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Edited Transcript of HAR.J earnings conference call or presentation 11-Feb-20 6:30am GMT

Q2 2020 Harmony Gold Mining Company Ltd Earnings Call (Analysts only)

Free State Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Harmony Gold Mining Company Ltd earnings conference call or presentation Tuesday, February 11, 2020 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 & Executive Director

* Peter William Steenkamp

Harmony Gold Mining Company Limited - CEO & Executive 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

* Jared Hoover

Morgan Stanley, Research Division - Equity Analyst

* Shilan Modi

UBS Investment Bank, Research Division - Director & Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Harmony Gold interim results for the period ended 31 December 2019.

(Operator Instructions)

Please 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.

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

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Thank you very much, and good morning, everybody. I'm joined here at roundtable with the full team with Frank, Boipelo, Marian, Jaco, Beyers, Phillip, Mashego and Herman. So we've got a full team here. Good morning again.

Just in line with our strategy to produce safe, profitable ounces and increasing our margins, it's a pleasure for me just to give the interim results.

The first highlight is that we had a quite improvement in the fatality injury frequency rate, the lowest ever recorded in the history of Harmony for the 6 months and hopefully, we can continue with that going forward in the new year or the rest of the financial year.

Comparing to the corresponding 6 months of the previous year, we had an 8% drop in gold production. Most of that was in line with our plan, but the 1 operation that was -- surprised us, it was Kusasalethu. We had a 32% decrease in our gold production. Comparing to the previous quarter, we had a 4% increase in underground South African gold production. Even though we had, with the Kusasalethu lower grade, we had a 4% drop in grade, we had 4% increase in gold production. So in general, the volumes have been very, very good over the 6 months. And then we had a 63% increase in operating free cash flow margin compared to that -- the corresponding 6 months.

So all in all, we obviously would love -- would have loved to have a much better performance at Kusasalethu. But other than that, I think everything was in line with our plan. So -- but we'll take any 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 Adrian Hammond from Standard Bank.

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Adrian Spencer Hammond, SBG Securities (Proprietary) Limited, Research Division - Research Analyst [2]

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Just 3 questions, please. Could you just run through the key drivers for the impact on production in the last 6 months and whether we're finding that a lot of these issues are permanent or not?

Then the benefit of the hedges in mandatory terms?

And then lastly, can you comment on media speculation regarding the sale of AngloGold South African assets, please?

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

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Thanks, Adrian. On the production side, we had -- I think it's quite an impact when compared to the previous -- the corresponding 6 months. One of the biggest issues was Hidden Valley. Let me just get that out of the way. Hidden Valley, we mined from stage 6 -- from stage 5 to stage 6. We were actually in lower grade. But that was planned, and we're now getting down to the meat of the ore body, getting down to the stage 6, and we are getting better grades. As we speak, we will -- with the next 6 months, we'll be in a much better grade than we had in the previous 6 months.

So all the others, these things were planned. The one operation that really had a big impact on us was Kusasalethu. And there was 2 things that happened there. The first thing is that we mined into a structure that was unexpected. So 5 of our higher-grade panels ran into a downgrade -- down the fault. So we couldn't -- we had to move those crews.

Other than that, as we move through the rest of the things, remember, we are mining a very specific sequential growth pattern in these deep-level mines. We went into what we call the terrace [phases] in the VCR. And again, we don't expect that because if you look at the other side of that raised line, we're back into the normal phases .

So what if few panels run into lower grade areas? Obviously, we didn't have enough prepared panels to move them around, and that is what we value at the moment. So we replanned Kusasalethu. We've done quite a extensive replanning. And we should, by the end of this financial year, back to the normal Kusasalethu -- normal grade Kusasalethu, which is over 6 grams a tonne. So that is what we're going for. So Kusasalethu, long term, the current raises that we're mining is still greater standing up, and we still have good grades, so we believe that our long-term plan of Kusasalethu will not be impacted.

Yes. So that is on the production side. On the hedging side, Frank Abbott?

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Frank Abbott, Harmony Gold Mining Company Limited - Financial Director & Executive Director [4]

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Yes. Thank you. Yes, so I'd like to refer you to our results -- interim results packet and the 3 on the revenue. You would see that we show the total value of our revenue. And you can see that where we made a profit of ZAR 365 million gain on our hedging in the previous 6 months. In this period, we made a loss of ZAR 317 million. We hedge 20% of our gold forward for the 3-year period. And the current gold price was higher than the prices that we hedged at. That doesn't change our view on hedging. In fact, at these very good gold prices, we would like to lock in hedges at 20% of our production into the future. But through the period, our gold price achieved was lower than it would have been if we had no hedge. Thank you.

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Executive Director [5]

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And then your third question was on the speculation that's currently out there. I think we stated all along that we, as a company, would like to look at any opportunity that's available in South Africa, Papua New Guinea and also the rest of Africa.

We are constantly evaluating opportunities. And at the right time, when we have -- if there's an asset that we'll put our long-term strategic objectives, we will make a decision. And we will let you know the moment we've done that.

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Operator [6]

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(Operator Instructions)

We have a question from Arnold Van Graan from Nedbank.

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Arnold Van Graan, Nedbank Capital, Research Division - Analyst [7]

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Peter and team, I just want to go back to your comments on the grade. So at Kusasalethu, you say that's sort of the only unplanned drop in grade. But if I look at your layout and your guidance, you're basically dropping grade at most of your other operations. So I guess the short question is, are you adjusting your cut-off grade lower or are you also experiencing unforeseen issues there? So here, it doesn't tie up. You say the only unforeseen issue is at Kusasalethu, but grade is dropping across the operations, so that either implies there's also unforeseen issues there or are you dropping cut-off grade? Can you just give us a bit of color on that?

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Executive Director [8]

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The cut-off grade is done on a gold price of ZAR 585,000. That was our planning gold price that we've done for this planning period. The ZAR 585,000, we have not changed that, and we're still using that to do the capital. So we've done nothing different to any other area.

Obviously, the grade is not -- if you want to look at our grade, we've now dropped our grade with about 6% in our new guidance between 5.5% and 5.57%, which is in line with where we were last year. If you look at the full year of last year, it is precisely the same that we had last year.

We -- obviously, where we are at the moment -- in any one of those operations, they are either mining, higher-grade or lower-grade areas. We typically think about the first 6 months of target, we were mining lower-grade areas. We knew we had to do that. We're now in a mine that is really good grade. We see very good results out of that. We should have a very good second 6 months. That measure should last us for the whole financial year. Joel (inaudible) now completed the project. So we will start the mining of the higher grade with 137 level. That project is done. We're now in the process of actually starting to mine and as we open the cross cuts, to mine more and more from that. So everyone has got his backup plan, but it's according to the plan that we submitted on the beginning of the financial year. It's no different to the plan that we had.

I think the surprise to us was really -- we plan to run about 6 grams a tonne at Kusasalethu, and we're probably going to have about 4.5-gram a tonne for the full year. We don't have to look at everything in total, which just probably have a bigger impact.

The one that also -- obviously, if we look at where we are now -- I mean the one that always had a big impact on that is the Bambanani pillar. We're mining now in the lower-grade part of the pillar. If we look at the -- we expect it now close to 35% -- or 65% of the pillar. So we're now in the final stage of the pillar. We always left the lower grade for last. We always -- so we are going into lower grade, but it's not because we changed the cutoff. It's just because we had this, we are mining it at this point in time.

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Operator [9]

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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 - Equity Analyst [10]

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Just a few questions on my side, please. I mean maybe just further to Adrian and Arnold's questions. You've indicated that Kusasalethu was probably one of the unplanned issues, and that's obviously resulted in your full year production guidance being downgraded and consequently, your unit cost guidance.

And then also, in your release, you mentioned that the electricity costs about 16% of your group, and we know that load shedding is yet to stay. But are you comfortable now that with your visibility of what you can see in the operational issues and maybe the Eskom outages that your guidance is on track for the full year, and we wouldn't see maybe a repeat of what happened in FY '19 regardless downgraded a few times?

And then just a further one on your hedges. Are you able to give us a mark-to-market at spot prices for what the cash flow benefit would be for the full year FY '20?

And then just lastly, we know that the silicosis are going to be due to be made by the -- call it June. So do you have an indication of what the cash outflow might be for your business by period?

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Executive Director [11]

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Good. If you just keep -- take the production things, so we're quite happy with the forecast. If we've done it, we will get you the forecast. And I just want to say that since 2016, it's the first time that we've adjusted the forecast. And we've always made our forecast that we set in place. So we don't consistently downgrade our forecast. That's not the way -- you've got another company in mind.

So we've been looking at what we had, and we think we took a conservative view in terms of where we'd go. And we believe what we have here, given the circumstance that we have, that we will be able to deliver on what we've done here. And many people will ask, "Why do you downgrade with 4%?" I mean that's actually -- but I mean, we want to have a conservative view, and we don't want to be in the position that we cannot deliver on our forecast.

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Boipelo Pride Lekubo, Harmony Gold Mining Company Limited - CFO [12]

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And we wanted to be transparent.

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Executive Director [13]

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And transparent. But the second thing on the Eskom thing, I mean, obviously, when we had stage 6 at the end of last year, we had that impact. We couldn't put anybody on the ground during those times that we had stage 6. That basically affected 2 night shifts and a day shift, about 80 to 90 kilograms of production in Harmony. But it was unfortunately at the time, it is because it was right at -- just before the Christmas break. So whilst we had a lot of momentum for people to deliver, getting their targets and everything else to get to the Christmas break, sitting on surface for that period of time just before the Christmas break is not good for the morale of the people and their focus in terms of working. Having said that, group -- looking at the current load shedding process, we are quite worried about that in a certain way because the constant stage 1 or stage 2 load shedding had about a 10 point impact on -- allowed power that we can use. So we have to curtail 10% of our production.

Now what we normally did in the past is that when load shedding was -- there was no load shedding. We could actually make it up because we can hoist during that period of time and we can make up for what we've lost. So we're worried about this because now load shedding is over weekends, it's every day, it's every night. So we know this is a issue that we need to resolve with Eskom.

Obviously, what will be the biggest impact on us, I mean we have to make a call. If this is going to continue for a long period of time that we're going to have constant load shedding, we have to rethink about our program. Most likely is that we will stop hoist milling and things like that, that we can do at a later stage because that won't impact on our operations.

The unfortunate issue that we have is that most of our electricity is consumed by refrigeration, compressed air, compressors running. And we have very little in terms of hoisting and milling capacity that we can play with or we can play with that, but we can't save it all in that area. So we have to sit with Eskom and think about a way in terms of all the certain times of the day that we shouldn't be hoisting and things like that and other the times of day that we can actually hoist a little bit more and don't have the 10% drop in production on that. We are in the process of having that conversation with Eskom, and we believe that we will get to an amicable relationship -- solution with them.

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Frank Abbott, Harmony Gold Mining Company Limited - Financial Director & Executive Director [14]

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Sorry, if I can answer on the [change]. I'd like to start on Page 22 of our interim results.

You see there at the bottom, Note 10, there's a sort of layout all the hedges that we have. And when you look at that, you will see that the first column is our rand gold hedging. This was as at the 31st of December. We were negative ZAR 474 million. On the U.S., we were negative ZAR 102 million. But on the foreign exchange hedging, we were positive with ZAR 622 million. So that covers a net position of -- positive position of ZAR 46 million at the end of December 2019.

And we do not -- we have not sort of calculated the current mark-to-market. And we only do that on -- obviously, when we actually do our financials. But I'd like to refer you to schedule 10 of the -- on Page 25 of that document. There, you see the layout of our financial instruments. And if we start at the top and we look at our zero-cost collars, you can see that we've -- our collars, the caps are still well above where we are trading currently. So we should be fine there.

On the forward contracts, those are also all in the money. And when you look at the rand gold positions, you can see that we've been filling them up from the quarter 4 in 2021. Those values have gone up to ZAR 733,000, ZAR 798,000, ZAR 792,000. So yes, the first few are in the 650s. But after that, from the quarter 4 2021, you can see that we've been achieving the current gold prices for that.

The same with the U.S. dollar, it's just below that. You can see the first few are lower. Again, we've been filling it up with the sort of current gold prices to the end of that period, the 2 years.

And then the silver is -- we're still in the money on the silver hedges. Thank you.

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Executive Director [15]

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Jared, there was a final question. I just want -- I didn't jot it down. It talked about...

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Jared Hoover, Morgan Stanley, Research Division - Equity Analyst [16]

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Yes. It was just about the silicosis payments. So my understanding is that those are going to be paid out by June or the first tranche by June. So I just wanted to find out what the potential cash outflow might be for how many, given you are one of the companies that are probably more exposed in the gold sector. .

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

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Yes. What we've done is the process of establishing the trust. And the trust is -- obviously, when the trust is good, there will be -- the first people will come through. So we probably would -- Boipelo, it will be in June that we will start with the first?

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Boipelo Pride Lekubo, Harmony Gold Mining Company Limited - CFO [18]

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Yes. So if you refer to our current liabilities on our balance sheet, you'll note we've indicated ZAR 175 million range that will be basically outlaid in the next 12 months.

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

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Yes.

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Operator [20]

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The next question we have is from Shilan Modi from UBS.

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Shilan Modi, UBS Investment Bank, Research Division - Director & Equity Research Analyst [21]

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Just a couple of questions from me. Can you give us some more color on the Moab safety issues? Because you lost quite a lot of production at Moab because of that.

And then maybe just talk to the life-of-mine extension potential at Unisel and Masimong. You've got a year left at both of those mines, according to your guidance. What are you thinking there?

And then Kusasalethu, given the grade issues that you have now, and you've only got a 5-year life remaining, what's the outlook for that mine?

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

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Okay. Moab, what we had is, in the first half -- in the first quarter of the year, we had a very, very good 3 months. And roundabout March, we had a quite a big seismic event that impacted on one of our levels, and that's actually the production level. So we had to rehabilitate that level, fix the level up and do it again. We actually have -- had 3 seismic events that happened in concurrent. So it took us quite a while to rehabilitate that cluster or that haulage. That's been done. So we are back into that mine. It's nothing to do on the stock place that we were mining. It was in the back area, where the haulages went through some structures. And there were seismic events on those structures.

If you know the Vaal River area, well, I mean that's quite common in Vaal that it happens. We do have some movement on structures from time to time. So we had to rehabilitate those haulages, and we stopped that part of the mining business for quite a substantial -- I think, about a month and a half. But we're back into that areas now. So more -- it's all systems going.

Unisel and Masimong. It's just -- Unisel, obviously, we're mining the short pillar. We mine it up to the point that we believe it is still safe to mine, and then we'll stop it. And we think we've got about 6 months left, then it will be finished. And we believe that the 1,000-and-such people they will absorb into our operations because we've got fantastic crews there, and we will be able to absorb them and the thing is we are fully aligned with the unions and everybody else in terms of our plan for Unisel.

Masimong would have closed by the end of this financial year. We managed to be able to do quite well at Masimong if you just look at -- there's also Masimong. And we've also managed to find some very, very -- some grades that possibly can extend it for another year or so.

We'll do the strategic training now, and then we'll get back to you. But what we've done is we extended Masimong until the end of this financial year, at least. And we're in the process of planning, and maybe there's another year of Masimong left. But we're not doing more development or anything like that. We -- it's just where we do find the area.

Kusasalethu, it's still a 5-year life. But I mean the grades are actually standing up quite well. And I mean as we develop the cross cuts, we will have 1-point-something to the cutoff of Kusasalethu.

But to the eastern side of Kusasalethu, we actually -- the high-grade block extended more than we thought it would have extended in our views of Kusasalethu about 4 years ago. The higher-grade block is bigger than we thought.

So the 5-year life is still there and we believe that the grade -- the 6-gram a tonne-plus that we recovered at Kusasalethu is doable for the full 5 years.

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Operator [23]

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(Operator Instructions)

We have a follow-up from Shilan Modi.

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Shilan Modi, UBS Investment Bank, Research Division - Director & Equity Research Analyst [24]

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Just one or two more. In the note -- in the release, you mentioned that there's a delay to Wafi-Golpu. Maybe just talk to us a bit about that.

And then just a general comment. It looks like there's an inventory drawdown, so like in answers across most of your operations, maybe you could just explain that to us a bit.

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Executive Director [25]

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Okay. Shilan, just on Wafi-Golpu, we actually have very good news this morning, and that is that the court case that actually sterilized the whole discussions with the government, it's actually a court case that the governor of the province -- state took to the court on participation in Wafi-Golpu. That has been dismissed here today by the court. So we announce the fact now all systems going in terms of renegotiating the SML.

Just to give this some color on to that, just to go back. If you remember correctly, over 6 -- in December 2018, we signed an MOU with the state of Papua New Guinea regarding a nonbinding agreement in terms of what are the -- all the terms going forward.

The governor of the Morobe province were happy with that because he was not partial to that discussion. And then he took the state to court, and we're not including the province. The MOU in the meantime has been taking such a long time that both parties withdrew from the MOU. So sort of at the end of the day, there was a -- when they took it to court, there was a stay of any actions or stay of any discussions between the parties. So for the whole year, we were sitting on our hands, doing nothing really in the space. So that has been lifted yesterday. So we're now going to continue going forward.

I had a discussion with Johannes this morning. There is some talk of headstarting the discussions next week and trying to get the SML now done and over the line. Again, full participation of all parties is anticipated. So that's some good news in that sense. So hopefully, we will get some traction on the MOU.

In the meantime, we were through -- most of the work has been done on the mine there. We took all the construction people offsite. We've taken all the -- if anything, that's still available there on-site, the care, maintenance and security. So -- and we probably would not -- going to start until we have the issue out of our hands, to start the process because we burned our fingers before. When we signed MOU, we started normalizing some work to be done and we had to withdraw from that. So yes, that is a good outcome.

On -- what is the second question? Could be on...

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Shilan Modi, UBS Investment Bank, Research Division - Director & Equity Research Analyst [26]

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Inventory drop.

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

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Inventory.

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Boipelo Pride Lekubo, Harmony Gold Mining Company Limited - CFO [28]

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Inventory drop.

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Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Executive Director [29]

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At the end of the previous 6 months, we really were in a situation where we had -- the [contract] was over a period where we had a lot of gold in underwater. What we have now is more or less what we should have. There's no -- that is a steady state.

But in the previous 6 months, we had quite a lot of gold in inventory at the time just because of the fact that we couldn't dispatch at the time, et cetera. So there's no issue for long -- for inventory. That is a steady state that we have at this point in time.

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Operator [30]

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(Operator Instructions)

It seems we have no further questions.

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

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Yes. Thank you for joining us. Just some final comments maybe.

We remain committed to our safety and health journey we embarked upon since the calendar year of 2016, really focusing on leadership, risk management and people.

While the strong gold price received continues to provide a welcome boost in our financial performance, we will focus our efforts on what we are able to control, which is safety, cost and production. Thank you very much for joining us this morning. We really appreciate it.

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Operator [32]

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