Harmony Gold Mining Company Limited (NYSE:HMY) Q2 2017 Earnings Conference Call February 2, 2017 8:00 AM ET
Peter Steenkamp - CEO
Frank Abbott - Financial Director
Johannes van Heerden - CEO, South-East Asia
Good day, ladies and gentlemen, and welcome to the Harmony Gold Mining Company Ltd. conference on the interim results for the six months ended 31 December, 2016. All participants are currently in listen-only mode and there will be an opportunity for you to ask questions later during the conference. [Operator Instructions] Please also note that this call is being recorded.
I would now like to turn the conference over to the CEO, Mr. Peter Steenkamp. Please go ahead sir.
Thank you, Chris. Good day to all of you and thank you for joining us. I should believe there's quite a few people out there that are listening to the results. We’ll go through the results by using the presentation that we made this morning on the webcast. Just take a note of the safe harbor statement that is in the second slide. We will cover the agenda. We will cover the normal type of agenda but also in this presentation we’ve got Johannes van Heerden here from Southeast Asia for us. We’ll talk about Hidden Valley, so if there is any question on Hidden Valley, he will be able to fill in. Our key features for the first half of FY17, I must save it in mind, safe profitable ounces, we believe that safe mines are profitable mines and competitively improve those, our performance will be. One of the biggest things that we’ve had in Harmony when we started was this unplanned stoppages, many of the [indiscernible] stoppages, we’ve done a quite lot of work in terms of improving our safety and then secondly also improving our maintenance on our major infrastructure and for that reason we matter of fact seeing quite a nice uptick in our production.
The majority of our mines are exceeding or achieving their plans. Our great management has really been very good. I'm very pleased to say that discipline that we have put in place not to mine below cutoffs is really working for us and grades continues to improve. And then we’ve done quite a lot of work as far as growth is concerned, we’ve concluded Hidden Valley acquisition during this half of the year. We are actually spending some money on exploration and we also have done quite a lot of work as far as acquisitions were concerned. To increase our margins, we remain free cash positive over the time. Hedging of the EBITDA margins, we’re still doing it very well and we’ll talk about that a little bit later. We recently repaid all our debt. We got a strong balance sheet and with a lot of flexibility in the company. And we believe in prudent financial management, we remain extremely conservative in terms of how we spend the money. We do not have a lot of money in our pocket to burn, somebody asked here this morning. We in actual fact very, very prudent in terms of where we want to spend the money.
Let's look at the strategic pillars. Our safety rates improved during the six months [Technical Difficulty] with 8% increase in gold production. We talked about the grade continues to go up and sitting at 5.04 at the moment. With 4% increase in all-in sustaining cost in rand per kilogram, but 14% unfortunately unused dollar because of the exchange rate we had. We made US$45 million from the hedging. We had headline earnings of US$0.11. We're on track to meet our production target for the financial year and we paid the interim dividend of US$0.04.
Let’s turn the page then to Slide 8, which gives us fatality injury frequency rate. You can see that we are probably the lowest as we’ve been. This six months have been the lowest that it has ever been in Harmony before. Moving to our safety achievements, we talked about being fatality free underground in December quarter. The Tshepong mine which is one of our biggest flagship mines recorded 2.5 million fatality free shifts; on 27, October, which took them 794 days. Doornkop achieved over 2 million fatality free shifts on 17, December, which took them 872 days. What is also quite encouraging if one look at the last bullet point on Slide 9 is that we had what we call white-flag days. So white-flag days is just really about you go to beach, there is a white flag on the beach, which means that it is a safe beach. White flag means there is no -- day without no injuries at all, not even a accident.
And we had many mines that actually had a full-month, calendar month without any injuries; at Unisel, at Bambanani, we had in September, November and December, and also Joel in October. Now that certainly gives -- underscore the notion that we can actually work injury free, there is zero harm to people and certainly means operations [indiscernible]. If you look at operational results, starting with Slide 11. Our gold produced was 553,000 ounces, 554,000 ounces for the six months. You can see [indiscernible] well on their way to get to 1.050 [ph] million ounces of guidance. The gold price in US dollar terms have dropped to 7%. Underground recovered grade we talked about is just at 5.04, up from the previous six month from a 4.883%. Our production profit has been US$177 million. All-in sustaining cost at US$1,136 per ounce.
If you look at slide number 13, you see the operational performance of different operations in the ounces per used. You see all of our operations improved except for the last three. The most significant end one is really the Target operation. The other two was really on the back of a previous six month excellent performance. Except for Target, all operations actually made the plans and we are very pleased with that performance. When we look at Slide 15, we look at the operational cash flow in US dollars. All operations made money, although some [indiscernible] but in Target, obviously is the only operation which didn’t make a dime. On Slide 16, we look at the underground recovered grade, we look at the difference this last three years and we see where we are now in terms of our first half of the year. We can see we expected quite fairly good improvement in grade and a consistent improvement in grade over the last few years.
I will now hand over to Frank to talk about the financial results.
Thank you, Peter. If we turn to Slide 19, recognitions from the income statement and this is for the first half of the 2017 financial year, this has been second half of the financial year 2016 in US dollars. So if we look at the revenue there, you see the revenue was US$706 million versus US$625 million. And this was a 13% increase over the previous six months. This was because of a 6% more gold sold. Although we produced 8% more gold, we only sold 6% more gold. And also a 7% increase in the gold price. Our production cost went up. What we done is restricted, because we now got 100% of Hidden Valley, so a portion of Hidden Valley was not included in our costs before. So our costs were $517 million versus $424 million the previous six months. This was largely due to the exchange rate. Exchange rate, rand strengthened against the US dollar was 1% and in rand terms we saw 11% increase on the six months and this was largely due to normal salary increases and electricity increases and also because of more production during the December six months than the June six months.
If we look at the amortization and depreciation, they increased to $91 million. We are amortizing process a little quicker now because shorten the life of the mine and thus resulting in more amortization. Exploration expenditure went up to $10 million and this is in Papua New Guinea. This is at [indiscernible] where we have two joint rigs. We have a foreign exchange gain of $51 million. This consists of $10 million, which is translation difference on the US line to rand terms because of the strengthening of the rand. It was $42 million of hedging profit from our currency hedge of which $28 million realized and we received the cash and $40 million was unrealized. So that added up to the $51 million. [indiscernible] Hidden Valley, I will explain it on the next slide. Our taxation was $34 million. Our net profit was $111 million versus $89 million in the previous six months. Until we add back the exceptional item which is the [indiscernible] from Hidden Valley, our headline earnings is lower than the six months in the previous one at $47 million.
If we page to Slide 20. Gain on purchase, the accounting standard IFRS3, business combinations require that the acquired assets be recorded at fair value on the effective date of control. So what we did, on the day we acquired the 50% assets from [indiscernible] of Hidden Valley, we fair valued those assets at $39 million, [indiscernible] and that adds up to a gain of $61 million. Because we only paid $1 for the acquisition we had to book the gain on purchase of $61 million in our income statement.
I’d like to page now to slide 22. This is the slide of the unit from December 2015 to now over the 12-month period and you’ll see, our net debt in December 2015 was $162 million. And we’ve added dividend, which increased the net debt position, there is an average expenditure which would have increased further, but then we generated a lot of cash from the operations and it’s $170 million and we have the hedging gains during this period, 28 million from the currency hedge in this six months, $5 million we access on the currency hedge from the previous six months, and $17 million from the RAND gold price and that adds up, up to $50 million. So, you can see that our net debt has come down to $21 million from $162 million in December 2015 to $21 million in December ’16.
Next page item, we look at our EBITDA. This is on slide 24, US dollars. You can see EBITDA for the period was $175 million and in the year 2016, we had two parts. It was $49 million in the first six months and this is substantially more than it was in the corresponding six months and adding the first six months of the 2016, we had a EBITDA of $212 million. And we said $175 million now for the first half, and you’ll see we’ll get to the second half if the gold prices can find a new high, we should have a good second half.
I’d like to move to page 25, slide 25, which shows our currency hedge. And you can see here that we did had a floor and a cap. The blue line is the floor and the green line at the top is the cap. As you can see the yellow that we put in, that the floor price, we’re actually quite fine. So the first stat is for June 2015 [indiscernible] and in this period, from June to December, we actually received $28 million. And at the end of December 2016, the unrealized portion of this hedge was $41 million. [indiscernible] that will give us the $41 million.
Let’s move to page, slide 26. This is our gold page. You can see the line, the black line, marked as steps, this is our rand gold page, and this up to September 2018 and we’ve, I would tell you we took a very good [indiscernible] was $17 million and the unrealized mark-to-market value at the end of December was $116 million.
If we page over to the slide 28, what we show here is our capital expenditure in the next few years. You can see that in the year ’17, the blue portion is additional capital and that capital we’re spending at Hidden Valley. That is to do the cutback for banks five and six and in year 2018, we sustained through the capital on those market fixed after which demand will be reducing at just over 190,000 ounces per year of gold going forward, wanting to use the capital we will be spending on Golpu after we’ve completed the permitting phase.
If I can ask Peter to take over.
Thank you, Frank. Peter Steenkamp. I can also ask Johannes maybe to just talk us through the Hidden Valley project.
Johannes van Heerden
Thanks, Peter. So on slide 30, we basically give an update on where we are in terms of the plan. During the quarter, we acquired the Hidden Valley, subjective date of control was 25th of October. And from that period onwards, we mobilized the team and focused on commencing stage 5 by waste stripping. That’s obviously critical. As part of that process, we acquired additional equipment and we also recruited additional people to man that equipment. You will see that the plant basically amounts to treating, during waste stripping and then also treating ore stockpiles and Hamata ore for a period of June. After that, there is going to be a five-month shutdown, which allows us to do some refurbishment on the plant as well as to generate enough ore to feed into the block post startup.
And on slide 31, we talk to some of the parameters that we included in the plant. We believe we’ve got a robust plan that’s built on conservative parameters on outcomes that we’ve achieved in the past at the mine. So we’re very comfortable in our ability to deliver to this plant. As Frank has stated, once we’ve completed this pre-strip phase, the mine will be in commercial production from financial year 2019 onwards and generate about 180,000 ounces of gold and approximately 3 million ounces of silver per annum. The mining rate as well as the milling rate is very achievable target and you’ll see all of that part will generate or will allow us to produce an all-in sustaining cost of between $850 to $950 per ounce on average.
On slide 32, we basically demonstrate what the stage 5 and 6 cutback looks like. As you see, we’re mining 1.4 million ounces of reserves there, but the opportunity is to increase potentially to also a stage 7 cutback. That would allow us to mine an additional 1.3 million ounces, expand the mine life by a further 5 years. A key part of that study program would be looking at additional storage facilities as well as the drill program to confirm the stage 7 ore body. As part of this expansion or growth opportunities, we’ve also started up a regional exploration program proximate to the mine.
Thank you, Johannes and I will then just continue and just I think we really delivered on our strategy. Our safety is improving. We repaid most of the debt that we set ourselves out to do in the beginning of the year, I’m talking about this calendar year. We had shareholder returns and we have two dividends of 50 South African cents or 4 US cents each in the past 12 months. For the growth opportunities, the Hidden Valley acquisition adds 180,000 ounces from, by financial year 2019 onwards. There is a lot of brownfields exploration that we’re going in the areas, both in South Africa and also in proximate area and the Golpu permitting is progressing well. And we’re still pursuing acquisition assets and we’ve got a team that will work on that most constantly.
If you look at the value uplift in Harmony, first, safer and more predictable ounces. We are very glad to say that we’re proud of what we achieved as far as that’s concerned. We will maintain the increase in grade. We are on track to produce in line with the guidance that we set up in the beginning of the financial year. We have robust margins. We’ve got a strong balance sheet, which allows for dividends and we’ve got growth in our portfolios and our share price uplift should continue from there.
Thank you very much. We are prepared to take any questions you would like to ask.
Yeah. I think -- first of all, thank you very much for being on this call. We certainly, from Harmony’s perspective, both operations, both in South African and Papua New Guinea, and we have good momentum, we are very proud of [indiscernible] and we leave with our annual guidance of approximately 1.05 million ounces will be achieved at the cash cost of $1,100 per ounce and I think we’ve got a very strong performance of the team. The team is very much keen to do well going forward and maintenance is in good stead as I said before. So, I think we can continue with the strong operational performance. Thank you very much for joining us on the call.
Thank you very much. Ladies and gentlemen, that concludes this conference and you may now disconnect your lines.
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