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Harmony Gold Mining Company Limited (NYSE:HMY)

F2Q 2014 (Qtr End 12/31/2013) Earnings Call

February 3, 2014, 8:00 AM ET

Executives

Graham Briggs - Chief Executive Officer

Frank Abbott - Financial Director

Analysts

Operator

Good day, ladies and gentlemen, and welcome to the Harmony Gold Mining Company Limited Second Quarter 2014 and Six Months Ended the 31st December 2013 Results. (Operator Instructions) Please also note that this conference is being recorded.

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

Graham Briggs

Thank you Dillon, and welcome, ladies and gentlemen, wherever you may be. With me I have Frank Abbott to help me through the financials. We also have Mashego here. So we can pretty well answer hopefully most of the questions that you have. And if not of course Marian and Henrika are available on the e-mails if you want to send them [inaudible] questions.

On Slide 2, the Safe Harbor statement, and I'm going through the presentation as you have hopefully picked it up off the website. Agenda, Slide 3, we'll talk about mining, profitable ounces, where our focus is and our focus is on margin, talk about Wafi-Golpu, a little bit of information about Wafi-Golpu and what we are doing there. Frank will take us through the financial results and then I will conclude.

On Slide 5, our strategy, this is a slide that has not changed much over the many years that we've had it and it's certainly our intent to continue to pay dividends into the future. So we're really looking and focusing on margin and therefore growth in profits. Then it comes out of the second bullet point down growth in margin and therefore the free cash flow [inaudible]. A lot of work we've been doing in the last few months, in the last few quarters in fact, and will probably continue until the next six months is really looking at optimizing the operational delivery, trying to deliver on the projects that we spent capital on and really focusing on our operational plans to be able to deliver on those. Sharing our rewards and profits, we've talked about dividends. And obviously we have a host of other stakeholders as well.

Slide 6 is the rand per kilogram, the all-in sustaining costs but I like us to go to Slide 7 which is in dollars. You can see that end of June, we had $1,551 per ounce that came down to $1,264 per ounce in September and now down at $1,222 per ounce. Then looking at a little bit of the FX of exchange rate on that and obviously you can go back to Slide 6 to have a look at the rand per kilogram terms.

Slide 8 and 9 really go together, but let's talk Slide 8 first. And we are talking about some of the operations that are really done very well here, less than $1,000 an ounce, and we're talking in all cases all-in sustaining cost Joel, Target 1. Target 1 has had some great quarters and done very well. Bambanani is really starting to perform well, mining the shaft fuller. The decline is almost in operation yet, but is being equipped and certainly that will be better at getting tonnes out there, and Phoenix tailings operation.

When you look at the next group of mines Hidden Valley, Kalgold and Unisel, Hidden Valley has turned around the corner dramatically from a few quarters ago. Three quarters ago, it was more than $2,000 an ounce. Last quarter, it was around $1,600 an ounce. And this quarter, it is just above $1,200 an ounce. Our total all-in sustaining cost is below, as you've seen on slide 7, $1,250 an ounce. And so the real focus is to continue with the sort of increase in margin.

Over the page on Slide 9, Phakisa, Tshepong, Masimong, Doornkop, some of these operations have been refocusing during the last six months. Tshepong has basically gone through a management change as well as we've done some restructuring in labor there, about 10% of the labor force. So there's been a real focus to get that operation back on to where it should be. And now we’ll see things [inaudible] done on Tshepong going forward. So we're looking forward to better performance there.

On Doornkop, we took out the Kimberley reef mining. That happened towards in December. And of course, now there is again about 10% work force that's being taken out there. And that's a lot of [our people] [ph], because they're quite skilled from the Kimberley mass mining has been transferred to other operations. So those are two operations that have been restructured.

Phakisa, we continue to spend some capital, although this capital is really spent on various refrigeration plants, but looking forward to getting that down into the $1,250 an ounce to $1,300 an ounce mark by the financial year ends. The capital was skewed certainly towards the front-end of this financial year.

The disappointment for the quarter was Kusasalethu, it should have done lot better. We had some technical issues, bottom of the shaft issues. And unfortunately, because of the sort of mining sequences, we couldn't get it back into production as quickly as we wanted to. And Target 3, we mentioned that we'll probably do some restructuring in Target 3 to make it profitable.

Slide 11, a little bit of an idea of what we're focusing on safety. We have had very good success on safety and we continue to focus a lot more on safety. Certainly, management and I believe that we can mine without having a [fatal] [ph], which is a mindset change in the South African mining scenario. We are doing much better, but we need to ensure that we don’t have anybody dying on our mines. So that still remains an objective.

Slide 12 talks about six months to the end of December '13. We also have the six months to end of June '13 here. And if you go to the quarterly booklet, you'll see the six months ended December 2013 and December 2012, and you can see our trends really on various things like the rand per kilogram and where we are. So obviously in the six months December '13, June '13, we are 10% better there. In the US$ per ounce we are 18% better there. The difference between the two is obviously in relation to the exchange rate, bottom line there on Slide 12.

If you look at the all-in sustaining costs and that's of course the big difference there between the 10% improvement and the 15% improvement is capital expenditure [line there] [ph]. And dollars per ounce goes from $1,600 per ounce to $1,200 per ounce, and that's a 33% improvement. That's on the six months to June and December.

If you go to the booklet, you'll see the similar comparison on December 2013 and December 2012. And you could see the sort of where we are in the unit costs there and it's quite a good story as well.

Slide 13 is a slide on the December quarter versus the September quarter. [Company] [ph] production is flat. Gold products went down 3% in rand terms, 5% in dollar terms. Cash operating costs came down by 5% in rand terms, 6% in dollar terms, pleasing improvements in grades. Operating profit you can see is sort of minus-5% there. You can say virtually flat mainly because of low gold price, gold price down to 415,500 in that quarter. And all-in sustaining costs below the 400,000 rand a kilogram mark. Exchange rate for the quarter was 10.12 and that is the December quarter.

Slide 14, grade trends, three quarters of improvement of grades. You can see also the planned grade for this financial year at 4.79 that was the planning for this year and this last quarter 4.85, hopefully will get similar to the 4.85 in the coming quarter.

Production, Slide 15 in kilograms, Slide 16 in ounces, [reflecting] [ph] most of the operations at Kusasalethu, you can see the disappointment there, it should have done much better. And hopefully we will see better production going forward into the next quarter.

Slide 17, rand per tonne, a bit of comparison, and you can see in the bullet point at the bottom where the source is from that. And you could see that Harmony is still the best rand per tonne deliverer in the South African gold mining industry. Sibanye and AngloGold have a 2 [rand] [ph] per tonne advantage over us and therefore in their rands per kilogram or dollars per ounce terms, they should be a lot better than us. But you can see that we're still pretty efficient when it comes to rand per tonne.

One Slide 19 and 20, all-in sustaining costs, we stack out each of our operations from the highest cost Kusasalethu down to the lowest one Bambanani. You could see the operations that are performing below $1,000 per kilogram. You could see operations performing in and around below $1,200 per kilogram. And then obviously those on the right are the ones that are requiring more work to be done and that's where a lot of the focus is.

Doornkop now restructured. Tshepong now restructured. Work to be done at Masimong; work to be done at Target 3. Kusasalethu is a case of we've got over those technical problems, so we should have a better quarter. And Phakisa, of course, we'll be spending some capital. So that’s why it is where it is and is planned to be that way.

Slide 21, a lit bit of sensitivity to the rand/dollar exchange rate. The grey bar is where we were last quarter at 2012, and that gives you $1,222 an ounce. But if we just continue at 398,000 rand a kilogram, you can see what happens with the changing exchange rate. Of course, our plan is not to stay at the 398,000 a kilogram, our plan is to get that down. So we should get a good advantage in dollars per ounce terms.

Wafi-Golpu, Slide 23 is just really a schematic section of 2009 Golpu and today what it looks like, just to show you how different this orebody is. There's been a lot of drilling over the years and you can see where it is. That's a fantastic orebody, 20 million ounces of gold, 9 million tonnes of copper. It's potentially one of the best projects, Copper-Gold in the world today. We are doing a lot of work with the appointment of engineering company to look at the modular expandable mine and also looking at going underground access.

Slide 24 we give you an indicative timeline. And we're really in that stage at the moment of where the [inaudible] really the process of feasibility of underground access and looking at a modular type mine. So that's what's happening at the moment.

I'm now going to hand over to Frank to talk financial results.

Frank Abbott

Thank you Graham. If we go over to Slide 28, look at our income statement and quarter, you see there, there is the September quarter in dollars. If you look at the revenue line, it is flat, and that's because of the gold [inaudible] increased by 5%, but also offset by the 5% reduction in the gold plants. Our cash operating cost reduced with $24 million; the savings in electricity, $19 million. In South Africa, we didn't have the [inaudible] during the quarter of December. And from Hidden Valley, we had a $5 million [inaudible].

Inventory movement was negative $15 million. And this is a result of the reduction in gold inventory over this period, the previous period we build up gold inventory and in this period it reduced. Our operating profit was $7 million lower. Amortization was pretty much same as the previous quarter. Exploration expenditure was slightly lower. Foreign exchange translation loss, $13 million, this is only $270 million loan that we had for Papua New Guinea [inaudible] [our income statement in rand] [ph], we convert that to rand and the rand weakened against the dollar. And then we convert that back to dollar for purposes of these statements.

Our taxation was $1 million versus $4 million in the previous quarter. That gave us a loss of $3 million. The exchange rate for the quarter 10.12 versus 9.96 for the previous quarter.

If we turn over to Slide 29. We wanted to just show the impact of the foreign exchange translation on results, the net loss for the period was $10 million. The foreign exchange translation loss was $13 million. Our net profit, excluding this, was $3 million.

If I turn over, I’m on page – Slide 30 but Slide 31, we have our cash flow summary quarter-on-quarter in dollars. Our cash flow from operations before exploration was $80 million. That was substantially more than the previous quarter. And again, we had the advantage of reducing our gold inventory during this period compared to building up the inventory in the period before. Exploration expenditure, $11 million, was slightly lower. Income and mining taxes, $3 million, and our capital expenditure, $62 million. You can see that our cash flow from operations [inaudible] capital expenditure.

Our net debt increased by $5 million. But if we look at the [inaudible] our debt in fact stayed the same, but our cash balance has reduced slightly and this is in dollar terms. In rand terms, our cash balance has actually increased. But converting that to dollar, bigger exchange rate in December we’ve got the dollar balance being slightly smaller.

If we turn to Slide 32, this is our borrowings which we have renegotiated, our rand facilities for R458 million expired within the December quarter and we renegotiated the loan so we renewed it and to replace that with the facility of rand 1.3 billion, which replaces the old facility. This should mature in 2016. At the same time, we also settled the opportunity to renegotiate our covenants with our banks provide U.S. dollars and rand facility [uplifted] [ph] the different covenants there. What’s of importance is that the first covenant we changed, it used to be EBITDA versus total interest and then the last covenant tangible net worth replace market value. So we feel much more flexibility with the current covenant as we have been. And we're very happy that we could actually change it.

Thank you. Graham?

Graham Briggs

Thanks, Frank. For conclusion I'd like to go to Slide 34. This slide is really about the sort of foundations again in our strategy, what we've said, what we've done and the picture going forward. Growth in margin, we have, as indicated some time ago, we closed the last shaft that we intended to close. Now we're looking down every operation and looking at the unprofitable areas like we have at Doornkop closing that. We've had some changes in management. Those changes mainly have happened in the general manager level and the human resources management level, and then done quite a bit of restructuring of the labor force, [inaudible] should be below R400,000 a kilogram on an all-in sustaining cost.

At the same time, focusing on operational delivery and optimization, we have the advantage of the lowest rand per tonne and we need to continue to keep that advantage. Capital and other costs we've been reducing. That has gone through the whole company. There's obviously still more work to be done. The easy stuff is done. And we need to do some more of it. And then we’ve got the ore reserve flexibility.

Slide 35 is just an indication of what we think is where the upside in the share price is, we’ve got increasing grades, lowest rand per tonne, good capital discipline, free cash flow, we still remain unhedged both in gold terms as well as in exchange rates, certainly got balance sheet strength and [inaudible] low debt. We're geared very much to the South African currency, because 93% of our gold is produced here in South Africa, obviously what happens in South Africa and to the currency is very important. We've got earnings growth, and then Golpu one of the top gold/copper resource of the world, there's no doubt about that. from the graph on the right-hand side gives you an idea of what the market cap for reserve ounce is in Harmony versus other companies, and $24 an ounce versus $65 on a South African peers, and then of course internationally the cost per ounce is very much higher.

In short, we really have been focusing on managing costs and production. Kusasalethu was a bit of a disappointment on the production but certainly we believe we're over that. We’re going to mine profitably in future, there's no doubt about that. And that's really what management's approach is.

There is in the presentation some appendices, some detail on grade, detail on rand per kilogram, cost year-to-date versus what we gave guidance about, both in rand terms and in dollars and then a graph on all-in sustaining costs at the rand per kilogram dollar per ounce level.

Thank you very much. I'd like to open up the call now to questions.

Question-and-Answer Session

Operator

(Operator Instructions) It appears we have no questions. Do you have any closing comments?

Graham Briggs

Ladies and gentlemen, thank you very much for listening to us. Thank you for taking the time out to read through our presentation. Hopefully you will find further information in our quarterly booklets. And obviously there is a lot of financial information there as well. Thank you very much and enjoy the rest of the day.

Operator

Thank you. On behalf of the Harmony Gold Mining Company Limited, that concludes this conference. Thank you for joining us. You may now disconnect.

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