Harmony Gold Mining Company Limited (NYSE:HMY) Q2 2016 Earnings Conference Call February 4, 2016 8:00 AM ET
Peter Steenkamp - Chief Executive Officer
Frank Abbott - Financial Director
Good day, ladies and gentlemen, and welcome to the Harmony Gold Mining Company Limited Second Quarter for the Financial Year 2016 and Six Months Ended December 31, 2015 Results Conference. [Operator Instructions] Please also note that this call is being recorded.
I would now like to turn the conference over to Chief Executive Officer, Mr. Peter Steenkamp. Please go ahead, sir.
Good afternoon, ladies and gentlemen. And I've got with me, I've got Frank Abbott, our CFO and a team of financial people and I've also got Marian van der Walt and her team of Investor Relations and I've also Mashego Mashego, who's an Executive Director of Harmony Gold. We're going to talk off the presentation that I think you all should have. So I'm pretty sure, we're going to start on the 1st Slide and if you look at the agenda. We're going to talk about growing our margins.
Frank will take us through the financial results. We also then look at creating the future value through exploration and some conclusion remarks that I would like to make at the end of the presentation. So if we first, we move onto to the growing margins, which is on Slide 4.
I think, we're very pleased to announce that we actually ticked all the boxes. Grade improved by 7%. Our production on the back of a very good quarter and the previous quarter, we actually improved further 2%. So we're very proud of that. Our All-in sustaining costs is been down with 7%. Production profit up by 84%. Headline earnings of R74 million and net debt reduced and all-in sustainable cost margin is 17%.
Just talking about delivering the results. First of all, I think our restructuring that we started sometime ago is now paid off. We keep in focus on what we can control, which is the safety production and grade. Higher Rand per kilogram gold prices simply a bonus for Harmony. If you look the results quarter-on-quarter. Our safety parameters improved, we're still working to zero harm in that 100% day, but we are working towards that.
With a 7% increase in our underground recovered grade, 2% increase in our production. I'll say, that was in the back of a very good quarter. The previous quarter, our all sustaining cost is down by 7% to R434,000 a kilogram. And in US Dollar terms we're 15% down to $950 per ounce. 84% increase in production profit to R1.3 billion and in Dollar terms is to $91 million. Headline earnings is $5 million and a net debt reduction was $29 million for the quarter.
I'll move into next slide, which is Slide number 6, we can see that the four quarters that we have in our productions, we have three consecutive quarters of increasing production. And [indiscernible] also exceeding our annual guidance for the year.
We move onto Slide 7, we look at our grade. Our South African underground recovered grade improved dramatically as we had 5% from FY 2015 to where we were in the first quarter, in terms of FY 2016 and a further 7% improvement. That is against a grade guidance predominant [ph] market of 5 grams per tonne. So we had quite a kick up in our grade.
If you look at, we're looking at - I'm going to move skip Slide 8 and go to Slide 9, which is actually US Dollar, per ounce, we can see. That although the US Dollar price came down with an exchange rate most of our positive [ph] FX quite a dramatic improvement in our cost. So cash operating cost together with our total capital cost went down dramatically and if you compared that to in terms of price we got and also where we are, this point in time in terms of exchange rate, this quarter [indiscernible] now between our cost and also the and the price that we're getting in US Dollar terms.
I'm going to move further down to do - we also look at the all-in sustaining cost. And I've really go to move to Slide 11, which we look at the Dollar price. We can see this is where we, at this one stage we were not making as far as the price is concerned, where the exchange rate and also the cost concerning and also improved production. We are now much better place, there's lot of headroom between [ph] ourselves and our cost and also the price that we received.
I'll move onto Slide 12 and that is really the net free cash flow that we had in Rand terms, of all the different operations and it is really the first quarter. The previous quarter and not the quarter we report on. And we can see, where we were, if you look at what the improvement that we show between the different operations. All the operations improved to show net free cash flow is concerned and that is on Slide 13. But we still have two operations, that didn't make it, is Kalgold and Kusasalethu.
Kalgold, we had a quite a problem with our crushing systems there and we have that issue resolved. In Kusasalethu, we're still busy with some work on the infrastructure and to improve the production in that particular mine. We move onto Page 14, it actually shows that plugged in [ph] the yesterday's Rand per kilogram gold price, all operations on last quarters or this quarter, that we report on production.
You will see that, we're net [ph] effect making profit in all different operations. I'll move into Page 15, you can see the performance of our share. On the JSE, you can see as you compare to all the industries and also the US Dollar price, gold price and South African Rand gold price. You can see the leverage that we find, share price due to the fact that we are exposed to the South African Rand.
I'll ask Frank to just go through the financial results.
Thank you, Peter. I'd like you to turn to Slide 18. This is the extract from our income statement quarter-on-quarter in US Dollars. The first column is the December quarter and then we've got the September quarter.
If we look at the revenue line. Our revenue was $321 million, not a big difference from last quarter. Although, our gold sold was 3%, the Dollar gold price is 2% lower and it had a very small difference in the total revenue figure.
However, when we look at cash operating cost and off $226 million and that was substantially lower than the September quarter. Now a portion of that was because of the lower electricity cost in the December quarter, we do not buy the winter tariffs. But in the balance of it, the biggest portion of it was because of the exchange rate.
As the Rand weakened against the Dollar. The amount that we convert back into Dollar is much smaller, so our costs have reduced in Dollar terms. If you look at the production profit, our production profit was $91 million. It was 68% more than the previous quarter. Amortization and depreciation very much in line.
The exploration expenditure went up slightly. This is because of the second [indiscernible] and Kili Teke. Our foreign exchange translation loss $26 million, this is because of the weakening of the Rand against the Dollar. But during the quarter we started buying back our Dollar loan [ph] and currently it's looking at $200 million. End of last quarter it was $250 million.
We had taxation of $4 million and we had a profit of $5 million. Thank you. If we - page over to Slide number 20. We done is slight [ph] here, to indicate the reduction in net debt quarter-on-quarter in US Dollars and this is extract from our cash flow and balance sheet. If you look at the opening balance here in the debt column. $298 million that was the total debt, we had end of the previous quarter. And that consisted of the $250 million loan, US loan and in the other $48 million was from South African debt.
We had cash funded to $7 million, so that got us net debt figure of $191 million at the beginning of the quarter. We generated $33 million of cash from operations during the quarter. This was from profits with $73 million. This our - capital expenditure of $40 million. So that got us the net cash of $33 million.
If we take that off the opening balance. We get the closing balance there of $162 million net debt. So the net change to be in $29 million, where net debt is reduced quarter-on-quarter. If we look at the debt balance of $290 million. $200 million is for the US Dollar loan and the $80 million is what's left of the South African Rand loan. And we've got $56 million of cash, at the end of the quarter and that gives us the net debt figure of $162 million, $29 million lower than previous quarter. Thank you, Peter.
Thanks, Frank. The next-- I just want to cover some of the issues, some of the things that we have in terms of future in our exploration. The slide that we have there on the heading. It's actually, we're on Papua New Guinea and that is a lady geologist in Papua New Guinea, that took me through this coal and - was a very exciting trip for me because it's really a world-class exploration team that we have there.
We move onto Slide 22, I think this is what we the Kili Teke reserve we actually announced in November. We believe, we are at the right address and even in the right geological setting. The Maiden and further resource on Kili Teke has been declared and it is 128 million tons, at 0.4% copper and a 0.3 grams per ton gold. On a gold equivalent basis this equates about 4 million ounces of gold.
The resource in shell [ph] that's been cut off at 0.5% copper and the remains open at further development and you can see in that area, both to the north and the south of the resource. There is still opportunities to find more and also obviously big [ph].
The extra drilling, we added extra drill rig into the resource. We're actually trying to firm the results. It is very difficult terrain and in that area and we have been able to, the second drill is probably the best if we can do. And we believe it's probably around about two years of the drilling program ahead of us.
We continue to see good results and we're very excited [indiscernible] that is concerned. And we may move to the next slide, which is the Golpu study that we're currently under final review. The feasibility study of Golpu for stage 1 and the prefeasibility of stage 2 has been completed in December and has been represented to the different JV partners.
So both need to prove it. We believe that by the month of February, we'll be in a position that we can actually share the results with the market and we will come back to you, if all there is concerned.
We also, have continued discussions in finalizing the pre-mining development agreement which is the prerequisite for us to actually start this project. We don't have this agreement, we will now continue - we have been - met with our Prime Minister and the Minister of Mining in Papua New Guinea, whilst I was there in the beginning of January and both of them indicated that they're very keen for this project to continue and so we believe that is actually eminent that we'll get that agreement, get in place. So we're very confident that agreement, we'll get it soon.
In conclusion, we've just some observations as I've been there. First of all I'd just like to thank Graham Briggs. The Previous CEO for all the hard work, he's put into Harmony and led Harmony through very difficult time. He's certainly taken some very good leadership in Harmony and certainly the things that he initiated, all the fruit has become, you see today. And we'd like to thank Graham for that. Graham is still available for consulting work, but he's actually now moved on and into retirement.
It's been five weeks on the operations. And what I found, was it the most operations I think it's too outstanding, I still need to visit, that both of them in South Africa. I met with the senior management. I've met with Unions, I've met with all the leaderships on different operations and also preview with our board.
My early takes is that, we have very competent team. So I'd like to congratulate Harmony in terms of the development of the teams. We've got a good leadership on over different operations. I'm very satisfied with that. I've got - I believe [indiscernible] very good.
We still are, in many cases are undermining the whole body, where we don't get to the average grade of the reserve above cut off. And I believe, there's some opportunity to improve that. There's also opportunities for synergies and also to develop certain of the areas and we can de-bottleneck some of our operations and get better volumes.
I should - believe that we should focus on the basics of mining, that we focus on the grade, we focus on the volumes, we focus on the cost and don't just run away with the price and don't go on high grade or low grade areas. Focus because you can make money out of it now. So we certainly are focusing on that.
Obviously the March quarter, we believe is not going to be typically in South Africa. We have another very good March quarter because we have still very long periods of long weekends in dealing this period. We also take that on account of annual guidance. Our investment case, I believe is still very strong and goes to Slide 26.
And I believe, our profit drivers are intact. With safety and everything we do. The company's strategy is to create value for stakeholders, by increasing its margins and generating cash nets [ph] to develop Golpu in Papua New Guinea and ensuring our positive shareholder return in the long-term.
We move to the next bubble there, which are operations. It is our mindset to be positioned to the lowest [indiscernible] answers [ph]. This continued to be our focus. Mines are profitable at plain gold price of R450,000 a kilogram. We will consider various options initiating that all our mines perform, under that price.
We control it, we can great production and cost. Look at the third bubble that is really about financial results. We believe we have a solid balance sheet. Will continue to repay our debt in the short-term and sharing financial flexibility and everlasting fund, share of Golpu project.
And if you look at our fourth bubble there. Our guidance remains intact and it takes into account of weaker March production quarter. Our fifth bubble there is really about our future and we're looking at replacing ounces both Golpu and Kili Teke. I think both of them are exciting projects. We certainly at this point in time, we're trying to pursue both of them and so they are very exciting projects and one is obviously much further down in the line than the other one.
So Harmony is still a company worth investing in. Then move to the next slide, which is the Safe Harbour statement. Please take note of the Safe Harbour statement read it and take note of that and then we get to the final side and it's just that's the end of our presentation. And is there any questions, that we can answer. We will do that.
Thank you, very much sir. [Operator Instructions] our first question is from David [indiscernible] from Deutsche Bank. Please go ahead.
Yes, welcome aboard, Pete. I guess, one thing if you really look at South African producers and you highlighted it slightly. Could you tell us, how many shifts you actually work during the December quarter and how that compared to September and what's your budgeting for the March quarter?
I can't offer, but I'll give you that information, there's Marian [indiscernible] in terms of how many shifts we have, but we obviously we've planned accordingly. So that's why our guidance is in line with where we want to because we know, that we're going to have in January quarter we're going to have late shifts because obviously we know, what plans we're going to have Republic Holidays and long weekends in advance.
We always know that in the first quarter, we liked. Easter weekend and we also have the Christmas part. It got the biggest impacting in that period. I don't [indiscernible] know precisely how many shifts we have on that [indiscernible] number of shifts, but we'll get it to you, David.
Okay, thanks and I just - going through the headlines this morning. I haven't been through your results in detail. I see some commentary that you're looking for acquisitions. I mean, given the, I guess the tenuous state of the South African asset base. I'm a bit surprised to see that headline out after one quarter profits. Can you just explain where that might be, where that came in, what context?
I think, Frank was quite out of context, that day [ph]. Somebody asking, if you're interested we have no plan at this point in time to find any. We don't have nothing on the table, as far as acquisition is concerned. We obviously with the free cash flow. Our first focus is to, pay our debt, that is our first focus. Obviously and at the end of the year, we have to certainly considered dividend, if there is a dividend available and we will consider that. If the [indiscernible] east, it's obviously a good chance of that. But we're not in the moment looking for any or actively pursuing any acquisition.
What we - our plan is still the same. We're focusing on what we can get in terms of making free cash flow and see if we can fund our Papa New Guinea project, which is in the pipeline going forward.
Just one last follow-up question. So the intention is to have a balance sheet that can finance and follow the P&G project.
That is the intention, yes.
Okay, thanks. Best of luck.
Thank you, David.
Thank you very much. [Operator Instructions]. Sir, it appears that we have no further questions. If you have any closing comments.
No. Thank you everybody for being on the call. We certainly appreciate that and we obviously are very proud of our results in the last quarter and we hope to see that going forward. Thank you very much.
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.
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