Harmony Gold Mining Company Limited (NYSE:HMY)
Q4 2014 Earnings Conference Call
August 14, 2014 9:00 am ET
Graham Briggs - CEO
Herman Perry - Head of corporate reporting team
Good day, ladies and gentlemen, and welcome to the international conference call for Harmony Gold Mining Company Limited's Fourth Quarter Results of financial year 2014 and the year ended on 30 June 2014. All participants will be in listen-only mode and there will be an opportunity to ask questions after today's presentation. (Operator Instructions) Please also note that this conference is being recorded. I would like to turn the conference over to the Company's CEO, Mr. Graham Briggs. Please go ahead, sir.
Thank you very much and good afternoon or good morning if you happen to be out in the Americas and a very warm welcome to our quarter four and year ending results. I have with me Alwyn Pretorius, Chief Operating Officer; I've got Herman Perry. Herman is standing in for Frank Abbott who is recovering from an operation; and also Mashego here, you've probably heard him or maybe even seen him before.
I'm going to go through the presentation, hopefully you picked that up from the Web-site, and going to focus on certain areas that certainly it's an interesting year that we've had. Let's just start off on Slide 2, Safe Harbor statement, of course worth reading, and it's my duty to bring your attention to that.
On the agenda, we'll go through some of the highlights, both the annual as well as quarterly, and then go through with the Harmony story, if you like, because all from that gets a bit lost in the various strips of detail and the various issues that happened in mining.
So firstly on highlights, and I'm now on Slide 5, really working towards profitability and free cash flow. The year has been nice in that there's been an increase in gold production; a reduction in all-in sustaining costs, quite marked in dollars per ounce, 18% drop in dollars per ounce, 4% in rand per kilogram; improvements in the underground grade year-on-year, there's a growth in the takes which I'll take you through. And I think we've also been quite responsible with our capital expenditure, another graph in the capital expenditure but it's 30% down and it's right on target for where we said it would be. We have recently talked about the – had a press release out about Phakisa shaft decline but a few slides on that just to go through that detail. Quarter-on-quarter 7% increase in gold and all-in sustaining costs basically static.
Going through Harmony's investment case and our four advantages, the one thing that we have caught of course is assets which were bought from other operators and therefore we have had to be quite inventive and be efficient in our mining. So we are in fact of the last cost per tonne producer and that's by nature of what we are and also by the circumstance of having low growth.
We have been funding our own capital over the last years and spending money on the projects here in South Africa as well as in Papua New Guinea. Experienced explorers, this sometimes doesn't actually [go home and sink home] (ph) because we have got a significant exploration portfolio in Papua New Guinea and certainly our discoveries are great in that country. We've developed Hidden Valley mine, it's the first mine that was developed for something about 15 years in Papua New Guinea, and we continue to develop and sink shafts here in South Africa, both vertical shafts as well as declines. Golpu simply a great asset and I'm still very excited about that asset and will go through some of the details later.
On Slide 9, just to take us through that sort of efficiency of mining, Harmony, Sibanye and Anglogold, the three South African assets obviously, and this is CIBC's information. It represents the 2013 calendar year, haven't got any better information than that.
But if you page over on Slide 10, you can see the grade variances there; 4.7 Harmony, Sibanye is at 6 and Anglogold 7.8, and that's over the last quarter. I guess sort of fairly variable quarter from quarter but it's a good sort of approximation to where we are. You can do the figures yourself if you want to try and plug in somebody else's grade into our results and see what sort of dividend we will be able to pay if we had much better grades. But that's the nature of the assets we have. There are some other comparative of the capital spent and also South African operations all-in sustaining costs at 1,293 the highest cost producer.
Slide 11, 3% increase in gold production. This is year-on-year. Gold price of course dramatically down year-on-year in dollars from 1,603 to 1,299, and in rands also down from 454 down to 432, 5% down. Cash operating costs pretty well static, 1% difference there, down of course in dollars per ounce. And if you look at the explanation of dollars per ounce, you have to get down to the exchange rates and look at that. All-in sustaining costs down 4% year-on-year and in dollars per ounce down 18%.
Quarter-on-quarter, 7% increase in production, that's Slide 12. Again you can look at the gold price there, quarter on quarter gold price is significantly down than the previous quarter in rand per kilogram terms and that's because the rand strengthened during that period. Virtually the same in dollars per ounce. Look at the cash operating costs, similar. All-in sustaining cost pretty well flat as well.
Slide 13, year-on-year grades, 4.26, 4.54 and 4.77 for this last year 2014. Going forward looking at the grades, obviously the grades can be fairly noisy from asset to asset. The higher grades operations have skewed some of the sort of totals and the averages, if you like, and the lower grade ones also skewed that in how much tonnes are produced. So what we're looking at going forward is really sort of an estimate of that 4.7 to 4.8 grams a tonne. And we've taken out this sort of high grades of Bambanani that were a bit of an anomaly this year and we've also taken out the anomaly of Target 1 which had much higher grades. But who knows what those grades will be other than we have to plug in the reserve grades that we've got.
Hidden Valley had a great quarter, best quarter ever, both on production, cash costs and all-in sustaining costs. Hidden Valley is making money and helping to pay a great deal of the gold in the last six months in Papua New Guinea.
On capital, Slide 17, we talked a little bit about those 2.5 billion rands worth of capital expenditure, in dollar terms $244 million, capital that's supporting production and also sustaining costs, and I'll go through some of the numbers going forward again looking into next year. But now I'd like to hand over to Herman to take us through from basically Slide 19.
Thank you, Graham. Good day, ladies and gentlemen. I would like to take you through a few aspects of the financial results for Harmony growth for the 2014 financial year. Starting at the extracts from the cash flow statement, cash [indiscernible], if we look at cash flow from operations before exploration, you see that we have generated $245 million on that line and that is a touch more than the total capital expenditure for the group over the same year.
Now those capital expenditure includes both sustaining as well as growth capital. So that part of our growth we have funded internally, and the exploration expenditure, the other line on there is also an investment into Harmony's future and it is the only item that we had to fund otherwise. Looking at the net debt result at the bottom, a net debt rate of less than $100 million, or put another way less than one month's gold sales for Harmony.
Moving over to the extracts from the income statement and operating results, starting at the top line, revenue line, now in the year we had, Graham had spoken about, improvements in grade and improvements in production. We had a 4% increase in ounces sold year-on-year and that has helped us to offset the 19% decrease there in the average dollar gold price, so that we ended at a 16% decrease there year-on-year.
If we look at the production cost line, cash operating costs in the rand slide, you see that that has increased by only 4% year on year and that's really credit to our operation colleagues managing costs very well, particularly labor cost year-on-year in rand terms is only up about 2% and contracting cost year-on-year up by only 1%. In addition we had the massive cost savings at Hidden Valley, and all-in-all that combined with the currency effect gave us a 11% reduction in cash operating costs on the income statement.
Moving down to amortization and depreciation, in rand terms, the cost are sort of slightly up in line with the increased production. The translation effect of the weaker rand is off in the lower number there of $207 million. The impairment charge we had spoken about last week as well, just financially important to remember that it is a combination of things. It is what comes over the last of month planning that we do every year and this year with the planning process obviously we will not do the decline at the moment but many other assumptions including cost of capital, cost assumptions, inflation assumptions and the like.
Moving on to exploration expenditure, you see there is a decline on that line and that is we have been spending money more economically in Wafi-Golpu, the bulk of that number relates to activities in PNG, but it relinquishes really as the drilling program reached its completion. We did not have that expense so much in 2014, especially in the latter part. Studies are in [indiscernible] and we'll say more about that later.
The next line is taxation line and that shows a credit, $27 million, and that really comes from us assessing our average tax rate in the Company because we have a gold-mining formula that varies according to the profitability of the legal entity. We assess that every year and this year [that was actually determined] (ph) to be a bit lower. You'll see a similar reduction in the balance sheet on the deferred tax liability.
Net loss coming in at $123 million, but importantly a positive headline earnings per share and we're staying through this $0.025, and I'm going to show you on the next slide how we get there.
If you look at the normalized profits, Slide 23, starting with the net loss per income statement, $123 million, we add back the impairments, we add back some other items and we end up with a positive $11 million of headline earnings. Normalizing that for two further items, the one is the loss recorded on our investment in associate Rand Refinery, we have provided for potential loss there following the difficulties experienced after them implementing in New York [indiscernible] system; adding foreign exchange translation loss on the dollar loan that is unrealized in our books, we record that in our primary accounts for rand balance sheet and therefore there's a translation loss there, we've just down-sided back in dollars on this sheet and that gives us a $15 million adjustment; normalized profits therefore just adjusting for those two items and $38 million and that gives us $0.09 per share which is a very positive result given the significant headwinds the business [experienced] (ph) in the year that's gone by.
And with that, I'll hand back to Graham.
Thanks Herman. Just on Slide 24, I think what you're seeing in the results there from what Herman has been talking is that we have got financial flexibility. We continue investing in our assets, we continue investing in exploration, even though sometimes we have low gold price cycle, like we probably have now, and we think we've got great exploration properties in Papua New Guinea and we'll continue exploring those. Of course very geared to the rand gold price and dollar gold price or the rand-dollar exchange rate.
Slide 25 is giving a little bit more of a breakdown in the capital expenditure and also the capital expenditure predicted into the future. You can see that there's more money going to be spent on maintenance capital I guess from roughly 700 million rand to just over 1 billion, and then a slight increase in the ongoing capital development. We've got the same numbers in dollars, we've used I think 10.50 for the exchange rate share, and so you can see there is that increase. Of course that's only the prediction of the rand exchange rate. It's not what we used in our reserves calculation, we think we used 10.17, which is far more scientifically that we have just used 10.5 because probably more realistic for the day.
Slide 27, this is a plan of Phakisa and you can see Tshepong on the right, the Tshepong mine, Phakisa mine. The orange area on that graph, that is the area that the declined project would have got to. The project reserve there would have been 3.4 million ounces in our previous reserve statement and we have decided not to do that project. It's basically looking at our capital expenditure and being prudent about that and rather get the production of Kusasalethu, Doornkop, Phakisa that should be producing some cash and then we can reconsider that in the future.
Over the page on Slide 28, you can see the brown area is now been taken up in the area that we put in the Tshepong decline. That's a decline that exists, ramping up and starting there, and what we basically said we'd probably do a 77 level, in other words go down one more level and mine that out to full extend Tshepong's life going forward, but you can see that the gold ore body there at depths of Phakisa is not the superior, it's slurry, we can decide if we want to mine that in future, but taking us through the current life of mine of course that led to be impairment.
Slide 29, national picture there Papua New Guinea, a bridge across the river, something that we do in places like Papua New Guinea. Previously these kids would have been battling to, struggle across the river in tubes or something like that quite here I think.
Slide 30, we've got a significant exploration land holding. We think it's probably more prospective than it has been for some time. The reason for that is we've been continuing exploring, then turning over tenements that don't reveal any reasonable results. And with generally everybody ceasing exploration and saving those exploration dollars, they've obviously relinquished their exploration licenses in various places including PNG and we've been narrowed to get some fairly attractive looking licenses. So we are working on those.
We have been very successful in exploration. We give indication of a highly successful, less than $9 an ounce discovery costs. That's pretty efficient. And of course in those countries, like South Africa, like Papua New Guinea, we embrace the social licenses to mine and we intend and we try to go beyond compliance, not because it's going beyond compliance but it's the right thing to do.
We certainly as I said, our assets are purchased from other companies, so we create value from low-margin assets, and that's left us with a fairly diversified portfolio, 10 operating underground mines, one open pit at Kalgold in the Northwest, and in the projects that are in build-up, Kusasalethu, Phakisa and Doornkop here, and of course Hidden Valley being the first significant greenfield development mine that was undertaken in the last 15 years.
We continue to look at our portfolio and assess it and really the focus on our portfolio this coming year is to make sure that we have profitable operations even after capital. Certainly the one operation that is going to require a bit more capital expenditure during the year and therefore probably will make a loss off the capital is Phakisa, but that's consciously and certainly reinvesting into that ore body.
Slide 31, this is the year when the hold charter comes to an end. Final date is in December. That's when we report to the DMR on that three months later, so the end of March. This is a bit of our status as Harmony just picking two of the elements on ownership as well as employment of equity and you can see that we're beating the charter requirements there.
Slide 32 requires a little bit of explanation. We have spent some time in the Free State on rehabilitation that really flows through a lot of operations and we have fully funded trust fund. So we've been doing rehabilitation, we found that we could do cheaper than what we calculated before, and probably we've been looking at what sort of other things can we do in the Free State. And we have discovered that King Grass, and that's the photo on the left, that King Grass is about 12 foot high, so sort of the height of two men. It grows very well on impacted land and we need to see what it's growing on [indiscernible].
And then on the right is sugar beets, actually also grows well. So you couldn't eat that sugar beets but it's certainly something that you can turn into some biogas and use it, and what we intend to do is replacing some of the fossil fuels that we use both in the plants and the laboratory.
Slide 33, photo of a drilling machine in the Golpu region. This is a significant asset. It's massive, high-grade, copper-gold resource. What we are looking at is a scalable mine with low capital start-up, certainly low cash costs and of course for us as a gold mine that's got lots of copper credits probably with negative cash costs, but it will have long life there's no doubt about that. And the way we're looking at it is to get sort of exposure to multiple cycles. So we're in the process of de-risking that asset by going through the various studies, and we think we've got a lot of experience in this and the project team is doing well in looking at the sort of the new way of mining this asset.
Slide 35 is a reminder, I showed this slide last quarter, just to illustrate what are we talking about and it may have been missed several times before, but if you look at WR504, and you see 1,369 meters at those grades, that you see high-grade, 428 meters it's 2 grams a tonne gold and 2.9% copper. Same with the other hole, WR499, a big intersection at the sort of 1 gram a tonne, 1.2% copper, but 560 meters that's basically 2 gram a tonne gold and 2% copper. So all high-grade portions to this ore body and the trick now is to look at how we can mine those high-grade portions when we have relatively subdued commodity prices.
From an investor point of view, I'm on Slide 36, obviously investors are looking for a return. A lot of criticism against the high capital projects, so we are looking at projects with lower capital, so near-term cash flow, something that's scalable, something that we can build bigger in time and scale it according to the requirements and economics, and a portfolio in PNG of course that we think has got huge value and looking at that sort of sustainable.
So, what are our targeted outcomes looking at a modular expandable solution? Something that we can start off with small mine and should be copper-gold product scrap, we can certainly build into a bigger mine. So the start-up looking at lower capital costs. The potential to use sub-level caving is really what we're looking at now and that has got two significant differences. One you can target the high-grade portions, the ore body which is the full-fledged as opposed to the mineralized middle settlements. And then you can also get production earlier because you don't have to sink all your capital into the extraction level like a block cave, you can actually start mining so you get some early tonnage. Just a bit of a targeting summary between 2.5 million and 5 million tonnes per year of mine, again that may be scalable as well, and then infrastructure that's built with the flexibility to allow for expansion.
Slide 38, we've had far too many fatalities during this year. We have done an internal audit on safety, we did internal audits on health as well. I think we've got regular underground visits by execute the management to really focus on improving it looking at a lot of the leading factors as opposed to the lagging factors. And so there's a lot of focus on safety in all our operations over and have increased the number of people reporting to them. We now have three regional general managers, we have three senior engineers reporting to those guys. So we have increased the amount of cover amongst other sort of positions that we've been out for to really focus on safety.
We believe we are positioned to deliver. We've obviously got sort of a diversified portfolio here, skewed operations to higher-grade areas and we have a bit of open-pit experience about Kalgold and in Hidden Valley. We've looked at the operational trends in some detail, although we're going to spend a lot of time looking at those, and really looking at the bottlenecks and so on. And so we've got a target set here approximately 1.2 million ounces and all-in sustaining costs of somewhere between 410 to 430. The dollar ones, we are simply using an exchange rate of 10.50, you see the footnote there. Certainly intend to develop the Golpu project during the next five years, and really as I said, focus on the safe quality ounces.
Slide 40, bit of a restatement of our strategy, most important of course is one and I think dealing with some of those issues, safety, improving the cash flow, retaining the flexibility in the balance sheet. The assets in PNG we think are worth a lot more than we get credit for and therefore completing our studies in Golpu and eventually building this mine is incredibly important. We also think that there are opportunities in the world with sort of a state of gold-mining and depth levels and so on, there are always companies looking to sell assets but we'll be open to look at things and we have been looking at some that will get a little bit more serious during this year.
Ladies and gentlemen, I think I'll leave it at there and then open up for questions.
(Operator Instructions) Our first question is from David [Borussia] (ph) from [Bitwire] (ph). Please go ahead.
Thank you for the presentation. I just wanted to ask you about the possible refinancing of your 300 million revolver. In December you were already in early talks a few months ago regarding the financing and I'm wondering if there is any update in that regard.
I'm going to ask Herman to answer that question, if you don't mind.
Our intention is to refinance that and we will certainly communicate to the market when that is done. We're finding that the lending group is very supportive and we had unforeseen issues with that.
Okay, that's all, thanks.
Okay, then we just wrap up if I can? Ladies and gents, interesting year, a challenging year, that's for sure. There has been some changes in the Company. Alwyn has obviously taken control of the operations here in South Africa and we've spent a lot of time on safety, on the bottlenecks, on looking at the assets. Certainly there is a plan in place to get the best out of the assets. So I'm feeling more confident about that. And the big challenge that we've had during the year obviously has been the sort of uncertainty around labor, I think we have managed through that quite well, and hopefully we have a calm financial year 2015 with respect to labor.
The gold price, I think everyone is sort of calling it fairly static. The bears was at 1,000, the bulls at 1,400, I think we can call it fairly flat. Obviously as gold mining executives, we are a little bit more bullish on that. But we are highly geared to the gold price and obviously the rand exchange rate. Ladies and gents, thanks a lot for listening to us.
Thank you very much, sir. Ladies and gentlemen, on behalf of Harmony Gold Mining Company Limited, that concludes today's conference. Thank you for joining us and you may now disconnect your lines.