Harmony Gold Mining Company Limited
Q4 2013 Earnings Call Transcript

Published: 14 Aug 2013

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Harmony Gold Mining Company Limited Fourth Quarter and Financial Fiscal Year in 2013 International Conference. [Operator Instructions] Please also note that this conference is being recorded. I would now like to turn the conference over to Mr. Graham Briggs. Please go ahead, sir.

[Graham Paul Briggs:]

Thank you very much, and welcome, ladies and gentlemen, or good morning, if you're in our time zone or good afternoon in South Africa. This is our quarter 4 for the financial year '13 results. We'll also be talking about the year-end results for financial year '13 and have an outlook for year '14, financial year '14. I'm certainly hoping you've all got the presentation, as per our website. If so, Page 2 should be the Safe Harbor statements. And then we go over to Page 3, which is the agenda. And I'm going to start talking about strategy and talk about the 3 legs of our strategy

[Frank Abbott:]

Thank you, Graham. We turn to Slide 26. We have our cash flow summary it year-on-year in U.S. dollars. Our cash flow from operations, $434 million compared to the $650 million the year before. I mean, if we add the $150 million from Kusasalethu, we would have been very much in line with the previous year. Exploration expenditures, $76 million, $73 million of that spent in PNG, and that was on drilling exploration and the feasibility study. Income and mining taxes paid, that's the actual taxes paid, proceeds from sale of Evander $143 million; capital expenditure, $430 million. And then we paid a dividend of $49 million during the year. Our net debt position at the end of June 2013 is $46 million. We've got good cash balance of $209 million and the debt of $255 million. If we pass over to the income statement, year-on-year in U.S. dollars, that's Slide 28, Slide 28. Before I go through this, I'd like to just talk about a few accounting entries. And one is the impairment and also the tax, the deferred tax reversal. Now what happened is at Hidden Valley, we had an impairment payment of $310 million. That's the convenience -- conversion translation from the event figure to this income statement. And we had a very small impairment of ZAR 58 million from South Africa. The deferred tax asset, which we reversed, was $65 million, and that was in Papua New Guinea. And how did we get to that figure? In Hidden Valley, in Papua New Guinea, there are special deductions for tax and there's a double deduction for exploration costs, and over the years, we've built up these deferred tax assets. Because of the impairment of the interim value asset, we've reversed the deferred tax asset because it means at these gold prices, we would not be utilizing this safe loss. Should the gold price cut, that is still available the future to be offset against our profits. If we go through the income statement, the deferred tax asset -- sorry, is not added back for headline earnings where we do add back the impairment for headline earnings. If we go through the income statement, our revenue for the year was $1.8 billion. That was 8% lower than the year before. That was the gold prices, 5% down and our gold sold was also 3% down. And that was mainly because of the Kusasalethu labor and risk, which was temporarily closed. Cash operating costs went up by 2%. The last portion of the cash operating cost increases at Hidden Valley, where we have a number of costs pages during the period. Our Operating profit, $511 million; amortization and depreciation, very much in line with the year before. We discussed the impairment, that's at -- on Hidden Valley, $310 million; exploration expenditure, taxation, which is the reversal of the deferred tax asset of the earning profit from discontinued operations, the profits from Uganda during the period. And this resulted in a net loss of $267 million. There are headline earnings per share is $0.05. If we page over, we try to normalize so this is to both [ph] [indiscernible]. We try to normalize our profit and add back some of these accounting entries and exceptional items during this period. Our net loss in terms -- from the income statement was $267 million. If we add back the impairment of $310 million, other items of $20 million, which was profit on sale of some assets, we reported headline earnings of $23 million. If we add back the impact of Kusasalethu of $136 million, the deferred tax written off at Hidden Valley of $55 million and the foreign exchange translation loss on the dollar loan of $40 million. Our normalized profit would have been $254 million. Thank you. Graham?

[Graham Paul Briggs:]

Thanks, Frank. I'm now going to talk about growth and Slide 32 captures that. Our focus has been more not growth in ounces but growth in margin. Slide 33 gives you our assets, and you can see where our assets lie on this sort of building from exploration through to steady states. Doornkop is getting closer to steady states, it will get 2 steady states during this next financial year, 2014. Target 3 may take a little bit longer, and Doornkop and Kusasalethu should show good progress. Phakisa, still some work going on the ventilation shaft, as I said. And Hidden Valley, certainly, there's a lot of restructuring that's happened there. In our quarterly reports, you have quite a few pages on the mineral resources reserves. I just got the slide here on reserve reconciliation, looking at June 2012 to June '13 and where the differences occur. And mined, during the year, 1.5 million ounces, some adjustments on surface sources of 800,000 ounces. Scope changes, which were positive on 900,000, and that gives us a gold reserve for 2013 of 37.7 million ounces. And then gold equivalents, which is the same as the year before and that's for Golpu. You can see underground resources, 22.8 million ounces at 5.87-gram a tonne. Very much forward-looking statements on Slide 35. Asset-by-asset, expected potential ounces for financial year '14, giving a total for the whole business at somewhere between 1.3 million and 1.4 million ounces. We've given some cash costs there. We've put average annual capital costs and cash costs. Please read the bullets at the bottom, which means that those costs include cash costs, royalties, maintenance capital, growth capital and the various local economic developments we do. And that takes us to a rand figure of somewhere between ZAR 325,000 and ZAR 360,000 a kilogram. And at ZAR 945,000 [ph], which we've used in this, a U.S. dollar price of somewhere between $1,070 and 1,180 dollars an ounce. When you look at the detail of that operation, you will see that in our planning, we really used ZAR 400,000 a kilogram as sort of the benchmark where no operations should exceed that, so they should be profitable. Below that, you'll see that Phakisa is the one outlier there. It's quite a bit of capital still going in Phakisa, and it's relatively small production compared to where it should be. As so it is building up. Another operation is Hidden Valley, and that one, we should look at the dollars per ounce. Our intent was to try and get Hidden Valley profitable at $1,400. It's going to be selling, looks like pretty close to margin, but we have done a lot of changes and restructuring there. We'll see how that develops over the while. And then if you go further down the page, Kalgold is one of those operations where the cash cost is fairly good, but we have been basically rebuilding the plants over the last year and a bit. And we've got another 2 years to go in that plant. So we're basically rebuilding that plant. Should the gold price go down lower than the ZAR 400,000 or we don't achieve our plan, certainly that's sort of a consideration on what we do, put it in care, maintenance or whatever needs to be taken. So those are 3 operations that are sort of sailing, I think, fairly close to the wind, if you like. We have reviewed our capital, Slide 36. We've given, in the gray shading there, our guidance that we gave last year at this time, August 2012. And we said for this year, financial year '13, we'd spend about ZAR 4.1 billion, the real number is about ZAR 3.6 billion. And this is in rands. And then you can see the forecast for year '14 and '15 there. We were forecasting ZAR 5.1 billion. In fact, we've got to the numbers of ZAR 3 billion. You can look at that over the slide for, Slide 37, see the numbers in dollars, in sort of capital dollars. So quite a change in where we are in the capital of what we are predicting a year ago to what we're predicting now. Slide 38, that's in graphical form, but we've gone back to 2012 and forecasting here through 2018. Of note, of course, is the gray glob, if you like, on it, and that's where -- we haven't put any capital for Golpu from year 2016 onwards. And we'll talk a little bit about Golpu and our plans for that. So we have forecast for the next 2 years, financial year '14 and '15, mainly on drilling and various studies, and we'll talk a little bit about the capital of Wafi-Golpu going forward. We have made some progress on cost cutting and capital. You've seen the capital there. It's supposed to just sort of give us more detail and the reduced costs in Africa. Corporate costs, services and exploration totaling ZAR 450 million. And the capital expenditures you've seen in the previous graphs. Don't envisage mine or shaft closures, I've talked a little bit about those that are sailing close to the wind. On Wafi-Golpu, Slide 42. Great ore body, this, but the Golpu 2012 pre-feasibility study doesn't deliver adequate returns on the current investments on gold and copper prices. And therefore, we found it prudent to reposition Golpu and rethink the whole process of how we build the mine there. In the last year, we've done a lot of drilling, mainly in the upper part of the mine where you've seen before and you'll see now in our quarterly report, you can see the sort of detail of some of that drilling. The higher grades in the top portion is more porphyry and we're getting better metallurgical recoveries. So we know a lot more about the upper portion of the orebody and that has lead us into the conclusion that we can probably build a smaller mine and be it modular and expandable, so we can come in with much lower capital and expand this operation in the future. So in our budget, we've got funding for drilling and study expenditure in the next 2 years. And beyond the year '15 and over to year -- financial year '16 onwards, we'll consider external funding options. By then, we'll have more detail and more certainty on what the capital costs would be, but safe to say, that will be a lot less than what was predicted in the pre-feasibility study. We'll be reviewing and giving you feedback, hopefully, within the next 9 to 12 months and we'll certainly make sure that the development of these projects is aligned with the strategy. 43 gives you a little bit of detail where we were on the 2012 pre-feasibility. We have world-class Greenfield copper porphyry resource, no doubt about that. Extensive infrastructure that we've had to do to get down to it. Now we are thinking more in line with sinking shafts, which means that we can get to the orebody quicker, especially if it's in the upper portion of the orebody. Slide 44 just recaps some of the things which you all know very well. If you look at copper price, there's a sort of down trend there. The gold price, certainly, have quite a large downtrend. Capital costs for new developments is the orange portion to those graphs where various mining companies have also had a big increase in their capital costs. That's due to several factors. One is that there's been big competition starting to draw -- sorry, to develop these projects. There's been time delays as well and safe to say that a lot of these contractors and issuers have really been under the microscope and there's a lot of sharper pencils out there. So our expectation is that capital costs will be very much more competitive in the future. Operating costs for mines, this is just a graph showing world's and Australian, I'm sure the world one includes the South African cost, you can see our costs are going up. And, of course, if you look at the gold price now, it's down at much lower, $1,300, you'll see certainly a tight squeeze on margins worldwide. Slide 45 tries to put that into words of what we're planning to do. So the 2012 pre-feasibility outcome was really a Big Bang solution, it's going to be a big mine, capital-intensive, lots of dollars have to be spent to get it into early really production and a fairly high-risk profile. The new targeted outcome is looking at a more modular expandable solutions, with much lower capital and achievable but a competitive schedule, really a lower-risk profile. So the various areas of focus

[Operator:]

[Operator Instructions] Our first question comes from David Haughton from BMO.

[David Haughton:]

I've got a question about the impairments. It seems that the impairments are really pivoting around Hidden Valley. I'm just wondering whether that's because you inherited that from Newcrest, who had also recorded an impairment, or whether you had run the carrying body [ph] test right across your portfolio?

[Frank Abbott:]

All right, David. This is Frank, I'm going to answer you on that. Yes, we did run -- David, we did run those tests on all our operations. We had small impairments in South Africa, but the 95%, 98% of impairment was in Hidden Valley. I think the one thing is that the rand gold cost didn't come down as much as the dollar gold cost. That helped us in testing for impairment. But the second thing is also that most of our South African operations are -- we've built it as operations, sometimes [ph] may go and then our carrying value for that those assets are much lower than what's the case of Hidden Valley, which was recently sort of built from nothing.

[David Haughton:]

All right. And what kind of economic parameters did you put around those tests, Frank, as far as your rand per kilogram prices, et cetera?

[Frank Abbott:]

Yes. So what we would have done is we would have used the real terms, we would have done the gold price in rand at real terms, at ZAR 400,000. And our discount factors was -- depending on which operation, would have been, in real terms, between 6% and 10%. And then Hidden Valley, I think our discount there was at 8.52%, if I remember correctly. And the gold price for the first year was $1,250. And then we had a gold cost [ph] of $1,300, and then we had a long-term gold cost [ph] of $1,400.

[David Haughton:]

Okay. So that's a fairly reasonable go at it. If I can just now switch topics, CapEx revisions shown on Page 36, that's quite a significant improvement, and obviously, a lot of hard decisions gone into that. If we wanted to think about how we build that CapEx up, should we be thinking about the data that you gave us on Page 35 and look at the difference between your operating costs and your operating costs plus capital costs with that?

[Graham Paul Briggs:]

Yes, David, if I can, you need to sort of maybe flick between Page 39 and 35. If you look at 39 and you look at the yellow, sort of gray, light gray color and green, that's all in South Africa. So if you look at the top 3, they're around about $300 million for this year and for next year. That's all South African capital in the various categories. That capital will all be in the difference between the cash cost and the average annual capital there in unit costs on Slide 35, except the Hidden Valley one is the purple one and that's the delta between roughly the cash costs and the average all-in costs. But you have to -- when you look at Hidden Valley, take note of the exchange rate that we've used here.

[David Haughton:]

Okay. So I just want to confirm I've got all the bits and pieces between those various slides, if you're able to get it down to the individual operational level.

[Frank Abbott:]

Yes. The only exception would be on Slide 39, the red, that's the Wafi-Golpu. Because the capital, we haven't included in any of those operations.

[David Haughton:]

All right. And we're having a look at the cost as you are going through, Graham, you identified the ones that were kind of -- the problem child and Hidden Valley, clearly one of those. Are you comfortable that you'd be able to get those costs down to something that you would find acceptable, or are you thinking of something more drastic there?

[Graham Paul Briggs:]

David, the guys have done a lot of work. There's been some significant management changes in that we are starting to get in -- instead of fly in, fly out, we're starting to look at residential. And therefore, management decisions should be carried forward without sort of non-hand over, if you like, or the difficult to handover that's normally associated with fly in , fly out. It also reduces the number of managers you actually have to have because you don't have 2 managers for each job. So there's significant changes in numbers of people. In total, I think the whole PNG, including exploration, Hidden Valley and Golpu, about 1,000 people less than they were just 2 months ago. And the big change there is obviously the crusher, now starting to perform, which means that we won't be holding the ore down to the plants, that 5-kilometer crawl [ph] down the hill and getting the trucks back again. So that's a significant change in the cost. So it's certainly -- it's still a plan, there' still a lot of promise in that and I think the guys seem to be fairly convinced that they can do it and they're getting measured on a daily basis. So there's a lot of focus on that, no doubt.

[Operator:]

Our next question comes from David Barbusha [ph] from Debtwire [ph].

[Unknown Analyst:]

I just wanted to ask a question regarding your outstanding debt facilities. From what I understand, you were planning to renegotiate or renew a revolving credit facility that you obtained from Netbank [ph], which is maturing in December 2015, plus a term loan of ZAR 762 million and a syndicated loan of $300 million that is supposed to mature in August 2015. What's the situation and do you still plan to renegotiate this debt?

[Frank Abbott:]

Yes, thank you. I think that we all are going to -- beginning of -- I think it was to, in the next 12 months, to renegotiate and to reprice those loans facilities with the new loan facility, dollar facility. We've been really fortunate that the current interest debt that we're paying is 2.6% plus LIBOR. And so I'm not sure if we will be able to get the same rate going forward, but we will be looking at the base interest rate and replace those facilities in the next 12 months.

[Unknown Analyst:]

All right, I understand. And do you have a target, I mean, in terms of maturity of the new facilities that you're going to obtain to replace the old ones?

[Frank Abbott:]

The old ones were 4 years, and we're not certain yet but it would -- at least be 4 to 5 years.

[Operator:]

[Operator Instructions] We have a question from Stephanie Barsdorf from Noah Capital.

[Stephanie Barsdorf:]

I was just wondering if you could elaborate on -- you spoke about mechanization innovation, I was wondering if you could go into detail on what exactly you're looking at there.

[Graham Paul Briggs:]

Yes, Stephanie, it's a good question. There's quite a lot of new technology that we are using on our mines, which is really often available in various industries and it requires a bit of adaptation to be used on the mines. Certainly, when it comes to our safety systems, there's quite a lot there. I can give you an example, for instance, and likely we have on several of our operations. Basically, drill rigs, which you would find in sort of normal mines internationally, they're either rail bound or rubber wheeled. But in a lot of mines, because we rail a lot of things, they are rail bound. And it's a case of getting them to adopt and work in the conditions that we have, and for us to get full advantage of that. At the moment, we're in the situation where we haven't seen that technology working greatly for us in, obviously, a productivity advantage. So that's the type of thing that we're looking at. We, in the industry, together, in South Africa obviously spend some time with the other companies talking about their technology. And we do a lot of, hopefully, learning from each other. So we don't want to reinvent the wheel. So I know AngloGold is doing a lot of technology changes. We're aware of those, they are doing some developments. A lot of the companies are trying to perfect the equipment to be able to operate under the underground conditions. And then companies, obviously, will be keen to sell us some of that equipment as well. So there are various programs, but it's a case of really getting them to adapt to the conditions that we're working underground.

[Operator:]

[Operator Instructions]

[Graham Paul Briggs:]

Well, let me complete and just finish off the presentation, if you don't mind. I believe that we've done a lot of work on repositioning Harmony for the future. Safety wise, we've done a great job. We need to continue to do that job so that we eventually can claim not to kill anybody in our operations. We've done a lot of work on health as well, we've got very much more proactive health planning. We've done a lot of planning on our operations with respect to production and grade and looking at the bottleneck. We've done some cost savings. You've seen the capital view that we have. A new sort of idea and new thoughts on Golpu and the way to take it forward is starting to emerge and we'll obviously give that information through as and when we get it. And then, most of our operations are in South Africa. We are still very much South Africans and the gold price hasn't been that bad. It's, today, at gold price of ZAR 425,000 a kilogram, that's not too shabby. It takes us into some of the gold prices that we had during our last while. So we certainly are really well positioned to look at the future and fairly confident about our plan going forward. Ladies and gentlemen, thank you very much and have a great day.

[Operator:]

Thank you very much, sir. Ladies and gentlemen, on behalf of Harmony Gold Mining Company Limited, that concludes this afternoon's conference. Thank you for joining us, and you may now disconnect your lines.