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Edited Transcript of HAR.J earnings conference call or presentation 20-Aug-19 6:30am GMT

Q4 2019 Harmony Gold Mining Company Ltd Earnings Call (Analysts Only)

Free State Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Harmony Gold Mining Company Ltd earnings conference call or presentation Tuesday, August 20, 2019 at 6:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Boipelo Pride Lekubo

Harmony Gold Mining Company Limited - CFO

* Frank Abbott

Harmony Gold Mining Company Limited - Financial Director & Director

* Peter William Steenkamp

Harmony Gold Mining Company Limited - CEO & Director

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Conference Call Participants

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* Adrian Spencer Hammond

SBG Securities (Proprietary) Limited, Research Division - Research Analyst

* Arnold Van Graan

Nedbank Capital, Research Division - Analyst

* Dominic O'Kane

JP Morgan Chase & Co, Research Division - Analyst

* Jared Hoover

Morgan Stanley, Research Division - Research Associate

* Patrick Mann

BofA Merrill Lynch, Research Division - VP & Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to Harmony's Full Year 2019 Results. (Operator Instructions) Please note that this call is being recorded.

I would now like to turn the conference over to Peter Steenkamp. Please go ahead, sir.

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Director [2]

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Thank you very much. Good morning, ladies and gentlemen. Thank you for joining Harmony's FY '19 Results Call. I'm joined by Frank Abbott, Mashego Mashego, Boipelo Lekubo, Herman Perry, Beyers Nel, Phillip Tobias, Marian van der Walt and Jaco Boshoff.

Firstly, I would like to start with safety. The tragic loss of our colleagues in FY '19 and the calendar 2019 to date in mine-related accidents is not acceptable. Safety is a priority at Harmony, and it is important to me and every employee to return home each day both safe and healthy. Myself and my management team and operational teams are committed to improving our safety performance by continuing on our journey of achieving a proactive safety culture and preventing fatalities.

The FY '19 operational and financial performance was boosted by the inclusion of Moab Khotsong and Hidden Valley for the full financial year. The group achieved a 70% increase in gold production to 1.44 million ounces resulting in a 23% increase in production profit, a 2% increase in underground recovery grade to 5.59 grams a tonne. Moab Khotsong and Hidden Valley boosted cash flow and generated ZAR 1.38 billion in operating free cash flow and a 90% increase in headline earnings per share to ZAR 2.04.

My management team and I will be able to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question we have is from Patrick Mann from Bank of America.

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Patrick Mann, BofA Merrill Lynch, Research Division - VP & Research Analyst [2]

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I wanted to ask 2 questions. I'm sure a couple of people are going to ask the ones I'll just jump in. AngloGold are looking to sell Mponeng. I mean it is right next to Kusasalethu. Would you -- obviously, with the current gold price, you are deleveraging quite quickly. I know you've got a kind of organic pipeline of your own opportunities, but you still have a strategic goal of looking at M&A that could fit your portfolio and make sense. So would you be involved in that process in looking at it?

And then the second question is I don't really understand the impairments given how strong the rand gold price has been. I'm looking at the notes and understand you've distinguished between short term, long term and you're still using a lower gold price, but maybe if you could just walk us through that? And if you did change to spot whether that impairment would have -- would reverse or wouldn't have occurred. And what it implies for the life of mines as well? Have you now decided Tshepong and Kusasalethu have shorter life of mines.

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Director [3]

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Perfect. Thank you. I'll take the first part of the question. I'll ask Boipelo to do the second part. Just in terms of -- obviously, we are looking at many opportunities at the moment. We're looking -- constantly looking for other mergers or acquisitions that will enhance our portfolio, and we like going back (inaudible) towards us. So I don't want to comment anything more than that. Phillip and his team is, at the moment, busy with quite a few things that we look at. So yes, if it's whether while the price is right, anything else, and any opportunity is possible, Patrick. And I'll ask Boipelo to talk about the impairment.

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Boipelo Pride Lekubo, Harmony Gold Mining Company Limited - CFO [4]

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Thanks, Patrick. If you look at our impairments, you correctly say we save some payments at a plain gold price of ZAR 585,000 a kilogram, which is obviously quite different to where we currently sit at spot. The 2 things that you have to consider with our impairments, we looked at our life-of-mine models and then we've got an outside life-of-mine resource model. Looking at our life-of-mine resources, that impacts the net present value improved year-on-year.

When we look at our outside life-of-mine resources and the plants that we plan to mine, there was an impact on the grade, impact on cost. We also introduced the expected carbon tax within those models, which obviously then had an impact on cash flows and the recoverable amount, so -- which then obviously resulted in impairment. So year-on-year, yes, it has reduced. If you look at spots today, there would be no impairment, but that is not an indication of a reversal of an impairment next year.

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Patrick Mann, BofA Merrill Lynch, Research Division - VP & Research Analyst [5]

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Okay. And sorry, one more, if I may. And in Golpu -- there's obviously a delay now. It doesn't seem to be anything to do with the relationship between Harmony and the government, right? It seems to be how they're going to split the royalties between the province and the national government. I mean do you have any idea on timelines there? Obviously, we've missed the first half of this year, SML being granted. I mean have you got any idea? Or was it just one of those things where you've got to wait for the government and the province to find an agreement?

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Director [6]

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Patrick, no, I think you're spot on. The relationship between ourselves and the government is very good. I actually -- just after the new Prime Minister where at (inaudible) myself and (inaudible) who met up with the Prime Minister, the Minister of -- Treasurer and also the Minister of Mines, there's still a very big wall in the country to get the project off the ground. I think the Minister just needs to get -- the Prime Minister just needs to get his feet and just understand where he (inaudible). So at the moment, we could not -- I'm happy that we will get [traction] the moment we start. Unfortunately, we can't give you a timeline because we haven't sat down with the government yet and actually concluded any timelines and things like with (inaudible). So -- but yes, I mean there is some -- one of the things that was criticized was really the thing about that we're the step of the take between the different parties, other landowners, the governance or the province and then also the government -- the state itself.

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Operator [7]

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The next question we have is from Jared Hoover from RMB Morgan Stanley.

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Jared Hoover, Morgan Stanley, Research Division - Research Associate [8]

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I've got a few questions on your hedging. So it looks that if I look at your rand gold hedges and your dollar gold hedges, it looks like the pricing or the forward pricing was roughly in line or below spot levels at 30th of June, but it looks like you still managed to record a derivative gain. So I just wanted to see if you could walk me through that and also the interaction between debt and the FX hedges, which looks like it flows between a cap and a collar. And then I've got a follow-up question on the hedge as well, but I'll let you guys go ahead for now.

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Frank Abbott, Harmony Gold Mining Company Limited - Financial Director & Director [9]

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So when we valued our hedges at the end of the year, we've had an asset and a liability on the one. So if you look at now (inaudible), you would see that an amount of -- we had a financial asset of ZAR 506 million, which was on our rand go-forward contracts and also our U.S. commodity contracts. And then also on our current rand go-forward contracts, so about noncurrent and current, and that added up to ZAR 506 million. And then on -- we have financial liabilities, which added up to ZAR 442 million. So as at the end of June 2019, we had about a ZAR 60 million positive mark-to-market at that stage. Since then, of course, the gold price has gone up, but we haven't mark-to-market our positions again. But if you look at our positions and you look on that team, you see that our policy was actually quite good. You can see the cap on our policy is above the current spot price of the exchange rate. And our forward contracts also looks really good and in line with what we've currently got. What is a bit underwater is the rand gold positions, which are sitting at about ZAR 650,000 per kilogram. We -- the current price is ZAR 740,000 per kilogram. And then we've got our dollar gold positions, which are not a very large position.

So yes, I mean we are quite comfortable with the positions that we do have. And every quarter or every month, we actually deliver to these hedges. And at the end, we would enter into new phase at the current gold price. So the current gold price, the rand gold price, we can actually put a hedge of [ZAR 840,000] per kilogram in 2 years' time because of the contango. Our dollar -- our commodity, which is -- we've limited to 24% of the total 2-year production, and we've also got a limit of 25% on our exchange rate hedges. So 75% of the upside is still there at the current gold prices. Sorry, does that answer your question?

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Jared Hoover, Morgan Stanley, Research Division - Research Associate [10]

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Yes. And I guess you almost answered my follow-up question because I wanted to know if the board approved limits have been increased from 20%. And then by -- I guess by your answer, you mentioned that it's 24% now, and I guess that would imply a production profile of about 1.4-ish million ounces in FY '21 if I'm correct.

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Frank Abbott, Harmony Gold Mining Company Limited - Financial Director & Director [11]

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Yes.

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Jared Hoover, Morgan Stanley, Research Division - Research Associate [12]

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Okay. And then lastly, given that you've increased the limits to about 24% now, I just wanted to get a view of how you're thinking about the levels of production that you hedged versus remaining geared to the gold price given your production profile falls off quite rapidly from FY '24 and the CapEx outlay that might mean for Harmony?

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Frank Abbott, Harmony Gold Mining Company Limited - Financial Director & Director [13]

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So I mean we're only etching 24 months into the future. So we are very comfortable with what we're (inaudible) saw. So we do look at our plans and we determine the percentage based on those plans. So that's certainly not going to be a problem for us in the next few years.

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Director [14]

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Jared, maybe just to add on that, the 24% is actually a 28% in the first year. It was 8% more in the first year. And the reason for that was really to -- we locked in a very good price for our -- two (inaudible) shops. So we -- the board approved that as a once-off. Otherwise, we still stick to the 20%. So that is still a policy to stick to 20% going forward.

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Jared Hoover, Morgan Stanley, Research Division - Research Associate [15]

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Okay. And so for the second year, that would be just under 20% then?

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Frank Abbott, Harmony Gold Mining Company Limited - Financial Director & Director [16]

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20%.

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Director [17]

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20% in the second year if probably we could lock in a good margin. But at the moment, it is 20% maximum. That is where we are.

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Jared Hoover, Morgan Stanley, Research Division - Research Associate [18]

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Okay. So then the one-off hedging was really just dependent on spot prices.

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Director [19]

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No. We just told that whilst we have these operations for another year, we can just get a little bit from cash.

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Operator [20]

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(Operator Instructions) The next question we have is from Adrian Hammond from Standard Bank.

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Adrian Spencer Hammond, SBG Securities (Proprietary) Limited, Research Division - Research Analyst [21]

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Just a bit on the operations. If you could give us more color around Tshepong given the poor H1 and how that's faring in the last quarter? See the grades fell off quite materially there as well as Moab and Bambanani.

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Director [22]

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Let me just kick off on with Tshepong. I think it's Tshepong operation, which we reported on previously that is quite a, I won't say a disappointment, but it was really quite a lot of underperformance there. We talked a lot about why it happened. And we really took this last year, financial year to get it back on track. I'm quite happy to say that we've got Tshepong now where it should be. In the last quarter, we probably would have done a little bit better if we didn't have the double fatality on the mine, which 2 incidents, which actually stopped us for quite a while with the Section 54 instruction we had at the top. But if one think about that, the performance and release that is part of Tshepong is the one that we need to pick up because that is a higher grade part of Tshepong. But I mean all the plans we made in Tshepong in terms of integrating the mine, getting all that sold, getting the mine operational is working now. So it's all done. So certainly, we've got the flexibility now in moving the tonnes, and I'm quite comfortable that we've done all the hard jobs to get the mine back on track. We put a new management team in place, and the team is one of the top managers within Harmony, is on the mine now, and we're quite happy that it will perform well. I mean all of our operations, we're in a very, very good space going forward.

As far as Bambanani is concerned, I think one of the biggest -- the thing is great. It's not necessarily unexpected. We've obviously revaluated the mine, look at the current dilution factors and things that we have in the mine. We were mining in a high grade, and we're mining a lower grade than last year, and we're looking for, going forward, our mines in the middle mine, which is actually the very, very high grade part of Bambanani. So Moab Khotsong will be back on track, not contracted. We will be mining at the higher-grade areas. So yes, we did -- the lockups that we had maybe brought up in the last part of the year. So the mine is now in a steady state. I think the mine is fully integrated into the Harmony culture in terms of our great management and everything in place. So more -- the grade environment looks better than we had in the past.

Bambanani is not necessarily we can do anything about the growth. We are mining the short pillar in a certain way. We obviously started at the highest grade of the short pillar so that we can -- that we have good grades. And where we are mining at the moment is where the grades are. And let me get to the latter part of the bullet, we probably will have a little bit of improvement in grade. But I mean where we are at the moment is with the grade is. And we can't do much about it. We've got a very strict extraction seat that we have that we follow for safety reasons and (inaudible) way we're now mining now in Bambanani. Going forward, I think we guided, obviously, in the guidance, there were -- the grade will be. But there's no surprise in Bambanani in terms of the grade.

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Adrian Spencer Hammond, SBG Securities (Proprietary) Limited, Research Division - Research Analyst [23]

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Okay. Just on Moab, the performance hasn't been -- I'm sure to your expectations both from a tonnage and a grade perspective and as well, if you benchmark Moab on a rand-per-tonne basis, it's certainly not one of your better operations. So I'm struggling to understand although it's got a high-grade operation, it doesn't seem to be performing as well as at least AngloGold did when they were running it. And is there any or something there that we should be looking closer at or...

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Director [24]

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Yes. Let me just -- what we've done since we joined, and that's why -- which is a little bit better proceeding, we separate reef from waste. So the rand-per-tonne cost will go up because of the reef and waste, but we're now taking waste to the waste dump and we've taken reef very clear out of the mine. There's something that we always do in Harmony. What they've done in the AngloGold is they actually put it together because that's just our [will base] manage your grade if you actually don't have those contaminations and those things coming into play. That will -- that is now where we are. So the waste tonnes, which is probably 20% -- value is about 20%, 25% of the tonnes are now reporting to the -- and we've done that in around about February when we start over there. So from February, we've expected to do it, and that will continue going forward.

Now I'm not, I mean, worried about [Moab ore]. I mean we've made a huge amount of money there. We'll continue to make money. We've extended the life of mine with 2 years. We're now starting to mine the short pillar. There are some -- and obviously, some isolated blocks that we're going to mine going forward, that was not part of the old Anglo plan. Those gone up are the grades in the middle mine. The middle mine, it's got very, very high grades. So we -- so we're looking probably at -- those outside of the box that we increase, but probably come at about 7 grams a tonne, but we extended the life of mine with another 2 years.

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Adrian Spencer Hammond, SBG Securities (Proprietary) Limited, Research Division - Research Analyst [25]

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Okay. And then just on your hedging again, I mean you've -- it looks like you've hedged 30% of your production for FY '20, is that correct?

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Unidentified Company Representative, [26]

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Yes. Sorry, so (inaudible) to Peter. January, we hit 20% of our production because of 2 of the operations, which are closing. We decided to hedge the production too just to make some money out of them for the remainder of the period that are open. So we increased the hedges for the first year to 28%, but after that, it goes down to 20% again.

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Director [27]

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And that was really the Masimong and Unisel production. And we locked in a good price, so we know we're going to get good money out of those mines in the final year of the production.

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Operator [28]

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The next question we have is from Dominic O'Kane from JPMorgan.

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Dominic O'Kane, JP Morgan Chase & Co, Research Division - Analyst [29]

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Again, on the hedging. Sorry if this questions' been answered, but what -- how come you're only using forwards rather than using common collar structures where it would appear that you could get probably bigger upside to the gold price?

And then second question -- actually 2 questions. Is there any update you can provide on your level of strategic interest on Mponeng and AngloGold's South African asset divestment?

And then final question, the delay on permitting on Wafi. What's the implication for CapEx spend at Wafi over the next 1 to 2 years?

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Unidentified Company Representative, [30]

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Okay. If I can start on hedging, what happens is when you do a collar, of course you get a higher cap, but your floor is lower than the forward line -- than the forward price. So yes, you can put a cap at a higher level, but your floor is also then at the lower level. So if you do a forward contract, you can actually lock in a bit the price, although you can have the risk on the upside to -- you're locking a higher price. I don't think you can compare those two, the process from the one to the other because this would have -- could have been happened at different tonnes during different exchange rate, the spot exchange rates. But that's why we do a portion of our hedging in collars and the other portion in forwards.

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Director [31]

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Dominic, I'll take the other 2 questions. I don't think -- I think we answered before, but just to recap, we're always on the outlook for any opportunities that will meet our investment criteria. We've got a team looking at that. I don't want to say anything more than that as far as that's concerned.

As far as Wafi is concerned, our current expenditure on Wafi is really just on permitting the -- on permitting. It's not all the other -- anticipation of having the SNL signed by the middle of the year, we started to build up a bit in terms of getting ready for construction. We set all of that back. We, at the moment, are only focusing on the permitting of SNL. And when we get that, then we will restart our construction readiness in terms of where we're going to go. So there's very little money in the next year. (foreign language)

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Unidentified Company Representative, [32]

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ZAR 240 million.

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Director [33]

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ZAR 240 million in the next year as far that's concerned. Obviously, looking at where -- I think there's also some sort of concerns about the creep that we'll have in the construction cost. Obviously, there's dollar-denominated and there's always -- many other things that we do -- in Papua New Guinea will be under kina. And there's obviously inflation that works there for the depreciation against the dollar would help us there, too. But yes, Wafi, the CapEx that we spend is really just on the permitting.

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Operator [34]

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(Operator Instructions) The next question we have is from Arnold Van Graan from Nedbank.

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Arnold Van Graan, Nedbank Capital, Research Division - Analyst [35]

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I've got some follow-up questions on Moab, so the one related to the cost. Unit cost is up sharply, and it's obviously got a lot to do with grade that you've talked about earlier. But what I want to get is a sense of what costs you actually managed to take out of that line or take out of the system? Because looking at that and even adjusting for the grade, it seems that you haven't really managed to take up that much cost. So can you give us some clarity on what you've done there and how we actually managed to lower cost as you would expect from Harmony taking over an operation from another operator?

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Director [36]

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Well, if you look at the costs, we took about ZAR 18 million per month out of the cost of pure AngloGold's. We're talking here only in itself. It was ZAR 37 million, it's now ZAR 18 million less. That's what we take out of the average cost. And then we've -- a lot of that is really -- (inaudible) collected expenditure because, obviously, then you're set, and we then use something different. That itself is about ZAR 24 million of cost. On the labor side, we've had labor reduction. Our labor reduction is about 500 to 600 people now.

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Unidentified Company Representative, [37]

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10%.

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Director [38]

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10% of the production at least that we took out of the mines cost. Obviously, during a period of time, we also had labor increases and we also had electricity increases and all of the other kind of things. But from a labor perspective on mine, we have taken 10% of the labor reduction, and we increased -- we will increase our production also going forward with the IBGs and the mine of the shop, et cetera.

Having said that, let me go back to -- really, savings were really on the overheads and the plus offshore, which we managed to bring down quite substantially.

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Unidentified Company Representative, [39]

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And so we compare more the last year versus this year. It's really the 4 months that it was in our stable. So when we took it over, there were many of the overheads, which were already cut out at that stage. So there's sort of big increase year-on-year on unit cost. It has got a lot to do with -- that the grades were lower than the previous year. And as I say, we were able to reduce the overheads by ZAR 20 million a month. That's about ZAR 200 million a year. And on the labor costs, as Peter also said, we took out about 10% of the labor force. To date, it's about 600 people.

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Arnold Van Graan, Nedbank Capital, Research Division - Analyst [40]

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Okay. And is that reflected in your operating metrics and efficiencies? Are you seeing a 10% improvement in your tonnes per man or centers per man or however you measure that productivity? Is that reflected in that, in those numbers?

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Director [41]

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Yes. We haven't dropped the plan. I mean with the plan, it's still on the same level as it was before. Obviously, we managed a little bit less people. We have -- obviously, construction is a little bit different. But again, I mean the focus is really of savings in terms of where Anglo were, and we're really on outside of the mine and to optimize things in the region. Remember, we didn't take over the Anglo head office of things. We took over the regional cost and then obviously the big things of -- I mean the big saving that we have is the [SEP] saving versus the saving that we have in our article system.

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Operator [42]

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We have a follow-up question from Patrick Mann.

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Patrick Mann, BofA Merrill Lynch, Research Division - VP & Research Analyst [43]

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I just wanted to ask in terms of your organic opportunities. So you're going ahead with the shaft extraction at more [Moab] (inaudible). And then just in terms of looking at [Zaaiplaats], looking at Mispah, looking at expanding Central Plant, kind of surface operations, how should we think about the timing of each of those and when you're thinking about them?

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Director [44]

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Well, gradually, we'll get started and we're already on the go. We -- the board gave its approval to continue with further extraction. It is a very good (inaudible) to extract. Obviously, the biggest concern there was safety and how we're going to extract this. It's not a full extraction, it's a [partial] extraction to predict the sharp infrastructure, but also to make sure that we have the right safety risk in the mine.

Central plant is in a feasibility stage. It's actually very close to -- we've been pulling the trigger, it's a question of how are we going to invest in that years from now? Is that the best place to invest? The other ones that is obviously Mispah Tailings, is one that is -- I won't think about -- the best thing for you to -- is to actually take an existing plant and convert it into Tailings retreatment plant. That's not normally -- if you look at the Central Plant -- original Central Plant construction, it was a very low-cost one. We paid it back in a year. It's actually a drug, nobody want to do that. So Mispah, we've had the Mispah plant available for conversion. We also have Joel plant currently available for conversion. Any one of those 2 probably would be more lucrative than the Central Plant. So that feasibility study is very close to completion. We're not sure if we're going to continue with that. We'd rather bite and see if we should do (inaudible) Mispah and also later on the Joel Tailings facility. But having said that, I mean these things are normally -- the conversion is about a construction of less than a year and then we start with the mine. If you look at Central Plant, we converted it in a year.

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Operator [45]

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So it seems like that was our final question for today's call.

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Director [46]

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Can I stop? I think there's no furthermore, so let me just say the final comment. I think the last few couple of months, we've seen that always very highly get gold share. Harmony is an opportunity to benefit from the uplift in the gold prices. If there is no further questions, thank you for joining the call. And the live webcast presentation will take place at 10 a.m. South African time if you would like to dial in or be at the presentation. Thank you very much.

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Operator [47]

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Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.