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Harmony Gold Mining Limited (NYSE:HMY)

Q2 2014 Earnings Call

February 03, 2014 12:30 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 - Chief Financial Officer, Financial Director and Executive Director

Operator

Good morning, ladies and gentlemen, and welcome to the Harmony Gold Mining Company Limited second quarter financial year 2014 and 6 months ended 31 December, 2013, results conference. [Operator Instructions] Please also note that this conference is being recorded.

I would now like to turn the conference over to Mr. Graham Briggs. Please go ahead, sir.

Graham Paul Briggs

Thank you very much, and good morning, ladies and gentlemen. This is the early media and analysts questions sort of time. You have probably seen the press release, but there's also the quarterly, the presentation and the like on the website. So I'd refer you to that for further detail.

A satisfying quarter, and if you look at what we've been busy with, it's been a fairly busy quarter. Of course, everyone asks about the gold price and labor situation; we try and address some of those issues in some detail in our commentary but, really, probably the best thing now is to hand over to questions.

I have with me Frank and Mashego and, therefore, we are probably able to take any questions you like. There are a few of the other management around the table, so really enable us to address any questions.

Can I hand over for questions, please, Chris?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Kevin Crowley from Bloomberg News.

Kevin Crowley

Two questions, if I may. Given the ruling on -- at the court on the 30th then, how confident are you that an AMCU strike will now be avoided? And secondly, I wanted to ask you about your new loan arrangement with Nedbank. What's the interest rate on that?

Graham Paul Briggs

Okay. I'll hand over the loan question to Frank. Just let me talk about the court ruling. The court process is that when we go to a labor court and get a ruling like this, the first ruling is a temporary one. And -- the first ruling is a temporary one and then, it is -- does give the other side an opportunity to come back to court with any further issues. So it's part of the normal process, so it's up to AMCU to argue why they should go on strike. We believe, obviously, we've got a very strong case. I think we've made that abundantly clear. We have an agreement, and the agreement is with our employees. AMCU have accepted the salaries and the terms of that agreement, and that agreement has been implemented as from the 1st of July. So the people have been benefiting, and they didn't stand back and say, "We don't want to be part of that agreement." Most of our employees have accepted the terms in signature. And the only people that didn't accept it was AMCU, and they represent a pretty small proportion of Harmony's people. So we're fairly confident. Frank? Interest, interest.

Frank Abbott

Interest. Let's take the quarterly booklet, and we look at Page 20. Under point 6, you can see that we've actually written quite some detail there. And the second paragraph there, we talk about on the refinancing state banks revolving credit facility into new agreement of ZAR 1.3 billion. And the interest rate is equivalent to JIBAR plus 3.5%. So JIBAR being plus/minus 6%, that would bring interest rate [ph] to south of 9.5%. This was exactly the same as it was before, so we've just placed the previous agreement with a -- longer dated and a bigger amount on the credit facility. Thank you.

Operator

Our next question comes from Ed Stoddard from Reuters.

[Technical Difficulty]

[Operator Instructions]

Ed Stoddard

Now I want to ask 2 things. One is about -- you mentioned that there have been some -- there was operational underperformance at Kusasalethu during the quarter, and I was just wondering what that was about. Does that have anything to do with sort of ongoing labor tensions? And I was also wondering if you could explain a little bit about the foreign exchange translation loss that was recorded on our U.S.-denominated loan and gold stock adjustments. Just if you could just explain that a bit in layman's terms.

Graham Paul Briggs

Ed, I'll ask Frank to do the foreign exchange one; I'll do the Kusasalethu one. No, it has nothing to do with labor, Ed. If we -- we've got some great employees out of Kusasalethu. We have those guys who are very capable of producing the tonnes. What happened was we had some technical issues to bottoms of shafts. So a -- 2 of the shafts had bottom-of-the-shaft problems with spillage and the like, and this restricted us. As you know, at Kusasalethu, we do have back-fall. And to get back-fall, you're required to process. And to process, you require tonnage. So it's a bit of a circular route, and once you disrupt it, you really get disrupted. So those technical issues are now behind us, and we're looking forward to an improved quarter this coming quarter. It has nothing to do with labor. Thanks, Ed. And Frank?

Frank Abbott

Thank you. We have a U.S.-dollar facility, and we draw down $270 million on it. And that's really to finance our activity in Papua New Guinea. And if we don't use it at South African bay, it's used it -- for Papua New Guinea. We actually keep our books in rand. We've got to actually convert everything that has to -- back into rand. So if the rand-dollar exchange rate weakens the rand we have, we actually have to mark to market that. And that affects the borrowing amount because the borrowing amount then increases in rand terms. Even though our intention is not to pay it back out of rand or to refinance it again with the dollar debt, that's how it works. Now the other lick of it also sits in our balance sheet. So on the negative side, we had to put it through our income statement. But on the positive side, as the rand devaluates against the Australian -- or Kina in Papua New Guinea, you find that our reserves increase in our balance sheet with the same amount. But because we keep books in rand, we have to convert that liability into rands EBITDA.

Ed Stoddard

Okay. And then, also -- I mean, that also comes through on your income statement?

Frank Abbott

Yes, yes. So just answering our income statement, as at ZAR 11 million of it, the ZAR 70 million, which has to do with other monies playing in the group, but under-delivers because of that and, as I said, if you look in our balance sheet again, you will -- and you look at this note on our reserves, you would actually see the other side of that entry. That's on Page 13, you would actually see where our reserves are actually increased by ZAR 378 million.

Operator

[Operator Instructions] We have a follow-up question from Kevin Crowley.

Kevin Crowley

Yes, just a general question. I think, obviously, your second -- if I'm right in saying, is this your second quarterly loss now in 3 quarters at the -- a gold price of say between sort of 1,200 and 1,300 or so? Just wondering sort of with all that's going on in the global economy now, I mean the gold price could considerably drop down to the 1,100 and 1,000 or so. I mean, how would you be positioned in that situation?

Graham Paul Briggs

Yes. So let me hand over to Frank here because if you just look at earnings per share and everything, one gets a little bit confused as to how well the operations are doing. And also, I would refer you to Slide 30 on the presentation. But Frank, if you just talk about the, I guess, money at the end of the day.

Frank Abbott

Yes. If we look at Slide 50 on the presentation, that's the excerpt from our cash flow, you would see that our cash flow from operations were ZAR 812 million for the period, before exploration, and that was ZAR 460 million more than the previous quarter. Now the main reason for that was that in this period -- or in the previous period, we actually builded up gold inventory. And in this period, we reduced some of that gold inventory. And so, if you look at the cash flow from operations of ZAR 800 million, that easily pays to our exploration expenditure and also our capital expenditure. So we have been paying for our capital and exploration expenditure. And the increase which we've had in our net debt position was merely because of the translation loss on the exchange rate. And if we were to go back to last quarter, in fact, very much the same thing happened there. Yes, so we have been paying our capital and exploration expenditure out of our working profits.

Graham Paul Briggs

Kevin, maybe another slide for you to look at is also to -- if you've got the presentation, is to look at what's happening to the rand. And you've got to remember, quarter-on-quarter, the rand really hasn't changed much. In the exchange rate, it went from ZAR 9.96 to ZAR 10.12. Yet, if you look at what the rand is doing now, obviously, it's really changed quite dramatically, in that ZAR 11.12 or ZAR 11.13, or whatever it is today. And if you were to go to the presentation and look at Slide 21, you can see what the effect is of the rand even at our current all-in sustaining costs, which we intend to get down even further. So I think there's a lot of work that we're doing. If you look at our net debt situation, it's fairly static. And that depends. Obviously, if you look in dollars, it's very static; I don't think there's much change at all. In rand terms, a little bit more. The foreign exchange loss or translation, really, is what swings it, but that's not something that comes out of the cash today.

Kevin Crowley

Okay. So just recently, the falling rand, I mean, it helps you guys out because it lowers your costs, is that correct?

Graham Paul Briggs

Well, yes, partially. Again, if I could refer you to the quarterly booklet and you've got 6 months on 6 months there. And there's not a worry about the exchange rate. Let's look at the costs. So look at the cash costs and this is the cost the operations had. And you'll remember, in the last 6 months, we've implemented wage increases; that came in 1st of July. And that's about 50% of our costs and the wage increases were in the order of somewhere between 7.5% and 8.5%. And you'll see that our costs only increased by 5% on the cash operating level. If you look at our all-in sustaining cost level, our costs actually went up by only 1%. So we've done a lot of cost savings as well, and that, really, is at a fairly static gold production. Now our intent is to increase the gold production. Kusasalethu was underperforming this quarter and the previous quarter, so there's a lot more work to be done on increasing gold production. But in essence, we've done a lot to reduce costs. Obviously, if you start looking at the dollars, on a cash costs level, we're 11% better. On an all-in sustaining cost, we're 15% better. So that gives you the extent of a foreign exchange, the exchange rates, but also the cost savings.

Operator

Our next question comes from David McKay from Mining Index.

David McKay

Have you made any adjustments to your rand estimates going forward?

Graham Paul Briggs

Yes, good question, though. What is the rand going to do, what's the gold price going to do in dollars? It's -- if we knew the answer to that, it would be great. Just over a month ago, we were dealing with a rand gold price of ZAR 400,000. In fact, it actually dipped below ZAR 400,000. Today, it's in the order of ZAR 446,000 a kilogram. The rand is fairly volatile. Our sort of -- well, we're still conservative on the rand. We think there's a bit of strength left in it, and it's not going to be so weak in forward. We may well be wrong, but we're conservative in our view going forward. Because if we put all the bullishness of a ZAR 12 exchange rate into it, there's -- we're going to be really flying. And now, to do that, you have to be fairly confident. At the moment, we are still planning for a gold price of somewhere around $1,250 and somewhere around ZAR 400,000 a kilogram -- sorry, $1,250 an ounce and ZAR 400,000 per kilogram, because we just don't know. As I say, a month ago, that's where the gold price was. We don't know what in a month's time it's going to be and, therefore, we have to continue to save costs. We have to continue to take some of the lowest grade of mining out and really focus on the margins. Thanks, David.

Operator

[Operator Instructions] Gentlemen, it appears that we have no further questions. Do you have any closing comments?

Graham Paul Briggs

Thanks a lot, Chris. Yes, I think Harmony is, again, displaying its strength on being able to be fairly agile in the way that it approaches mining. It will continue to save some costs, and will continue to focus on increased production. Obviously, costs and production is where we have to focus and not so much on the gold price and the exchange rates. We have had a -- we've got some operations which are doing incredibly well. We have got a few disappointing operations. We've noted them in the book, but we've got a plan for them, and we've indicated the plans, as such, in the quarterly presentation.

So I think Harmony is in fairly good space. And financially speaking, as Frank pointed out, we've been paying for our capital; we've been paying for our overheads;' we've been paying for our exploration; we continue to explore. We've got a fantastic project in Golpu in Papua New Guinea, and we're very optimistic about the future.

So ladies and gentlemen, thank you very much. And if there's any other information, Marian and Henrika will gladly take the call or the question on email, and we'll get back to you on the answer.

Thank you very much.

Operator

Thank you very much, sir. Ladies and gentlemen, on behalf of Harmony Gold Mining Company Limited, that concludes this morning's conference. Thank you for joining us, and you may now disconnect your lines.

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