Harmony Gold Mining Limited Management Discusses Q2 2014 Results - Earnings Call Transcript

| About: Harmony Gold (HMY)

Harmony Gold Mining Limited (NYSE:HMY)

Q2 2014 Earnings Call

February 03, 2014 2:00 am ET


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

Marian van der Walt - Executive of Corporate and Investor Relations

Jaco Boshoff - Executive of Mineral Resources Development and Growth


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

Steve A. Shepherd - JP Morgan Chase & Co, Research Division

Fiona Perrott-Humphrey

Graham Paul Briggs

Great. Ladies and gentlemen, thank you very much for coming. It gives me great pleasure to present the quarter 2 financial year '14 results. Thank you very much. As I say, there's lots of options this morning of things to do and people to meet. And so thank you very much for coming to Harmony's presentation. Thank you to -- I've got, I think, 3 directors here -- 4 directors including Frank, who is going to help me. And so welcome to you all.

Of course, the obligatory Safe Harbor statements, which no doubt you've read. And coming to the agenda, I'm going to take you through some of the pragmatic mining, the mining that we're doing. I'm going to take you a little bit of detail of some of the operations. We'll talk about profitable answers. We'll talk about the focus on growth, and the growth is not increased production for production's sake but increased production to get better margins, talk about Wafi-Golpu. And then Frank will take us through the financial results, and then I'll conclude. And then after that, we'll open for questions.

So this is our strategy. You've seen it before several times, quarter-on-quarter for many, many quarters. And our strategy is still intact despite what is happening in the marketplace, despite what's happening in the gold business. You will notice that some of the emphasis has changed slightly because growth now is more on margin than increased ounces. Safety is, obviously, is still a priority, and the sharing of profits with all our stakeholders. And our focus is still, if you see -- look at the top there, to pay dividends. That is one of our very strong objectives. And certainly, by the end of financial year in June, we hope to pay some dividends as well.

Just to give a little taste of what we're doing. This is all-in sustaining costs, the way that most gold miners are getting measured these days. And if you've go back to June 2013, you'll see ZAR 471,000 a kilogram; last quarter, ZAR 404,700; and this quarter, to all intents and purposes, ZAR 397,500. They have been rounded off slightly to the nearest ZAR 10 or so. So we continue to drive costs down. Same picture in dollars, slightly bigger decline in the last 2 quarters in dollar terms, and that's because of a slight increase in exchange rate. And remember that the exchange rate for last quarter was not ZAR 11.13 or whatever it is today, but it was much stronger.

Just talking sort of operation by operation here. Joel has had good quarter. Target 1 has had excellent few quarters, both mining the massives, as well as the narrow reefs. Bambanani is in that stage where it's starting to produce nice profits now. And as you know, that's the shaft pillar, of which there is about 8 years to mine. It's double-digit grade figures, something that Harmony is not used to mining; and then Phoenix tailings operation.

If you look at Hidden Valley, the next category, Hidden Valley has turned around quite dramatically on a lot of cost savings, better production, better plant performance. The crusher is now working and feeding the belts most of the time. So, we've eliminated a lot of the costs of hauling the ore down to the plant.

Kalgold continues to surprise everyone, I think, at 0.87 grams a tonne. This is really an operation that's doing well. And then Unisel, the old lady of Harmony, is still doing very well, very dedicated team there, working hard and making sure that they remain profitable so that's doing -- done very well. Our total all-in cost is below USD 1,250 for the company. And really, we are sort of planning to get that down even further during the next while. And really, the focus has been on these operations.

Phakisa has been continuing to spend capital. It's actually achieving its plan as we planned it. So it's spending capital. New fridge plant is now in operation. And during the next 6 months, it will have a declining trend in its all-in sustaining cost.

Tshepong and Masimong have been disappointments, but Tshepong has now gone through its restructuring. That was completed in December, where we had -- we've dropped about 10% of the labor force there. Masimong is thought to happen during this next quarter or 6 months, as you can see from the notes.

And Doornkop, we've taken out the Kimberly Reef production. Kimberly Reef, at sort of fairly low grades, around 2 grams a tonne, is not making any money. We stopped that production. It was about 30%, 35% of the production in tonnage. So we'll see improvements in grade there, as well as better costs.

Kusasalethu was our single big disappointment for the quarter. It should have done much better. We have some technical issues there, which have now been resolved in the bottom of 2 of the shafts. So as you know, that is a bit of a cycle of mining because you need backfill to mine. And if you don't produce the tonnage, you can't process the tonnage in the plant, and therefore, you can't progress -- push the phases. So that is a little bit of a disappointment this quarter. We should have done better in our production.

Target 3, we will have some restructuring there. And probably also, about 10% of the workforce will leave from that operation. So we've got a little bit more restructuring to be done.

On safety, we continue to have a huge safety focus. There will be some announcements by the Minister probably today or tomorrow about last year's safety. It's been quite a good year from the safety performance in the industry. I won't steal her thunder, but nevertheless, we continue to contribute to better safety, and we won't be satisfied until we don't have any fatals. There was a time in the past when, I think, a manager at our operation was -- couldn't believe that he could operate without a fatal. We can certainly -- all our management teams believe we can operate without having fatals, and it's our job to make sure that we eliminate those fatals.

6 months on 6 months, this is a comparison up to December and up to June. In the document, the quarterly document, you'll see the 6 months up to December '13 and then you see a year ago, 6 months up to that. So you can look at 6-month trends if you'd like. Here, you can see that gold production increased by 18%. You can see cash operating costs improved by 10% in rand per kilogram terms; in dollars, of course, better. You can see the exchange rate for the quarter at the bottom was ZAR 10.04. Of course, today, it's a bit weaker. And of course, all-in sustaining cost, you've seen that figure before but improvement in 15% in rand terms; in dollar terms, 23%. So our focus is really to continue to improve production but also to focus on reduced costs.

Quarter-on-quarter results. Results static on gold produced mainly due to the disappointing production at Kusasalethu. You can see what happened to the rand per kilogram price there and also at the exchange rate for the quarter at ZAR 10.12, so that was the quarter's exchange rate.

This is our grade, three quarters of consecutive grade increases. Our plan that we spoke about in August was 4.79. We're actually overachieving that from the last quarter. We'll probably get some low grade during this quarter. Of course, if you correct the numbers for Kusasalethu, because it had a very low grade, you'll see that the other operations actually are doing very well on their grade. And in the appendix of the book is a grade by grade, operation by operation, and a bit of history there, so in detail, which I won't go through in this presentation, but please feel free to look at it and ask any questions you may on that.

The stable production. Again, you can see the rest of operations at just over 8,300 kilograms. And then of course, Kusasalethu at the top and that should have been much better at probably another 450 or 500 kilograms if it was back into September 2012 numbers. So that was the disappointment there, but nevertheless, we have done well on the costs. And so the results are quite satisfying. Same number here in dollar terms -- or ounce terms rather.

Just a little bit of information about rand per tonne. There is a bullet point at the bottom, giving you the source of this information, and we're looking at 2 quarters, Harmony and Sibanye versus AngloGold. Of course, what it doesn't tell you is that the grade at Sibanye, AngloGold is about 2 grams a tonne higher than Harmony. And therefore, you can imagine the potential if we were mining higher grades. So it gives you a little bit about -- we still remain the best cost producer in rand per tonne terms in South Africa.

We have been focusing on our margins. This graph really stacked from the left-hand side, highest cost producer, and this is all-in sustaining costs, rand per kilogram, down to the best performer, which happens to be Bambanani, the average for the lot on the gray on the right-hand side and to this last quarter's gold price. Today's gold price, of course, is a little bit higher than the yellow line at the moment. So you can see that the operations that are getting the focus for the next quarter, next 6 months, Kusasalethu, Target 3. I've spoken a bit about Phakisa. A lot of that, of course, is capital. Tshepong has been underperforming, as well as Masimong; Doornkop now restructured, and we'll see the benefits of that going forward. Same graph in dollars per ounce terms.

The rand exchange rate, I guess, is one of the benefits of operating in South Africa, as we do have huge exposure to the rand exchange rate. The ZAR 10.12 in the gray bar there is the last quarter at $1,222 per ounce. If we remained at ZAR 398,000 a kilogram -- of course, we don't intend to stay there, but if we did, then you can see the effect on -- in dollars per ounce, at today's gold price somewhere less than $1,125 an ounce, so quite a big difference there. Our intent is to get that rand per kilogram down to closer to ZAR 380,000, a lot of hard work to go there. Of course, the easiest cost-cutting has happened. The more difficult stuff is still happening and has happened over the last 6 months or so.

Wafi-Golpu. I guess endless stall [ph] plays no value on this fantastic deposit. I give you an example of 2009 and today of where this deposit is and how big it's grown. If you just care to sort of visualize those dimensions out in the parking lot as to how big that would be, quite massive, now 20 million ounces, 9 million tonnes of copper. The work that we're doing now on the sort of next phase, the modular, expandable mine, we're looking at much lower capital, looking at mining the upper parts of the ore body and looking at underground access. So there is studies there.

WorleyParsons has been appointed as the engineering consultants. Our team now spends about 2 weeks of the month in Johannesburg with those consultants, and they're making some excellent progress. So they're really talking about the orange dot on this graph, and this is a bit of an indicative timescale as to where we're going to, certainly hoping that in the latter part of this calendar year, we'll be able to give you some more information, probably also tell you about some latest drilling results, a lot of more drilling results in the upper part of the ore body. It's just a fantastic ore body, and I'm more excited about it now than I have been for a very long time.

I'm now going to hand over to Frank. Frank?

Frank Abbott

Thank you, ladies and gentlemen. Our income statement quarter-on-quarter, we've got the December quarter versus the September quarter. We can see our revenue went up with a small margin, and that's a result of 5% more gold sold offset by a 3% lower gold price. If we look at our cash operating costs that came down by ZAR 190 million, of that ZAR 190 million, ZAR 50 million was a saving from Hidden Valley and the balance, ZAR 140 million, was really because of low electricity charges during this period. The negative inventory movement of ZAR 149 million is because we reduced our inventory balances in the December quarter compared to a buildup in inventory balances in September.

Operating profit was slightly lower at ZAR 985 million. Amortization stayed the same. Exploration expenditure is continuing to come down as we're scaling down the drilling in Papua New Guinea. We've scaled it down from 5 drills to 1 drill. Our foreign exchange translation loss of ZAR 128 million, this includes ZAR 111 million, which is the translation of the dollar loan of $270 million which we raised to fund Papua New Guinea. Our taxations rate was a little bit lower this quarter. Then we made a net loss of ZAR 91 million compared to a profit of ZAR 13 million the previous quarter.

I want you to show you the impact of the foreign exchange translation loss on our results. The net loss, as reported, was ZAR 91 million compared to the profit of ZAR 13 million in the previous quarter. If we strip out the foreign exchange translation loss of ZAR 128 million in the quarter, you'll see our profit would have been ZAR 37 million compared to a profit of ZAR 22 million the previous quarter.

This is our income statement, quarter-on-quarter, in U.S. dollars, and I'm not going to take you through that. And this is the impact on that in dollars.

Our cash flow summary. If we compare the December quarter with the September quarter, our cash flow from operations before exploration was ZAR 812 million, and this was ZAR 460 million more than the previous quarter. Now this is mainly as a result of reduction in gold inventory during the quarter compared to a buildup in gold inventory in the quarter before. And this has really to do with gold shipments over quarter end.

Exploration expenditure was lower, as we indicated; capital expenditure of ZAR 624 million. And you can see we paid for our own capital expenditure and own exploration expenditure from our cash flow from operations. Our net debt position increased by ZAR 90 million, and this is really the result of the translation loss, which increased our debt from ZAR 3,159 million to ZAR 3,280 million.

We've also got a slide here on borrowings renegotiated. During the last quarter, our new 3-year Nedbank debt facility was put in place, ZAR 1.3 billion. It really replaced a debt that was expiring at the end of the year. And the previous debt was for ZAR 850 million, the facility. And we replaced it with ZAR 1.3 billion. It matures in 2016, and we partially used that to settle some of the old facility. The interest-rate terms are exactly the same as they were before.

We also took the opportunity to renegotiate our covenants for both the U.S. dollar and the rand facilities, and we believe they are much more flexible than they were. If we look at them, the 2 that tranched, was the net group's interest cover shall not be less than 5, and that's the EBITDA to total interest. And also, the last one, tangible net worth to net debt shall not be less than 6x. So we're really comfortable for funding and financing going into the future.

Thank you.

Graham Paul Briggs

Frank, some very satisfying financial results there. Just to conclude, I guess, where are we? What have we got? So I think we've got the foundations in place. We've said various things. We've done things, and the way forward, of course, is very important. So in our operations, we're not looking at the shaft-by-shaft detail now. We've gone into portions of the shaft, so Doornkop taking out unprofitable mining.

Same is happening at Masimong and Target 3. We've had some management changes and also some restructuring on the labor force. The intent is every operation is to get, by June, down to the ZAR 400,000 per kilogram terms, and that is injective on every single operation. So, we're still the lowest cost in rand per tonne. We've reduced our capital quite dramatically. We believe we've got quite a lot of flexibility in the ore deposits.

Jaco is here. He can answer some of the questions if you have any questions on reserves, resources. And we spent a lot of money on improving infrastructure. In Target 3, for instance, that was an asset that we bought some time ago with very neglected infrastructure. We spent a lot on that. We put in new cooling systems at Tshepong, at Phakisa as well. So we've really put ourselves in a position to be able to perform into the future.

I guess the upside in the share price, and there has to be lots of upside in Harmony share price. We've got increasing grade. We continue to be the lowest rand per tonne producer, huge capital discipline. You can see from the Frank -- slides that Frank presented, we've got the capital discipline. And we're not expecting any sort of increased capital -- dramatically increased capital during the next 2 quarters.

We remain unhedged, got a good balance sheet, good financial control there, very geared to the South African currency. I've talked about what's happening to the rand, and we've got some good potential on earnings growth. Golpu, still one of the top gold/copper resources in the world. I give you an example of our ore reserves and our market cap there so you get an ounce of Harmony's gold, very cheap compared to any other company.

After this, I'll take questions, but I think you can read that. In short, we are very optimistic about the future. We manage our costs. We're managing our production, and our intent is to get every operation below ZAR 400,000 per kilogram, which means that we'll be mining profitably. We don't know what the rand exchange rate is going to do. We don't know what the gold prices do -- doing, but we're certainly erring on the side of caution.

Ladies and gentlemen, thank you very much, and I'll take any questions. Henrika is around with the microphone. So please just put up your hand, and you'll get the mic.

Question-and-Answer Session

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

Graham, it's Allan Cooke from JPMorgan. I think you've touched on 1 or 2 of these mines, Graham, but the bigger ones on your Slide 19, Kusasalethu, Phakisa and Tshepong, what needs to happen at those mines to get them down to ZAR 400,000 a kilo all-in sustaining costs because they're quite away from your target now? So in the next 6 months, what should we expect with Kusasalethu, Phakisa and Tshepong, in particular, please?

Graham Paul Briggs

Yes. So every one of them is different. Phakisa, the all-in sustaining cost is high as -- well, there's 2 main reasons: One is high capital expenditure. In the last while, we've put new fridge plants in there. We are spending a bit of money on the 3 shaft ventilation. And we are spending quite a lot of money on development, if you look at the sort of amount of development we're doing there. At the same time, the production is not quite to the level it should be to break even. We will see capital expenditure coming down in the next 6 months, and we we'll see production going up. And certainly, towards June, we should be looking towards around about ZAR 400,000 to ZAR 410,000 a kilogram in that area if all goes well there. So it's really a case of a capital project starting to get into proper swing of production. Tshepong, completely different situation there. In the last 6 months, we have been doing some restructuring. We've taken out about 10% of Tshepong's labor force. That obviously takes a while to do, and we've also had a management change there. So there have been a few people issues. When I say management change, general manager, as well as the manager on the HR side of things, so 2 management changes there. We, as the executives, spent a full day there just over a week ago and went through their plan, and I'm fairly confident that they will achieve what they are setting out to do. So we're going to see better production, better management of what's happening there. At Kusasalethu, the labor force, as you know, is mostly AMCU, 70%. I can't blame AMCU for the production issues. Those were technical issues in the bottom of 2 of the shafts where we had excessive spillage. And we've now solved the spillage problem, but that's really a sort of production cycle issue because once you're in a situation where you can't produce backfill, you can't blast the faces. So it just took quite a while to get it going. So it was an issue which really upset the production for about 4 weeks. So that was the real issue there. There's also been a management change at that shaft with Theo Keyter, the guy who was there just over a year ago, probably 18 months ago, is now back on the operations. So he was the guy that was there in the September 2012 quarter, for instance, which was a nice profitable quarter. So there's been management changes there as well.

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

Graham, maybe one more. In PNG, I think, Frank, if I remember correctly, that you have no CapEx or no capital budget beyond 2016 for Golpu. Could -- have you changed your mind on that or -- because we have the time line of what needs to happen at Wafi-Golpu but still no CapEx. What should we expect or penciled in for spend in PNG beyond 2016, please?

Graham Paul Briggs

Allan, excellent question, and I'm afraid I can't answer it in numbers, and the reason for that is that it relies on this new process of a scalable modular mine. The thoughts are to mine the upper ore body, and there's several mining methods that we're looking at. One of them is block cave from the lower part of the upper part of the ore body, and then we're looking at different mining methods for the upper part of the upper mining body. What has happened in the drilling there is that the grades have actually improved. There's more porphyry. And where there's more porphyry, you have better recoveries on copper and gold. And so the results are looking very pleasing in the upper part of the ore body. We have finished the modeling of the ore body. That is now going into the mining studies; that was finished during this last month or so. And it's a case of looking at the capital and how to take it forward before we can put some numbers in there. Safe to say that the numbers that we had in the original pre-feasibility study of ZAR 4.8 billion are not going to happen. This capital is going to be looking at getting a smaller mine into production much quicker, much lower capital and generating money. So we just haven't got enough figures to give you those numbers yet. And so you will continue to see those asterisks on our plan of capital going forward, but I think it will be very pleasing once we get the numbers out. And hopefully, we will be able to give you better update in around about August this year, which is typically when we update some of those things. So we will hope to do that. No questions from the audience, so Marian's got a couple of email/tweets/whatever -- okay, sorry. Don't ask me the bad question here, Marian. Just ask me the good ones.

Steve A. Shepherd - JP Morgan Chase & Co, Research Division

Graham, it's Steve Shepherd from JPMorgan. Could you perhaps just give us a little bit of a roundup on how you see the labor relations picture in the group? And maybe on Kusasalethu, I mean, you've had a long period of problems with that. Do you have any kind of deadline in mind for it to pay for itself or suffer some consequence? So it's really a wrap on how you see the labor relations and how much time you'll get Kusasalethu.

Graham Paul Briggs

Yes, I think if you look at the whole of Harmony from a labor relations perspective -- Anton is here, so if you want to ask him some detail -- Anton, why don't you just stand up so people can see who you are? Anton Buthelezi is our HR executive. But if you look at the entire company, it's been an interesting 18 months, 2 years because a lot of how we operated as a mining company was relying on a single strong union. And, of course, that meant that we probably didn't do as much communication as we should have as managers and owners into our workforce. So we've learned a few lessons: Number one, communication is key, and you have to keep communicating with everybody, all the time. Otherwise, the message that they will get will be somebody else's message, which may not be the message you want to get through. In general, we have also had a look at how do we motivate people. So we've gone through a lot of those sort of issues on motivation. We have, for instance, introduced financial assistance to people in the way of training them on how to deal with their own finances. We haven't done the training. We've got an outside person to do it because, guess what? There's a little bit of mistrust when the company starts trying to train you on your personal finances. So we've done those sort of things. We have introduced a slightly different bonuses system to try and get people motivated to actually produce more. And of course, if they produce more, they assist greatly in getting more money out of the end of the month. When it comes to AMCU, unfortunately, Kusasalethu has been suffering the brunt of that, being in that cotton ball [ph] area. About 70-odd percent, 73% or so of that workforce is AMCU. In the rest of the company, no other mine, except Masimong, were about 1/3 of -- so somewhere around about probably 800 people out of the workforce there are AMCU supporters. So it's really Kusasalethu. The issues around Kusasalethu in their production have not been union-related in the last quarter. That is not the problem. If you give those guys a face to mine, they will produce the goodies. So we don't have any problem with our people in that. Obviously, there is, at the level of negotiating, sitting there, you've got NUM and AMCU, and there's lots of discussions and various issues there. We have to continue to manage that. But when it comes to people on the ground -- or underground rather, there's no issues there. And it's up to us to manage our people properly.

Steve A. Shepherd - JP Morgan Chase & Co, Research Division

Just staying with Kusasalethu, I mean, ZAR 533,000 per kilogram is obviously not a representative number, Graham. Allan asked the question. I don't think I heard the answer about what you think that operation can deliver in terms of all-in sustaining cost. And we've -- obviously, all of us have been looking at it for a very long time, and it's being problematic or more than it hasn't. I mean, do you have anything in mind about how long you're going to tolerate that not producing the way you wanted to?

Graham Paul Briggs

Kusasalethu, like a lot of big operations, has quite a high fixed costs. So it really depends on the kilograms you produce. And if this produced like it should have done during this quarter at 1,500, it would have been a much better mine. And so the target there in the sort of near term is 1,600 kilograms a quarter. And so that changes the numbers. You can do the numbers for yourself and see where that would take you in all-in sustaining cost, but it takes you into the profitable region of Kusasalethu. And that's the plan. I mean, again, we've had the strategic review out there, and everyone knows the time frame that's ticking. I am not going to give you that time frame because there is too many journalists in the room, and they will write a story about this. So it's not as -- it's going to be positive story, yes.

Steve A. Shepherd - JP Morgan Chase & Co, Research Division

And the old, past problems have been resolved, have they?

Graham Paul Briggs

The old, past problems are still there, and they are still giving us sort of -- we're doing repairs. That's going to be ongoing for quite a while. Yes, someone is going to congratulate me on Hidden Valley, on Target 1 or "doing such a great job there." Brendan, sorry, you've got a question? Sorry, hang on. We'll get back to you.

Fiona Perrott-Humphrey

It's Fiona Perrott-Humphrey from Rothschild. Just 2, carrying on of a bit on the labor front. The first is, in this new program of communication, do you talk to every level of employee about what's happening globally and that the gold price could even go lower? I mean, do you get into some sort of scenario planning so that they understand just what a tough industry you're operating in? And the second question was on the covenants. Do -- given the history of the last 2 years of labor problems in South Africa, is there any flexibility built into those covenants if you are facing strike action?

Graham Paul Briggs

I'll let Frank look and think if he's going to answer the covenant one, but essentially, the communication goes down to great extent and all levels in the organization, to the extent that we don't talk about what the gold price could do. And in this forum, everyone will say, "What happens when the gold price gets down to $1,000?" Of course, as a Harmony employee, you should be more optimistic and you should be saying, "What happens when the gold price goes to $2,000?" So we don't -- we just -- our crystal ball, I think, is as fuzzy as most other people's, sort of cloudy. But we do, given the reality of the current gold price, the current state of the operations, what is happening, Kusasalethu guys know, and I had discussions with them just over a week ago, that as AMCU leaders of that organization, not once have we made a profit. And they know that, they're fully aware of it, and they knew about it before I started speaking to them. So the communication is going down to level. We actually have on -- in our organization, every general manager has a communicating officer, which is a fairly new event for us. And they're mostly ladies, and that's nothing to do with Marian leading it up, of course. But there's a lot of communication that's happening. And if you care to go to the booth, you will meet 2 of those people that actually do communicating on the shafts. And the communication actually works to the extent, if you all know, that sometimes, the communication is there as a draft form getting to me, "Do you approve this" before I even thought of communicating it? So, there is really a big push from communication side; general managers standing up at mass meetings, regular mass meetings, and telling people exactly what's happening on the operations and what's happening in the rest of the sort of gold mining world. Thank you -- oh, sorry, covenants. Our plan is not to have any strikes, of course. That's the first plan.

Frank Abbott

Thank you. If you remember, I mean, we had started -- yes, if you remember, we've had strikes in the past and that presided and directed our covenants. So the fact that we've got a strike doesn't mean that we've got a problem with our covenants. If you look at our covenants, you will see that they're all medium-term, longer-term covenants. And that's not affected by a short-term strike, if that would answer you.

Graham Paul Briggs

I think the other thing on covenants is that we have a fairly good relationship with the banks, and in this case, of course, Nedbank, and you remember that we've had this relationship since 2007, probably even before when I was acting. And so I'm sure Nedbank were happy. I'm sure they've made some money out of us, but we've got a long-term relationship with the bank as well. So, it's not a problem for us. Brendan, finally, you get your turn.

Brendan Ryan

Okay, Graham. Brendan Ryan, Business Day. Speaking as one of the journalists in the room, when you say everybody knows the time frame is ticking, what happens if the time frame isn't met? What are you saying here?

Graham Paul Briggs

Well, when we're looking at, for instance, Tshepong, where Tshepong hasn't been performing, we've gone in there and restructured that operation. So instead of -- in the past, you would have asked us a question of, "Are we going to close any shafts?" The answer is "No, we're not going to close any shafts," but we have been looking critically down into the operation and said, "There are portions of the shaft that just don't make any sense." And so we've looked at taking that out. So in Tshepong's case, 10% of Tshepong's labor force has left Tshepong. Some of those transferred to other operations to replace people that have left. Other people have left the company. And so, we've done the similar exercise. We've completed it. We're virtually completed at Doornkop. With the Kimberley Reefs, that was another 300 people. We are now doing that on Masimong and Target 3. So, if the total operation isn't meeting the financial hurdle, then we have to look down into the operation and see what can be done. If we can't produce more gold from the same amount of people, then we, obviously, have to cut out those portions of the mine that are either just spending money or not operating at a loss -- at a profit. So it's really homing in down into the operations itself. Marian, you've got some news from further afield.

Marian van der Walt

That's correct, Graham. Good morning to everyone. These are questions from Adrian Hammond from BNP Paribas Cadiz. The first question is, is it necessary to build an exploration shaft at Golpu? Or does this allow for an option for a smaller scale project?

Graham Paul Briggs

Yes, it does. The intent of a shaft was really to get down and to have a look at the ore body to take bulk samples, but also to be able to use it into the future. One of the reasons for a shaft was really to get down, and whatever you do, you're going to have to have another access point with another shaft or another decline. That's the work that the study guys are doing in that -- which is the best way to access ore body. You can access the top part of the ore body fairly easily with a decline. Now is that going to be preferred? And how much ore can you get out? What sort of size of decline? You're still going to need probably a shaft or another access point for ventilation or second egress. So those are the studies that are going on at the moment. If it is a shaft, it's likely to be a line shaft but not necessarily equipped, probably using rope guides and the like. So those are the sort of options that are being looked at, at the moment.

Marian van der Walt

Graham, the next question is, how will future production be impacted in light of your cash cost target?

Graham Paul Briggs

Taking production out like we've been indicating at Doornkop, Masimong, Target 3, obviously, does take some production out. But we're not going to just produce gold just to try and achieve our target of 1.3 million to 1.4 million ounces. We're going to produce less, but our margin is going to improve. This business is about profitable mining, not just mining to keep people busy. So, we will see a slight decrease in our targets as far as the 1.3 million to 1.4 million ounces. In fact, on one of the slides, we've actually got a target there of 1.2 million to 1.3 million. So that's towards the lower range. It's quite a nice, wide target because, obviously, these restructuring things do take time. So it will impact, but it will have improved profitability.

Marian van der Walt

Just well, audience will find that information on Slides 15 and 16. And then the last question, Graham, is, will you be appealing to the Constitutional Court following the court's decision to continue funding the pumping of underground water in the KOSH area?

Graham Paul Briggs

Yes, I mean, this is a long story, a long saga. The pumping in the KOSH area, which is Klerksdorp, Orkney, et cetera, Stilfontein area -- the pumping actually occurs at Stilfontein Margaret shaft. The water actually comes from Stilfontein mine. 90% of that -- or 85% of that water is dolomitic water. So it's fairly good quality, and therefore, it's not polluting anything. It actually gets discharged into the system. It can be cleaned up as part of our water very quickly. It's water that isn't coming out of the areas that we mined. There is some water coming out of the areas we mined. That pumping actually occurs to keep the other operations that are mining in that area dry. This is not about pollution. This is not about our responsibility on pumping. This is not about acid mine water drainage, but -- so, there's a fairly a lot of technical stuff behind this thing. No, we certainly intend to go to Constitutional Court. I don't think there's an expectation if your neighbor has pollution that you will clean it up, and that's exactly what I remember. This is a shaft we never owned. We don't even own the water that comes into that operation, and yet we pay -- or expected to pay 1/3 of the costs. And this is the cost to keep other operations dry. It's not water that's going to decant in some stage in the future, because it is coming down below the dolomites. And as you know, a lot of good water comes from the dolomitic areas of the country. If you read some of your water bottles, you will see it comes from the Malmani Dolomites, which is the dolomites in South Africa. No, we will continue to fight that case. It's -- if you read some of the press reports about acid mine water drainage, Harmony's pollution, that's simply not true. And unfortunately, that fuels a bit of the irrelevance in this fight.

Marian van der Walt

Thanks. I have no further questions.

Steve A. Shepherd - JP Morgan Chase & Co, Research Division

It's Steve Shepherd again, Graham. Just looking through your development results, always tell a fascinating story, don't they. I mean, you've got some outstanding development results here, but the South Reef doesn't look quite so good at 700-odd centimeter grams per tonne. And just looking at where Doornkop is on your cost curve, do you think that -- well, firstly, we don't have much information on the ore reserves, do we, for the South Reef? Because you inherited a position with no ore reserves -- published ore reserve we're talking about. Do you think that the future of Doornkop is secure in the sort of ZAR 400,000 to ZAR 450,000 a kilogram gold price environment?

Graham Paul Briggs

Steve, we've had increases in reserve going back now 3 years, year-on-year, on the South Reef. So we -- yes, you're right. We inherited virtually no reserves, and if you look at our mine plan and our justification for going forward, we actually have in that inferred resources in the mine plan. But those numbers of inferred resources are reducing year-on-year. This number, 714 is an average of the 350-odd meters that we had developed in that plan. So it's not probably a very good thing. We did, at the time, produce graphs, and I don't think we've got the graphs anymore. We didn't know anybody was still looking at development results, actually. So you've passed the test. Thank you very much. Now -- so I don't know. Jaco, I don't know if you've got any insight into it. Jaco, you have a mic there and give us a bit of information. I mean, we've obviously done the work so I'm fairly confident, but let Jaco answer it.

Jaco Boshoff

Yes, the -- I mean, as Graham pointed out, the reserves have increased year-on-year. We're currently standing above 1 million ounces of reserves of the South Reef at Doornkop. The average grade of that is about 5 grams per tonne, Steve. Now if you look at the development results, if you look at the 18-month average, it's closer to 1,000 cm grams, which is the right number. So this is the sort of up and down fluctuations that you see. And also, a lot of the development that we've been doing currently is in a lower grade portion towards the northwest of the mine. So it's not an issue for us.

Graham Paul Briggs

Thanks for that question, Steve. Fiona?

Fiona Perrott-Humphrey

Sorry, one more, completely unrelated, dividend policy. I mean, it has been a very turbulent 6 months or even a year now for the gold sector, and some companies overseas are seriously reconsidering the necessity or the drive to pay out a dividend when you're looking at tougher conditions in your operations. Have you reconsidered the dividend policy at all?

Graham Paul Briggs

Yes. We don't have a policy which is in -- on ratios or percentages of profitability or anything like that. What we do say is that we would like to pay dividends. We would only pay dividends out of profits. We're not going to borrow money to pay dividends. And therefore, with our balance sheet essentially staying static at the net debt level in the last two quarters, that's not a time to pay dividends. Certainly, the next 6 months, we're very hopeful that we will have some cash to be able to pay some dividends. The all-in sustaining cost, globally, is quite an interesting story when you look at it. Those companies which had very low cash costs but were amounting and amassing debt, the all-in sustaining cost is now coming home to haunt everyone a little bit because, again, if you look at the net debt figures in a number of companies, it is quite alarming. And maybe Frank is conservative. I'm supporting there in his conservativeness of how we manage the company. We'd certainly like to continue to manage this company with a minimal of net debt, which, of course, gives us maximum flexibility to do things. But as far as paying dividends, we haven't changed that at all. We don't intend, as I say, to pay dividends out of debt. We need to make some profits. Dividends is all about the company making money, and when the company makes money, it can afford to pay dividends. So, it's a sign that the company is in a good space if you pay dividends. That's how we pay dividends anyway. That's our -- yes. Henrika, there's another question at the back.

Unknown Analyst

Gunter [ph] from HSBC. Regarding the dividend issue, what you just said seems to be at odds with what's reported on Bloomberg, where it states that you've suspended your dividend.

Graham Paul Briggs

No. We've never suspended our dividend. We didn't pay a final dividend last year, end of last financial year. And the previous year, we actually paid an interim dividend, and we're not paying an interim dividend now. So the next time we actually pay a dividend and have that discussion, we'll be with the board in July, whenever the board meeting is, following our year end, July, beginning of August, and that's when we will release something to the market. Our intent is to pay dividends. I can't vouch for everything that's done in the press. Sorry, it's not my day to beat up the press. Ladies and gentlemen, thank you very much for coming, and have a good time at the INDABA. And don't drink and drive and all those sort of things, but have a great time. Thank you.

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