopefully we’ll see the good results that we’ve had from PNG drilling.
The quarter safety, we’re always trying to deal with safety first in every meeting that we have, unfortunately five fatals this last quarter. We’re looking forward to a quarter when we don't have any fatals, spending a lot of work and a lot of effort on safety in general, and we’ve got some great figures when you look at the trends. However, we need to get fatal-free.
A very pleasing 45% increase in cash operating profits, operating profits at 800 million Rand, and that’s a nice figure – a nice rounded figure to have. But 11% increase in the Rand gold price of course helped us. And the Rand gold price, roughly what it is today, it’s closed to 264,000 Rand a kilogram.
Underground operations in South African operations, free cash flow after the CapEx, in production terms, 11.5 tons of gold, very similar to last quarter. We spent quite a bit of efforts of what we call ‘fixing the mix’, and really, I’ll talk about some of the closures of shafts a little later.
Slight drop in capital expenditure, that was to be expected. I’ll remind you that we said we were going to spend about 3.1 billion Rand of capital this year. We’re going to have a little slightly more than that, because the Pamodzi Free State has intervened. In our planning during the flow swells [ph], so it will probably be up at about 3.4 billion Rand, 3.3 billion Rand for the year – financial year.
Good progress in PNG Hidden Valley. A lot of things have been happening there. They've delivered some good goals, and obviously, this with some very good exploration results.
Just going to operations, operation results, and this is the group, you can see the gold production virtually flat 1% down, gold sold there slightly up, and that’s what happens in December quarter. The gold price, very pleasing that the gold price went up from the 240,000 Rand a kilogram to 265,000 Rand a kilogram.
Cash operating costs are slightly up and this is really because of underground production, which was likely down, and I’ll show you the underground production. So that’s a reflection of that. Cash operating profit, of course, that’s a highlight there. And you could see that the exchange rate is somewhat different from the previous quarter, strengthened at 7.49 Rand.
Operations Bambanani; Bambanani had a pleasing quarter, but unfortunately one fatality. What’s happening at Bambanani, of course, they're just continuing to mine in its – in these old mine areas. But at the same time, we are doing the development for the shaft pillar. That’s going very well, guys on schedule. So that’s looking good.
Doornkop improved tons. Doornkop continued to mine on conops on the Kimberley Reef through the Christmas period. At the same time, they did quite a lot of work in the shafts to get everything commissioned. But as predicted before there, will be ups and downs on the grade and the tonnage, but Doornkop had an as expected quarter.
Elandsrand, slightly disappointing, it had several stoppages, so slightly disappointing quarter from Elandsrand. Hopefully we will get a better one this quarter.
Evander had a lot of restructuring going on and we closed one shaft, the 7 shaft during December. Subsequent to that, we’ve closed another two shafts, the Evander 2 and 5 shafts. So with that sort of mantle of what’s going on at Evander, it was bound to have a disappointing quarter.
Joel, a good quarter from Joel, nice pleasing increase in grades. It’s getting some good development results. We continue to draw in the Joel area. And we’ll give you those results once we’ve got more.
Masimong remains the best Rand per kilogram producer. Slightly low on grade for Masimong during this last quarter, and that was really due to the B Reef. B Reef is highly channelized and that’s what happens on the B Reef.
Phakisa, high gold production, again this is one of those operations that’s been going through a lot of commissioning. Commissioning is going well, but there are lot of holes in there with what's happening in the shafts, and the rover, ice plants, and the like. But the guys there are doing a good job.
At Target, slight decline in the grade; at Target, we did indicate too that we’ve been doing a lot of investigation on the ore body there. That work is done. We now need to measure it in with the mine planning and do that mine planning. So hopefully that would be reflected in the next five months or so.
Tshepong, again a steady quarter from Tshepong; Tshepong longer term grades will improve as the – more mining happens in the decline area.
In Virginia, pleasing that it’s return to profitability; in Virginia, we did close one of the operations, Brand 3, so there's an increase in grade there. Slightly down in total gold, but a pleasing result for Virginia from the previous quarter, hopefully better results to come and as they return to profitability this quarter.
And then on the Pamodzi Free State assets, if all goes well, the CPs will be completed during this week, and we should be blasting towards the end of this week or early next week. We are producing some gold from the plants. From the cleanup of the plant and also Rock dumps. Our plan at the Free State assets is within 12 months to get up to about 100,000 ounces, but in 24 months get to 150,000 ounces per annum. And at that time, get to around 2,500 people. At the moment, we’ve employed 800 people ready and raring – roaring to go to get to that first blast.
Underground results, the area of, I guess, concern you can see here is the gold production. That gold production is mainly down due to Elandsrand and Evander. Evander, as expected, and Elandsrand is a little bit of a disappointment. Grade virtually flat, and the cash operating cost in Rand per kilogram terms, virtually flat, which is good cost control, considering the almost 600 kilograms that was down.
On the surface operations, the three surface grouping there Kalgold, Phoenix, and Rock dumps. Kalgold, obviously when lots of rain like we have been having, it does affect throughput in that plant, but Kalgold’s performing so very well. Fairly low grade, as you can see from the results, but it’s still very profitable producing gold at 7.83 gram a ton now. Remembering that the D Zone is mined off. We're mining from (inaudible) pits and aren't really low grade. They are getting into better material or into harder material so throughput should be improved.
Phoenix, a very good quarter; it produced just almost an excess tons 500,000 tons throughput every month, and that’s what was planned to do.
And Rock dumps really, the filler is Rock dumps. We fill up plant capacity with Rock dumps and they performed as expected.
These are the surface operating results, and you can see the slight change in the grade there that was due to Rock dumps, and really a reflection on the previous quarter where we had much higher grade cleanup from plant material in Evander.
Hidden Valley, interesting photo here of the pot conveyor, it's still under construction here. It’s now been commissioned. And this is about 5.5 kilometers of pot conveyor conveying the rock material from the Hidden Valley pits to the plant site at Tamarta [ph]. With the performance of Hidden Valley, and you may have seen it in Newcrest results, for our credit, however, is 21,500 ounces there of gold. The contractors have now been demobilized. We now have just close on 750 employees there. So life is a little bit better in the camp. But a lot of commissioning is still staking place. We’ll get into commercial production during this quarter, probably during February.
I’d like to hand over to Hannes.
Thank you, Graham. Looking at our results for the quarter, revenue side, revenue, we've had a reduction in the gold sold, and this reflects the – this is experienced in the Hidden Valley ounces, a 6% reduction in gold sold. But we had a 10.6% increase in the Rand per kilogram price received. In addition, we had about 280 kilograms that came out of the plant side decreasing the inventory in the plant.
Cash operating costs, pretty much in line, well managed the cost side, 94 million Rand reduction on that, mainly reflecting on the electricity prices, lower electricity costs due to the – some (inaudible) are now being applicable.
Inventory movement, we can see that’s the de-stocking in the plant side that’s 290 kilograms coming out of the plant, all of that resulting in cash operating profit of 800 million Rand, quite a pleasing number for this quarter. Pretty much the same as the revenue – what the revenue increased, but amortization, depreciation in line with the previous quarter. In payments, that’s dealing with the Branch 3 closure, Evander 2 and 5 shafts closures, and that’s not being written off out of our books.
Corporate, administration, and other expenses up by – that's about 28 million Rand, 10 million Rand of that is in Australia where we paid political risk insurance along the Papua New Guinea assets. And there was additional 11 million Rand, 12 million Rand in this quarter in corporate and social investment expenditures.
Exploration is pretty much in line with the previous quarter. Other expenditures, it’s less currency movements, so that’s mainly the Forex movement in Australia on our Australian assets, so less and less movement in this quarter. Bottom line, hit line earnings number $0.49 per share is a pretty pleasing number for this quarter for us, so shares are reflected in dollars.
If we look at the balance sheet, it was a big drive for Harmony to get to a – get free situation. We’ve looked at it, and then, we've had opportunities in Pamodzi. We've said we must look at some additional flexibility in our balance sheet. So when we started the quarter, the net cash position at the top left-hand side, the brighter side, the 726 million Rand. We’ve had a continuous capital expenditure in the quarter, so we’ve spent items in 92 million Rand. We paid for the Pamodzi assets, 380 million Rand, and 80 million of that is the escrow account waiting for the final conditions precedent to be met. And then we have cash from operations of 329 million Rand positive inflow, resulting in a net debt position at the end of the quarter of 217 million Rand.
We put in place a facility with Nedbank of 1.5 billion Rand. We’ve drawn down 650 million Rand of that facility. So that leaves us with quite a healthy balance sheet in terms of that 850 million Rand capacity available on that facility plus the 808 million Rand of cash, and so allow gearing on our balance sheet.
Looking at how we pay for this capital program that we’ve embarked on many years ago, the red line shows our operating profit. And the sustaining CapEx is the dark gray section at the bottom of the slide. The yellow section showing our growth capital in South Africa showing that in most of the quarters, we’ve actually paid for all of our expansion in South Africa from our existing operations. The light gray a bit at the top shows the Hidden Valley assets that we've paid for, quite a significant investment and we are now nearly at the end of it. On the far right-hand side there, the March and the June quarter showing that top – that little bit red on the top, that’s the Pamodzi assets. And we've required some anticipated capital expenditure over the next two quarters here, lock down.
Back to you, Graham.
Thanks, Hannes, thanks a lot. On exploration, this is a map of PNG. For those of you who don't know PNG, some world famous deposits (inaudible) primary operation Porgera, a part of Barrick, a very good belt here to find deposits in and is the further belt out there. Panguna is what we all know as Bougainville Coppers, has been closed on for some time.
This is a JV of Harmony, and there're two other areas, which we own 100%. You can see the size of those areas. We’re really going to focus on the Wafi-Golpu deposits, which is right there. And this is a plan of it. Please note the scale, all these deposits fairly close together. Last year we were talking about Nambonga, about a million ounces of gold there. This is the Wafi deposits, 6.2 million ounces. There is Golpu, and this is the Golpu West. What we will do now, instead of drilling down into Golpu, we've actually stepped off from drilling from the side, so some very good intersections we’ve had in Golpu West.
And these are the – in tabular form, the results of those three holes. You can see quite large intersections and at very good values. That 155 is included in that 331, but excellent values, both in gold and copper. And I’ve done some equivalent grades there. And please note the prices that we’ve used at the bottom for the equivalent ounces. But when you’re talking 600 meters at 2.5 grams a ton, that’s quite spectacular results.
These are the bore holes that we’ve been talking about. And you can see on this, Golpu is in here. We now modeled a bit more on Golpu here, busy drilling this hole at the moment, and we’ll draw some further holes here. Infrastructure here was the scouting study of Golpu. And you can see that the capital cost would be the same to expect this hole deposit at or even just Golpu. So it makes an order of magnitude difference to the extraction and to the finances of this deposit, really pleasing results here.
I would like to just to conclude, a matter of some equipments at Hidden Valley. Just to recap on our strategy, really our strategy is to keep sustainable earnings to pay for our growth and to pay dividends. We’re still targeting 2.2 million ounces. We are targeting profitable 2.2 million ounces. So there will be some changes going forward in exercising the best we can, getting profits out of our operations, commissioning our operations, obviously very important. We are looking at strategic partnerships and looking at acquisitions.
Growing internationally is quite a challenge for us. We are certainly growing in Papua New Guinea. Hidden Valley in production will be great. The exploration we’re doing in Papua New Guinea is also great, but we need to do some more, and to some – do some further branching out of that, and really improve our cash cost position relative to our competitors. We're still on the far right of cash costs – high cash cost and we need to move towards the left to lower cash cost.
There're four aims that we’ve been targeting for the last while, and you’ve all seen some of these. You've seen the gray boxes, really the red ones tells you what we did for those quarters. So the restructuring in three of the Evander shafts and Brand 3 commissioning of capital projects are a very tough priority getting the best out of those capital projects. The Pamodzi Free State transaction nearly finished. And hopefully we’ll be producing gold from underground soon, and then we go through exploration.
Going forward, we're fairly confident that we can deliver on our plans. Operational guys have been working hard on getting everything commissioned and doing what they have to do get the best out of our assets so there is a lot of mining focus, a lot of great focus. And so we feel confident that we'll continue to focus on quality ounces, and that’s what our growth projects give us. But we’ll also look at the assets that maybe are struggling a little bit. And we need to get cost competitive when it comes to cash costs, so we are driving to improve cash costs.
Thank you very much. I’ll answer any questions, of course, with Hannes hopefully.
Allan Cooke – J.P. Morgan
Yes, you probably do, you’ve got one.
Allan Cooke – J.P. Morgan
Hi, Graham. Good morning to you all, Allan Cooke, J.P. Morgan. Just on Hidden Valley, will the current quota be when Hidden Valley comes into the account? And what are your expectations in terms of the red part maybe for next quarter or two as you are still waiting for the hydroelectric power there to come in, just some guidance on ounces and costs, if you can, and whether or not we should be putting that in our models for this quarter? And then also in terms of – you said you’re looking at struggling assets, Bering Straits, and maybe a few others, which of those and what’s likely to happen? And what do you see happening there at the current Rand gold pricing? And the shafts that have been closed, some of them in this quarter, there will be some costs associated with that or what should be factoring in terms of costs of closure for the shafts that you’ve not yet provided for?
I’ll give Hannes some time to think about the costs while I talk about a few of those things. Firstly, Hidden Valley, it will come into commercial production during this quarter, I don’t know, either the first month or maybe the first two months will be a capitalized store. And then in the June quarter should be a normal full production quarter for Hidden Valley, so that’s the 200 and probably 65 or 270,000 ounces divided by four.
Cash costs will still be a little higher than the average we’re planning for Hidden Valley, so life of mine cash costs is planned at about $350 an ounce. It will be a bit higher for several reasons, one is loss over in the first initial phase, so there will be lots of credits to cash costs. The power is an interesting one because obviously we're cutting diesel in for the gensets that was due to come in June, but maybe a little bit late, the hydroelectric power scheme. So cash costs would probably be fairly high for the first quarter and into the foreseeable future. And then, it'll drop in months to come – in quarters to come.
When it comes to our operations, Virginia has been really under scrutiny. Bering Straits shafts have got potential. They need to make sure they meet the production targets as well as potential. The one operation there that’s really struggling from an all-body point of view is Harmony 2. Phoenix will produce 30,000 tons, 3 grams a ton-type of operation. So it’s got intensive management and we’ll have to see what happens in the next six months. It's not our time to close in the next quarter. But maybe in the next six months’ time, we’ll see how it goes. That’s the annual operation that’s really under threat.
Hannes, have you been able to–
I think in terms of cost, as I shared with these operations that we’re closing, Brand 3, we’ve been able to redeploy most of those people to the Phakisa – mainly to Phakisa. In this quarter, we’ve had 2 million Rand worth of restructuring costs. Prices at Evander’s still ongoing, so I expect the cost of Evander for this quarter not to change that much, and there'll probably be some additional restructuring costs that we’ll have to see. And we’d also have to look at how many people we redeploy from Evander to some of our other shafts, to Doornkop and to Phakisa as well. So I can’t give you an exact number at this stage, but probably looking for the same number next quarter, and then plus probably some additional restructuring costs.
Did we answer all the questions, Allan. You've had quite a few. Steve?
Steve Shepherd – J.P. Morgan
Steve Shepherd, J.P. Morgan. Just on Evander, Graham, I can’t help being mindful that you’re running two shafts to produce from the eighth shaft here, including number 7 shaft. I can imagine the overhead’s are very high there. Is that sustainable? And secondly, does Evander actually fit in your portfolio anymore? It must be an awful lot of management effort for a very small amount of production.
Very good question, anymore questions, no. Steve, yes, I mean you’re right. That’s going to be a high cash cost operation because it only has really eight shafts that has two barrels, as you rightly pointed out, a seventh shaft. The guys have done a lot of restructuring at Evander, and includes services and everything around Evander. I guess we’re looking at it carefully and evaluating our options. And we do point that we will continue to optimize what we do, and see how we do things. I’d like to leave it at that at the moment, but we are obviously looking at our options.
Steve Shepherd – J.P. Morgan
I have one just last follow up on that, is there any potential to reprocess the massive tailings in Evander because you–?
Yes. It’s what we call Project Libra. It’s probably the best, highest grade tailings that we have. Tailings recover around about 50% if everything’s going particularly good. And Evander’s tailings grades are, correct me if I’m wrong, over 0.34 I think is what the tailings grade. So you’ll be dealing with the dark 15.17 thereabouts. Phoenix, we recovered about 0.12. So that’s quite lots of potential. It would require a plant or an extensive modification to the existing plant.
Steve Shepherd – J.P. Morgan
So you still can't think of that plant running I guess?
Steve Shepherd – J.P. Morgan
No, you haven’t.
No, the Doornkop plant is not running. It’s the only the Kinross plant that’s running. The Doornkop plant was – just had a milling section left, and in fact that was the demise of 2 and 5, will be cleaned up.
Any other questions?
John Fryer – Alexander Profit
Yes. Good morning, Graham. I’m John Fryer [ph], Alexander Profit [ph]. Just came for a comment relative to Doornkop, how the grades are working out relative to original studies and how it's developed. Thanks.
Thanks, John. Yes, the grades, as you know, we went through quite an extensive evaluation of the Doornkop ore body because the shaft deepening happened on a – not a reserve, but the resource. And so we had some tough decisions, some 6 to 12 months ago, whether we should stop the project and drill or try and do it from underground. We continued underground. We did a lot of developments, done a lot of underground drilling. And also this means no stopping in that time. Now I know that the guys went on a visit recently to Doornkop and I don’t know how many tons are lit up the bag, but we seem to be recovering in the order of about 5.2 grams a ton from that deposit, which is in line with what we’re planning. And that’s from the South Reef. The Kimberley reef, which will produce gold from very low grade, I mean, we’re lucky if we get sort of 2 to 2.5 grams a ton from that. So it’s returning what we’re expecting and it’s looking very positive.
John Fryer – Alexander Profit
Yes, Christian [ph] (inaudible).
Thanks, (inaudible). Just a quick question, John Monroe at the mining in Melbourne spoke about 3.5 million Rand CapEx for Rand uranium?
Forty percent will probably be for your Yorktown. Can you give us a sense of what’s that portion could be fined as by deck and what would be required to be financed by Harmony over the next you said two-and-a-half years constructions starting H 232?
Yes, no decisions finally have been taken on that. The title feasibility – definitive feasibility’s complete and that’s the right number. But no decision by the Rand Uranium Board, of which of course, we set as 40%, have been taken. They way that we’re looking at it from shareholder point of view right now is to look at financing it, project, and maybe a bit of equity with an off-take agreement. So it’s unclear as to what sort of announced – Harmony may or may not finance on that boat. And that decision will probably be undertaken over the next two or three months.
Any other questions? Sorry, I have to see. Bob’s at the back. Did I get the Libra figure right, Bob, on the grade?
0.33. Okay, good. Well thank you very much for attending, ladies and gentlemen. For any other questions, please feel free to tackle one of the executive members, or myself and Hannes, to answer any further questions. Thank you.