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Edited Transcript of HARJ.J earnings conference call or presentation 23-Feb-21 8:00am GMT

·47 min read
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Q2 2021 Harmony Gold Mining Company Ltd Earnings Call Free State Feb 23, 2021 (Thomson StreetEvents) -- Edited Transcript of Harmony Gold Mining Company Ltd earnings conference call or presentation Tuesday, February 23, 2021 at 8:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Boipelo Pride Lekubo Harmony Gold Mining Company Limited - Financial Director & Executive Director * Max Manoeli Harmony Gold Mining Company Limited - Senior IR Officer * Peter William Steenkamp Harmony Gold Mining Company Limited - CEO & Executive Director ================================================================================ Conference Call Participants ================================================================================ * Arnold Van Graan Nedbank Corporate and Investment Bank, Research Division - Mining Equity Analyst * Shilan Modi UBS Investment Bank, Research Division - Director & Equity Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Executive Director [1] -------------------------------------------------------------------------------- Good morning. Thank you for joining us for our interim results for the 6 months ending the 31st of December 2020. We continue to present our results on a virtual platform due to the COVID-19 standard operating procedures currently in place. Mining is all about people, and I do miss seeing each other of you in person. I do hope that during the various -- that through the various vaccine programs becoming available worldwide, that we will be able to see each other in person again in the not-too-distant future. Joining me today is Boipelo Lekubo, our Financial Director; Mashego Mashego, our Executive Director; and then also the Investor Relations team under the leadership of Marian van der Walt. Please take note of our safe harbor statement and competency report statement. Moving to Slide 3. Harmony creates and delivers value by successfully delivering on its purpose and strategic objectives. In so doing, we work towards ensuring the long-term sustainability and profitability of our business. This, in turn, enables us to invest in the employees, in society to contribute to the economy and to share the value created with all the stakeholders. During the first 6 months of financial year 2021, our strategic pillar served as a road map to achieve exactly that, value for all. We continue to support our own employees and stakeholders during the trying COVID-19 times. And we have been assisting communities with food packages and ensuring all our employees are able to go to work, knowing that we are making every effort to ensure of their safety and who they're getting contact with are all in place. We continue with the production under strict guidance of the DMRE and brought Harmony into new heights while enduring one of the most difficult calendar years in my entire mining career. Challenging times bring people together and build character. This was especially true for the Harmony family. Harmony delivered an outstanding set of numbers for the first half of the financial year, in line with our strategy of producing safe, profitable ounces and increasing our margins. These results are a true reflection of how Harmony has transformed and derisked its business. While the majority of gold still comes from underground, we have increased our production and cash flow from higher-margin, lower-risk surface sources operationally to approximately 50% of our total production. To illustrate just how effective the company has been for the last 6 months compared to the 6 months ended on the 31st of December 2019, I will touch on each of the strategic pillars 6 months from the operation. As far as responsible stewardship is concerned, we are now in Phase 2 of embedding a proactive safety culture focused on leadership and behavior. Our health initiatives, combined with the COVID-19 standard operating plans, were embedded in all our operations and actually make sure that we have sustainability in all of our operations. We ranked first in the ESG disclosure among South African mining companies. We are a FTSE4Good constituent. We're included in the Bloomberg Gender Equality Index, and we're glad to say that we are runnerup in the Sunday Times Top 100 Companies Award in 2020. On the operational excellence side, we had a 65% increase in production profit to ZAR 6.8 billion from the 4.5 -- ZAR 4.1 billion previously. We had a 5% increase in underground recovery grade to 5.58 grams per tonne from 5.29 grams a tonne. We had 8% increase in gold production. We had a 42% increase in total mineral resources and a 20% increase in total mineral reserves. On cash certainty, we had a 69% increase in operating free cash flow, with a profit margin to 22% from the 13% previously. We had a 336% increase in net profit to ZAR 5.8 billion. We had a 58% reduction in net debt, down only to ZAR 580 million from the ZAR 1.4 billion in the previous 6 months. And we had 31% increase in gold price received to close to ZAR 900,000 a kilogram. We had ZAR 902 million gain on derivatives. And our headline earnings per share increased by 211% to ZAR 7.75. So our net debt-to-EBITDA ratio at the moment is at 0.1x. On the effective capital allocation side, we successfully integrated Mponeng and Mine Waste Solutions. We have now 3 months of production in our production results here. We had a strong pipeline of organic projects to drive production profile and margin expansions, and we declared the interim dividend of ZAR 1.10. This slide simply shows the same information in ounces and U.S. dollars. On responsible stewardship, I do want to stand a little bit still there. Safety is a foundational value at Harmony, and this is utmost important that we ensure the safe production with all our operations. Risk management is essential step in ensuring that our employees and working areas are safe at all times. Harmony remains committed to the elimination of work-related injuries and fatalities. We continued to address specific courses of work-related events resulting in injury and loss of life, focusing on improving our safety in general and embedding a proactive safety culture. It remains a continuous journey of engagement, training, creating awareness, learning from each other and caring for each other. We started our safety journey in 2016. A number of our mines have recorded some significant safety milestones and are seeing progress as we have worked on to embedding our proactive safety culture. Our total injury and accident frequency rate has improved over the past decade and is now at 7.69 per million hours worked as we strive towards a goal of 0 loss of life. Despite this progress, the group fatality injury frequency rate regressed in the first half of FY '21, increasing to 0.13 per million hours. The [goal] on this Slide 8 shows the total injury rate -- accident frequency rate, which indicates that we are moving in the right direction towards achieving a goal of 0 loss of life and 0 harm. While we have not achieved the safety results proportion to the efforts that we've put in place, we are indeed seeing an improvement in our numbers. Mining, as I said earlier, is all about people. We have to ask ourselves whether we're prepared to send our own children down or family members to go and work at the gold Harmony mine. Now I would do that because I know that every effort is made to ensure a safe working place. We care about our people, and we are therefore spending a significant amount of time and money to develop our leaders and capabilities and also their credibility. Embedded practices throughout the company stipulate that we expect of each person, but there are also challenges of unsafe routines and unsafe habits. We are running various safety awareness campaigns throughout the company. We have introduced a Harmony app in conjunction with the Internet with both contained and delivered regular safety messages; Impactful safety days are held; the [visual] shared on the safe behavior; and we are continuously addressing Harmony's overall culture. All this ensure that Harmony's personal values are aligned with the Harmony value and culture of safe working areas. Positively impacting each and every Harmony employee's thinking and approach to safety is fundamental to achieve our goal of 0 loss of life. Creating a proactive safety culture throughout the company is a continuous journey, which we will look every day throughout the positive reinforcement, ensuring each and every harmony employee has embraced a positive and permanent approach to safety. From the outset, we established a multidisciplinary team to ensure compliance and alignment of all the COVID-related processes. Harmony developed and implemented a standard operating procedure to assist in the prevention and transmission of COVID-19 at its operations in South Africa and PNG. Employees who was scheduled to go home for the festive season were required to sign a registration form, and full screening was conducted. A return-to-work process was designed and implemented to ensure a safe return of all employees to the working place. About 7,000 of our employees traveled outside South African borders over the December 2020 period, all of whom were allowed to return through the borders provided they were able to produce a negative COVID-19 test results. As at 19 February 2021, about 0.2% of workforce tested positive for COVID-19, with 94 active cases. We mourn the 40 employees who have lost their lives to the pandemic and continue to urge all our employees, their families and communities to remain vigilant as we battle the second wave of the pandemic. Harmony is committed to playing an active role with us -- with our social partners to help with the vaccine rollout. While the South African government is primarily responsible for funding the vaccine rollout, it is a single -- and is a single buyer, harmony will play an important role by accelerating the vaccine program on all our mines and host communities. As guided by the Department of Health, our health care workers and other frontline workers will receive vaccines first, followed by our remaining employees as per our internal COVID-19 vaccine rollout plan. We will continue to prioritize our health care initiatives, particularly those relating to occupational and lifestyle diseases despite the current challenges presented by COVID-19. I do want to talk a little bit about Unisel. Operating the deepest mines in the world is often viewed as unsafe and costly. However, there's more to our business than just mining underground mines. ESG may have become more popular over the last few years but has always been part of Harmony's DNA. Unisel is actually a case in point. We closed the mine in October last year. The mine started producing in June 1978 and was originally designed to only -- to close in 1991. Harmony took over Unisel in 1996 and extended the life by a further 24 years. Not only was this mine profitable, but by doing that what we know best, we extended the lifeline to the communities and families who were all at the risk of mine closure. This perfectly illustrates the sustainability in ESG, and it's something that we are committed to doing in all our operations. Unisel is a clear demonstration of our expertise in, not only mine life extension, but also in turning operations profitable again. This, in turn, brings sustainable jobs for communities and much longer longevity for the area that we operate in. We have illustrated similar ESG successes at mines that we currently mine and will apply the same skills and know-how to the newly acquired assets. It is evident that from these external recognitions that we are certainly making a meaningful impact on ESG perspectives. A successful ESG strategy delivers positive shareholders return, and we are committed to deliver on both of these. Harmony was runnerup in the Sunday Times Top 100 Companies in 2020. This award acknowledged Harmony as a JSE-listed company for creating wealth and value for shareholders over a 5- year period. The CRRA, or the Corporate Register Reporting Awards, is a global award, and Harmony was amongst the top 10 companies for the best integrated report, best environmental, social and governance at ESG report and the best carbon disclosure report. Harmony also ranked first in the ESG disclosure for mining companies in South Africa based on the recent study conducted by the Risk Insights and Risk and Instinctif Partners. The research was based on ESG metrics using Risk Insights' own ESG rating tool, which analyze public available disclosures, integrated reports and media coverage. Standard bank recognized Harmony as a top gender empowerment company last year, and we were once off included -- once again included in the FTSE4Good index and the Gender Equality Index of Bloomberg. We will continue doing what we do best, which leads me to the next section on operational excellence. Higher gold production was due to the inclusion of Mponeng and related assets in our portfolio and achieving our operational plans at the majority of our mines. We have successfully integrated Mponeng and Mine Waste Solutions into our portfolio and have already seen an increase in grade, production and cash flow since we took ownership of these assets on the 1st of October. Our South African operations produced close to 1 tonne of gold more than we had planned for the 6 months to December. We have enhanced our existing portfolio by adding higher-grade underground assets. We will see a 5% increase in underground recovered grade compared to the last reporting period. The gold price continues to be volatile, which means that we manage what we can, which is safety, production and costs. This slide shows that at the current spot, 90% of our production remains profitable. Harmony overall all-in sustaining costs for the months to December in 2020 was 80% higher at ZAR 715,000 a kilogram compared to the 6 months to December in 2019. It was mainly due to the higher royalties that we were paid, the inclusion of the acquired operations, labor costs and what increased as a result of higher revenues and the COVID-19-related expenses. The capitalization project at Target 1 to bring infrastructure closer to the mining areas is continuing. But unfortunately, we had pillar failures and backfill dilution into 2 of our massive stopes, which impacted on the grade and the volume. We have adopted a revised plan which will take into account the delay caused by these events. We expect this to be resolved by the Q4 in FY '21. Through astute acquisitions, we have managed to expand our cash margins. Moab was the first, the most profitable operation, followed by Mine Waste Solutions and then Mponeng. Bambanani with its higher grade and our surface sources being lower risk and with high margins, both continue to impress. This chart illustrates that the lower-risk surface source operations produced excellent cash flows margins and are an important part of our business. To illustrate the previous slide slightly differently, you will note that the strategy of acquiring higher-grade assets, combined with a steady performance in our existing mines, has resulted in a strong operating free cash flow margins. And yes, you may argue that the gold price has lifted, and of course, it did. But as gold miners, we ensure that we're going to benefit from not just the gold price but also the asset mix and higher production. The integration of Mponeng and Mine Waste Solutions and related assets into our portfolio is expected to increase the group resources by 43% to 169.8 million ounces and the group mineral reserves by 20% to 43.8 million ounces from the 36.5 million ounces it was previously. So it's quite a healthy situation to be in. Over the past 5 years, we have diversified our asset base through increasing grade and adding lower-risk, higher-margin operations to our portfolio. You may still be tempted to call us marginal, but our surface sources now represents 27% of our total asset portfolio versus 15% before, which means production from these assets will drive our rand per kilogram lower. You may have to rethink your description of our assets. In addition, the newly acquired assets, which has much higher grades than our current portfolio, has approximately 275,000 ounces to 282,000 ounces for FY '21 based on the 9-month production figures as well as the potential of other surface and services synergies, which will be discussed in a little bit later. We have, therefore, updated our guidance from the original 1.26 million ounces to 1.3 million ounces for FY '21 to the new guidance of 1.56 million ounces to 1.6 million ounces of gold production for this financial year, with an all-in sustaining cost between ZAR 700,000 to ZAR 720,000 per kilogram. Average expected grade is expected to be higher, too, at 5.64 grams per tonne. You can also refer to the guidance slides in the annex section of this presentation for detailed production grade and capital guidance on each of our operations. If we look at the 6 months ended December 2020, only -- you will note that only 60% of our total cash flow is generated from underground operations. Adding more surface ounces to our portfolio post the recent acquisitions have, therefore, derisked our assets portfolio to some extent, as they are safer to mine, lower risk and increase our overall margins due to the lower all-in sustaining cost, which in turn increased our operating cash flow. Harmony is now one of the largest processors of tailings and surface ore deposits globally after our acquisition of the Mine Waste Solutions and related assets. While the newly acquired assets will present opportunities for both services and surface synergies in the regions we operate, we have identified several opportunities which could potentially contribute to an overall 10% reduction in cost per kilogram. Some of these include repurposing and optimization of marginal ore deposits and tailings storage facilities, logistics and plants in the Vaal area, cross-utilization of workshops, unlocking significant value synergies and scale through regional consolidation, enhancing the services from our water treatment plants and reducing our operational footprint in the regions where we operate. The extent to which we can achieve synergies in these will only be understood once we have done our further feasibility studies as part of our planning cycle. We will be able to provide more detail on cost and other ounces once we have completed our planning cycle in August of this year. Boipelo will now take the presentation from here to talk about cash certainty and capital allocation. -------------------------------------------------------------------------------- Boipelo Pride Lekubo, Harmony Gold Mining Company Limited - Financial Director & Executive Director [2] -------------------------------------------------------------------------------- Thank you, Peter, and good morning to all. After the strong results, headline earnings per share for the 6 months ended 31 December 2020 increased to ZAR 7.75 per share or USD 0.48 compared with the headline earnings per share of ZAR 2.49 or USD 0.17 per share for the previous period H1 FY '19. Basic earnings was up 288% to ZAR 9.66 with a 24% difference between headline earnings per share and basic earnings attributable to the gain from bargain purchase. This gain contributed ZAR 1.91 to the earnings per share. The drivers behind the increase in earnings was primarily due to the following. Firstly, a 336% increase in net profit to ZAR 5.8 billion or USD 356 million for the first half of FY '21 compared to ZAR 1.3 billion or USD 91 million in the 6 months ended 31 December 2020. As Peter already mentioned, this was a result of an increase in the average recovered underground grade and higher production from our underground operations, of course, supported by a higher average rand per kilogram gold price. 3 months production from the newly acquired assets was also included. Secondly, a 69% increase in operating free cash flow margin to 22% from 13%. The ZAR 902 million gain on derivatives was attributable to the gain on our foreign exchange derivatives and silver hedging contracts. Profits and losses from gold derivative contracts form part of the revenue line. The result of all of this was a 58% reduction in net debt to ZAR 580 million, down from ZAR 1.4 billion for the comparable period. Slide 25 is similar to the previous slides, just in U.S. dollar terms. Slide 26 is a very good illustration of our financial discipline over the years. If you track the black line, you'll see that we're able to keep net debt-to-EBITDA at lower than 1x throughout most of the past 5 years, and most notably, this was during our growth phase. All things staying the same, we should be cash positive by the end of March this calendar year. Slide 27 similarly represents the same, just in U.S. dollar terms. On Slide 28, we illustrate that the inclusion of the newly acquired Mponeng and related assets strengthened our operational cash flow significantly, contributing 41% to our total operating free cash flow. Gross profit increased by 136% for the 6 months ended December 2020 compared to the 6 months ended December 2019. 70% of our operational cash flow now is from higher-quality assets and surface sources, reaffirming Peter's earlier statement that Harmony is no longer a marginal operator. Moving to Slide 29. Harmony continues to enjoy favorable commodity and foreign exchange pricing on the unhedged portion of its exposure while locking in higher prices as part of its derivative program when available. For the current period, we realized a net gain of ZAR 902 million or USD 56 million compared to ZAR 157 million or USD 11 million gain for the 6 months period to December 2019, mainly due to a stronger rand to U.S. dollar exchange rate. Since the inception of the derivative programs in the 2016 financial year, these programs have realized net gains of ZAR 159 million or USD 10 million. Going forward, we'll be more selective before entering into hedges, only hedging when a margin of 25% above cost and inflation can be locked in. One thing I do want to emphasize is that our policy still remains in place, that being hedging up to 20% of our gold exposure over a 24-month period, silver is 50% exposure over a 24-month period and ForEx at 25% exposure over a 24-month period. I think this revised way of how and when we hedge is quite nicely illustrated in the graph that you see on the left. If you look at the current market forward of ZAR 850,000 per kilogram, in order for us to achieve that 25% margin above cost, we would have to track the red line. So clearly, given where that forward curve is, we would not be hedging at these levels. On Slide 30, we break down the headroom we have created for ourselves as at 31 December 2020. We've been able to create a significant cash position while still managing to repay a sizable portion of our debt. If we take into account the available facilities plus cash at hand, we estimate we have just over ZAR 7 billion available to deploy before dividends, leaving us with a myriad of options to apply our capital in a manner that funds growth but also creates shareholder returns. And that will lead me to the next section on capital allocation. Slide 31 is just the same slide in U.S. dollar terms. Turning to effective capital allocation. We remain good stewards of financial capital, and in particular, how we allocate it. We've repaid most of our debt with 58% reduction in net debt to ZAR 580 million or USD 40 million in December 2020 from ZAR 1.4 billion or USD 95 million (sic) [USD 79 million] in June 2020. Net debt-to-EBITDA is at a very low 0.1x. In terms of reinvestments, we've reinvested some of our capital and added safer, quality ounces to our portfolio through taking full ownership of Hidden Valley, reinvesting in the assets and acquiring Moab Khotsong, Mponeng and related assets in the past 3 years. At the same time, we managed to create total shareholder return through a significant uplift in the share price and reinstated a dividend, and I'll touch more on the dividend in later slides. We strongly believe that we will remain well positioned to benefit from higher gold prices to secure shareholder returns but also to fund our growth ambitions. We will only spend capital where we believe it will secure future returns. Our pipeline of projects are, therefore, aimed at firstly lower-risk projects with a focus on safety and overall risk impact; improving margins, thus replacing marginal ounces with quality ounces and reducing costs; thirdly, generating returns through applying an IRR of more than 15% and paying dividends as and when our net free cash flow allows us to do so; lastly, affordability through weighing up capital intensity against group cash flow projections and requirements. On the right-hand side, you'll note that we have a number of projects that we wish to pursue, but only the ones that meet our criteria will make it through the various approval [gates]. Wafi-Golpu is and will remain an important game changer for Harmony. As we wait for the special mining lease to be obtained, we'll pursue some of these organic projects. And when the SML is secured, we'll seek a separate funding solution for Wafi-Golpu. Slide 35 illustrates that our strategy has translated in shareholder returns. We mine gold, remain hands on with our operations, manage our financial risks and are thus able to benefit from higher gold prices as and when they arise. Since introducing our growth strategy in 2016, Harmony's market cap has seen a mammoth 472% increase. Moving on to dividends on Slide 36. Harmony has reviewed its existing dividend policy and is too pleased to confirm a more definitive policy aimed at paying a return of 20% of net free cash generated to shareholders. The new policy is aimed at being -- which is 3 very important things: firstly, more predictable; secondly, meaningful; and thirdly, sustainable. While the dividend policy is reviewed every 2 years, the payment of a dividend will be at the discretion of the Board and will be decided on every 6 months. When declaring a dividend, the Board will take the following into account in terms of their discretion: firstly, future, major capital expenditure; our net debt-to-EBITDA not being greater than 1x; obviously, solvency and liquidity requirements in line with the South African Companies Act; as well as our current banking covenants. As such, we are pleased to announce that Harmony has declared an interim dividend of ZAR 1.10 per share on the back of our strong free cash flow generation. This translates to a dividend yield of 1.5% to 2.5% per share. You'll note from the pie charts that even at very different gold prices, we are still in a position to pay a dividend alongside our growth aspirations. With that, Peter, I'll hand back to you to conclude. -------------------------------------------------------------------------------- Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Executive Director [3] -------------------------------------------------------------------------------- Thank you, Boipelo. The exceptional performance achieved in the first half of FY '21 substantiates the growth strategy that we set out to pursue in the beginning of 2016. Through astute acquisitions, we have successfully added quality ounces and derisked our asset portfolio. Harmony is no longer a marginal gold producer but an emerging market mining specialist. We have transformed into a company capable of creating value throughout the cycle. We have optimized our existing portfolio and improved our asset mix and continued to make decisions that benefit all stakeholders. We have acquired assets and lengthened the life of mines when no -- others no longer wanted to do. All of these assets have resulted in better margins, which have been able to lock in throughout the effective hedging strategy. These effective business practices have allowed us to create a robust yet flexible balance sheet, with a war chest of available cash and facilities to deploy in both opportune and uncertain times. All of this has been done to ensure that we deliver positive shareholders returns through a sustainable mining practices, whether it is lower gold price, COVID or Eskom outages and the like. We will deliver through the good times and the bad. Harmony is a different company to what you once knew. I hope you have noticed that. This is what Harmony of 2021 looks like. Marginal assets are being mined out and replaced with higher-grade assets and surface sources that have lower risk and higher margins. Know-how to mine sustainably and adding life of mine also adds significant to the values on the surrounding communities, government and other stakeholders. We get ESG. We know how to operate in emerging market countries. Our conservative approach to debt has positioned us well to be net cash positive towards the end of March this year. Stability at our mines have good momentum. Have secured -- and we secured long-term operating free cash flows. We continue to be leveraged to the rand gold price. Wafi-Golpu is part of our future, and it remains a game changer. The copper credits, and I'm not sure if you've seen the copper price today, but this copper credits could result in Harmony becoming a quartile cost producer. There are various ways in which to grow the company further, especially when our hands-on management style can sustain our operational performance. Our pipeline of economic projects and surface sources options, with margins protecting through the hedging, means that they all share in the upside in the form of share appreciation and dividends. In short, we are now able to produce at about 1.6 million ounces of gold. Add to that future quality ounces from our pipeline of projects, then combined the leverage exposure to rand per kilogram gold price with a robust balance sheet and a deployable and meaningful war chest, what you'll now see is a company that can and will remain well positioned to take advantage of the higher gold price with delivering positive shareholders returns throughout the cycle. This concludes the presentation. I will now hand over to Max to allocate the questions received in the webcast. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Max Manoeli, Harmony Gold Mining Company Limited - Senior IR Officer [1] -------------------------------------------------------------------------------- Thank you very much, Peter and Boipelo, for that. For the Q&A, I'm going to start with the questions that are on the webcast. So the first one that comes through -- can everybody hear me? -------------------------------------------------------------------------------- Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Executive Director [2] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Max Manoeli, Harmony Gold Mining Company Limited - Senior IR Officer [3] -------------------------------------------------------------------------------- Okay. So the first question is from [Delek] from (inaudible) Capital. Quite a number of questions, but I'll just touch on a few. Peter, this one is for you. He says, let me see, the decline project at Joel shaft, has it brought forth any improvement in grade so far? Can you please elaborate at the historical and present face grade, belt grade, recovered grade? Yes, and that's the question at Joel. -------------------------------------------------------------------------------- Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Executive Director [4] -------------------------------------------------------------------------------- So just repeat the first part of your sentence, the question. -------------------------------------------------------------------------------- Max Manoeli, Harmony Gold Mining Company Limited - Senior IR Officer [5] -------------------------------------------------------------------------------- The decline project at Joel, has it brought about any improvement in the grade at all? -------------------------------------------------------------------------------- Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Executive Director [6] -------------------------------------------------------------------------------- Yes. Joel, we in actual fact are starting the first -- we got the first raise line we started mining. Unfortunately, where we started the mines, it was a little bit -- not necessarily grade was a problem, but it's really a stoping width. We actually expected much higher stoping width in that area. The second raise line is through, and we're now probably in much better grade. And that will create a mine that will run for another 17 years. -------------------------------------------------------------------------------- Max Manoeli, Harmony Gold Mining Company Limited - Senior IR Officer [7] -------------------------------------------------------------------------------- Thanks, Peter. He's got a follow-up question here. He says, a couple of questions. Sorry. The overall cost in percentage of the ongoing development as part of the production cost, have been increasing -- has it been increasing or decreasing over the last 3 quarters at the shaft? Going forward, what do you expect it to be? I think based what's now the percentage of ongoing development in production costs, yes. -------------------------------------------------------------------------------- Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Executive Director [8] -------------------------------------------------------------------------------- Yes, ongoing development, or also what we call sustainable capital, as we call it in our terms, is really the development that we do. And obviously, going through COVID, we kind of cut back on the development because the first teams that we brought back, we put them back into our operations. So we're now getting back to the normal levels of development that we had prior to COVID. So if you compare it quarter-to-quarter, you will see quite an increase as far as that's concerned. But it's certainly now on the levels that will be going forward. And yes, I mean, our business, we have to develop, to ensure that we have the flexibility to mine. We do it through a very rigorous, what we call Iceberg management. Obviously, the development is an underpin of what we in actual fact to have at the end of the day as face length available to be mined. And that's a very, very powerful tool in Harmony. -------------------------------------------------------------------------------- Max Manoeli, Harmony Gold Mining Company Limited - Senior IR Officer [9] -------------------------------------------------------------------------------- Thanks, Peter. The next question is from Arnold Van Graan from Nedbank. He says here, the quality and scale of our asset profile has been enhanced with the acquisition of Moab Khotsong and Mponeng. However, we still carry several smaller high-cost and loss-making assets which may seem to show a lot of promise but often seem to fall short. Is it about time for you to cut out these loss-making, higher-cost ounces and put all your resources and focus on to the larger, higher-quality assets? -------------------------------------------------------------------------------- Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Executive Director [10] -------------------------------------------------------------------------------- Yes, and that's precisely what we've done, and that's why we closed Unisel. We still have Mponeng mine available for another 1.5 years to be mined and will be mined at the profit. Actually, at the moment, we're getting very good grades and very good profits out of the mine. Then Mponeng will also close -- actually not Mponeng, Masimong, sorry, my mistake. Mponeng is our star asset. Masimong will be obviously the next to close down. The other assets, both Joel and Target, which I think at the moment is a little bit of a concern, both of them has got very long life. And specifically, if we do the recapitalization of Target, our studies have shown that we will have a very, very good mine operating for many years, probably another 8 to 10 years. And then obviously, likewise, Joel, we can continue mining there, and we can actually spend more money there. And I'm very confident that both Joel and Target will do very well going forward. -------------------------------------------------------------------------------- Max Manoeli, Harmony Gold Mining Company Limited - Senior IR Officer [11] -------------------------------------------------------------------------------- Thanks, Peter. Catherine from JPMorgan wanted to touch on a few assets. She says, basically, can you shed some color on the additional -- the change in assumptions underpinning the change in FY '21 guidance versus the December from the investor briefing book? So we basically changed guidance for now recently. And she could appreciate if you could maybe touch on Tshepong, Moab Khotsong, Doornkop and Kusasalethu. Just those guidance ranges. -------------------------------------------------------------------------------- Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Executive Director [12] -------------------------------------------------------------------------------- Okay. Yes, I think what we've done is, obviously, we had 6 months of production behind it, so we take that in consideration. We also had to obviously bring in Mponeng and Mine Waste Solutions into our guidance. But those are fairly small to my knowledge. They are not really significant. I mean, the one mine that we did have a significant change in the guidance is really Target. Target, we -- as we said, we have our 2 high-grade massives. Obviously, that is a mechanized mining operation. And both of them at problems where the pillars failures and the backfill of adjacent stopes actually run into the areas and that we have to now redevelop. But we'll be out of that by the end of this year. -------------------------------------------------------------------------------- Max Manoeli, Harmony Gold Mining Company Limited - Senior IR Officer [13] -------------------------------------------------------------------------------- Thanks, Peter. Boipelo, I think this next question is for you. In terms of -- this is from Arnold Van Graan again. The all-in sustaining cost increases were substantial. It seems the outlook for cost inflation remains high. Are you carrying a large component of fixed costs associated with the Mponeng assets and regional infrastructure? And how much of these costs can you remove from the system and by when? -------------------------------------------------------------------------------- Boipelo Pride Lekubo, Harmony Gold Mining Company Limited - Financial Director & Executive Director [14] -------------------------------------------------------------------------------- No. So if you look at the all-in sustaining cost per kilogram, if you may, I mean, we did have some unplanned costs in terms of the COVID costs. And then with the higher gold prices, yes, we benefit from the revenue, but the royalty expenses is also quite significant. So about ZAR 15,000 per kilogram is attributable to the royalty. And obviously, I mean, as I say, we benefit from the revenue. With Mponeng, it's only been 3 months that we've had Mponeng in the fold, but we do expect to benefit from the synergies, et cetera, and probably reduce about 10% of that cost going forward. So on the total production costs year-on-year, it's fairly in line with what we expected. -------------------------------------------------------------------------------- Max Manoeli, Harmony Gold Mining Company Limited - Senior IR Officer [15] -------------------------------------------------------------------------------- Okay, Boipelo. And Adrian Hammond from Standard Bank wants to know if there's any further thinking on your interest in Golpu and the means of funding it. -------------------------------------------------------------------------------- Boipelo Pride Lekubo, Harmony Gold Mining Company Limited - Financial Director & Executive Director [16] -------------------------------------------------------------------------------- No. So at the moment with Golpu, what we did indicate is that the environmental permit was granted, which is quite a significant step in terms of going forward with the SML negotiations. So next step is the SML. And only once that is concluded will we start to have a look at what that funding package will look like. So it's early days in terms of the funding of Golpu. -------------------------------------------------------------------------------- Max Manoeli, Harmony Gold Mining Company Limited - Senior IR Officer [17] -------------------------------------------------------------------------------- And then just to add further, if you so fund Golpu, does that not conflict with your new dividend policy? -------------------------------------------------------------------------------- Boipelo Pride Lekubo, Harmony Gold Mining Company Limited - Financial Director & Executive Director [18] -------------------------------------------------------------------------------- As I say, Golpu is still far out. I mean, bearing in mind, once we do get the SML, there's a 5-year significant development period for that. So looking at the new dividend policy, I wouldn't be too concerned about Golpu. -------------------------------------------------------------------------------- Max Manoeli, Harmony Gold Mining Company Limited - Senior IR Officer [19] -------------------------------------------------------------------------------- Thank you very much. Do we have any further questions from the guys on the webcast -- or the guys who have dialed in, sorry. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Yes, we have a few questions. The first question we have is from Shilan Modi from UBS. -------------------------------------------------------------------------------- Shilan Modi, UBS Investment Bank, Research Division - Director & Equity Research Analyst [21] -------------------------------------------------------------------------------- Congrats on a good set of results and congrats on declaring a new dividend and reinstating a dividend policy. A couple of questions from my side. Just in terms of your hedging policy, I know I brought it up with you earlier on the call, but -- so the way I understand it now is, if prices are rising from versus where we are today, then you'll start hedging. But if prices continue to rise, then effectively, you're going to start taking in hedge losses as a result. But if prices fall from today, you're actually going to -- you won't hedge, and therefore, you're actually just taking the full exposure to the gold price. I'm just really trying to understand the reason for the change to the dividend policy -- sorry, the hedge policy. And maybe if you can just talk to that a bit. Then in terms of Mponeng and actually Tshepong, both of these are kind of key assets for you. The all-in sustaining cost of the assets are around ZAR 800,000 a kilo. What are your plans in each of these assets to kind of bring down the cost over time, if you can? And how does that -- how will that work? And what time frame are we looking at? -------------------------------------------------------------------------------- Boipelo Pride Lekubo, Harmony Gold Mining Company Limited - Financial Director & Executive Director [22] -------------------------------------------------------------------------------- Thanks, Shilan. Maybe I'll start with the hedging. I mean, what we must understand is that with the hedging, this is really around our strategic intent around cash certainty. When we started with the program in 2016, it was really about securing margins in order to repay our debt. We did that. We undertook a significant growth path, which we do not believe we would have been able to do were if not for those gains that we realized with the hedges. So where we are now, if you look at where Harmony is, we want to be a little bit more selective in terms of limiting those opportunity cost losses. So -- and bearing in mind that we only hedged 20% of the production. So on 80%, you benefit from full spot. You would have noted in the graph that I had, given where the current forward is at ZAR 850,000 a kilogram, we want to lock in a 25% margin. That would mean the gold price currently should be at the ZAR 900,000 levels plus in order for us to lock in those good margins. We published our hedging table as at the 31st of December. You'll note that the average price on that book sits at about ZAR 892,000 a kilogram, which is higher than spot. And that's exactly what you want to achieve. I mean, in a low gold price environment, we suffer considerably more than our peers simply because of the nature of Harmony's business. So we are quite happy that the new way in which we're looking at hedges will address the challenges that we saw in the past. -------------------------------------------------------------------------------- Shilan Modi, UBS Investment Bank, Research Division - Director & Equity Research Analyst [23] -------------------------------------------------------------------------------- So a follow-up question on the hedge then is, if you were to continue with the old hedging plan, effectively, you'll be protected to the downside even from today's level, but on the new plan, you're not? And then the second thing is, if prices rise from today, say so we go into another bull cycle for gold, then you'll actually limit your full upside. So the actual question is, why not just not have a hedging program at all, i.e., just don't hedge? -------------------------------------------------------------------------------- Boipelo Pride Lekubo, Harmony Gold Mining Company Limited - Financial Director & Executive Director [24] -------------------------------------------------------------------------------- No. I mean, it goes back, Shilan, to protecting to -- needing the cash when -- having the cash when we need it most. So we are trying to lock in, in the event that the price has come down, then we've locked in at least an attractive margin on 20% of our hedges. If we would -- remember also that a specific thing that we introduced in this new way in which we hedge is the inflation on our cost. So what you would have seen, rather, in the way the program ran in the past is that our cost base crept up to the hedges that are now maturing, so you're locking in losses effectively into the future. So in trying to lock in a margin above that cost inflation -- that cost that's inflated, then you will benefit in the future. -------------------------------------------------------------------------------- Shilan Modi, UBS Investment Bank, Research Division - Director & Equity Research Analyst [25] -------------------------------------------------------------------------------- Okay. Maybe if we can move to the Mponeng and Tshepong question. -------------------------------------------------------------------------------- Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Executive Director [26] -------------------------------------------------------------------------------- Yes. Thanks, Shilan. Both Mponeng, Tshepong, let me just start with Tshepong first. I mean, Tshepong, obviously, has been one of our long-lived assets and one of our assets that we believe has got a very strong future going forward. Where we have -- Tshepong, at the moment, has got the 2 different sections which is Tshepong North, which is the old Tshepong; and then, obviously, Phakisa. We are going to go into much better grades in Phakisa going forward. We're in actual fact mining towards better grades, and we expect that to happen going forward. Tshepong North was really affected by the double fatality we had in last year, and that had a quite impact in terms of our Section 54 standing, for us getting grips with what happened there and also then to get the mines back into production. So Tshepong has got a -- it's always going to be a tough mine to mine. It's all about volume, getting the volumes right, making sure it gets right in place because it is a 5.5 gram tonne kind of ore body that we're mining there. But it's always been a very productive ore body, and the teams that have performed very well. And we believe the grade is going to improve going forward in the next few years. That will actually, in fact, get Tshepong going. As far as Mponeng is concerned, we took it over. We actually looked at the plan they had, and we actually completed that plan quite handsomely in terms of the plan that was actually on-site at the time. We are busy with the restructuring or replanning of Mponeng mine. Mponeng mine is a mine that we believe has got a huge amount of potential. There's a huge amount of reserves ore body above infrastructure that is untouched at this point in time, which we believe we can bring it to the plan. But that obviously takes a lot of studies, take a lot of feasibilities. And going through this planning cycle that we're in at the moment to get to our new year plan, if we signed off on all of those plans, we will come back to them to the market in terms of what we believe Mponeng will deliver to us. But that being said, Mponeng, I mean, we're quite happy with what we got. We got a very good mine, very good infrastructure and good orebody that we are very happy with and a team of people that is a fantastic team of people that we got from AngloGold Ashanti. -------------------------------------------------------------------------------- Shilan Modi, UBS Investment Bank, Research Division - Director & Equity Research Analyst [27] -------------------------------------------------------------------------------- So do you think we can expect costs at both of these mines, all-in sustaining costs at both of these mines, to stay flat or decline over the next, say, 12 to 18 months? And then I've got one follow-up question for that. -------------------------------------------------------------------------------- Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Executive Director [28] -------------------------------------------------------------------------------- Yes. I think we -- as far as Mponeng is concerned, we should be able to cut back on the cost. I mean, there's a huge amount of cost currently still in there that is fees that we pay for Anglo for the service that they actually rendered to us. They are currently rendering services because we haven't migrated all the systems yet. As a matter of fact, we've done, in the last week, quite a lot of work on that. And we will now be, by the end of this month, be in a situation that we're fully on, on the Harmony systems, and that will bring our cost down. So -- but as far as Tshepong is concerned, certainly, we believe that the rand per kilogram all-in sustaining costs can come down. -------------------------------------------------------------------------------- Shilan Modi, UBS Investment Bank, Research Division - Director & Equity Research Analyst [29] -------------------------------------------------------------------------------- Okay. And then one of the comments you made in the presentation is that you're going to replace some of your more marginal ounces with more quality ounces. Can you kind of give us an idea of how that plays out? So the reason I ask this is, if you look at your life of mine profile on Slide 47, in the next 5 years, like 4 -- 3 or 4 of your mines deplete. So how should we be thinking about this? -------------------------------------------------------------------------------- Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Executive Director [30] -------------------------------------------------------------------------------- Yes. We, obviously, have 2 fairly big decisions to make going forward. The one is Saaiplaas project. We've done now a lot of studies. We actually will take it, the outcomes of that study, to the Board in the near future, and we'll bring you up to speed in terms of where it is. That's obviously a fairly high-grade ore body, high-quality ore body. We obviously have -- the other big decision we have to make is what to do with Mponeng mine with all the pillars that we inherited. So quite a few shaft pillars there that's of very high quality. There's also, obviously, deepening of Mponeng, which probably is a little bit further down the line. But I think the best low-hanging fruits are really on surface sources. There, we inherited quite a few plants that currently we think we can free up to do tailings retreatment. At the moment, they are doing marginal ore dumps or waste dumps as we used to call them in the past. So that will come to an end, and then we can free them up. The one in the Vaal area is Kopanang plant that is available. There's a Mispah plant that we had -- that we bought as part of Moab Khotsong. And if you look at the West Wits area, the (inaudible) plant most probably will -- can become available for retreatment because we will have enough space at Mponeng plant to do all this -- the underground sources, both Kusasalethu and Mponeng. And then also converting the Savuka plant, the old recent deep levels plants, so to tailings retreatment. So we can actually create quite a lot more in tailings retreatment. They are normally very low-cost capital cost and good payback times. It depends on all about your tailings facilities, what you have available. So we're excited about those kind of opportunities that will come our way. And certainly, that will be replacing high margins with obviously some of the costs that we currently have with high cost of operations. -------------------------------------------------------------------------------- Max Manoeli, Harmony Gold Mining Company Limited - Senior IR Officer [31] -------------------------------------------------------------------------------- Thank you. And I think -- yes, sorry, but I think in the interest of time, we'll take maybe one more question from the guys who've dialed in. I see there's more questions that have come through via the webcast. The Investor Relations team will handle those separately and get back to the guys. So I think we can have maybe one more question from the guys who have dialed in. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- Sure. Not a problem. The next question we have is from Arnold Van Graan from Nedbank. -------------------------------------------------------------------------------- Arnold Van Graan, Nedbank Corporate and Investment Bank, Research Division - Mining Equity Analyst [33] -------------------------------------------------------------------------------- Peter, just a question on your grade profile. So overall grade has increased, but if you look at the existing base, and I'm looking at Slide 14, grades have been declining since 2018. So my question is, is that largely a function of the gold price? Because the promise was always that the grades would increase. And I also pull that back to your previous comments on Tshepong and my question on that, that was read out on the webcast, where we always have the forecast of higher grades, improvements and all that, but we don't seem to get there, which again begs the question, given all the optionality you have, is there not a possibility opportunity to just do what you did at Kusasalethu for Tshepong? In other words, increase the grade, cut down the lower-margin ounces, the lower-grade ounces, take the mine life, for example, from 20 years to 15 years, but then at least you know you've got more certainty on delivering that. So yes, a lot of questions in there, but it's really about your ability to deliver on your targets and ability to deliver the higher grades. -------------------------------------------------------------------------------- Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Executive Director [34] -------------------------------------------------------------------------------- Yes. Thanks, Arnold. Yes, obviously, we go through a very rigorous planning process every year, and we use an assumption of a gold price, of exchange rate, et cetera, to do that. If you want to look at the South African operations in total, it's really about the mix. Some of the high-grade stuff -- first of all, one of the very high-grade pillars we mined was Bambanani. Bambanani's shaft pillars has a very high-grade portion that we started mining. And now as we're mining going forward, we're actually mining into the lower grades. And that then, obviously, had an impact as far as that's concerned. Tshepong, we have -- we actually have a very nice pay shoot, that very well-defined pay shoot that we have to mine in. So what we do is we mine and then we grade more levels and then we can mine into that pay shoot again, and then we mine to the peripherals of the pay shoot. So that also had impact. Joel also had quite a big impact on the grade that we've mined for that [going]. But overall, in terms of what we've planned and what we've mined is on track. As a matter of fact, where we mine at the moment, in terms of our planning parameters, we are mining for face grades that is higher than the plan, just slightly higher than the plan. So I don't think we have an issue. That will obviously be up and down going here and there. We had much higher grades at the time when we mined a few years ago. And as we mine in different parts of the ore body, we go to different grades. But they're all part of the plan. Nothing of that is out of kilter with the plan. Arnold, was there a second part which I missed, which I maybe just need to... -------------------------------------------------------------------------------- Arnold Van Graan, Nedbank Corporate and Investment Bank, Research Division - Mining Equity Analyst [35] -------------------------------------------------------------------------------- Yes. The second part is really just -- is there an opportunity or something to do, let's call it, Kusasalethu, where you just cut down the life of mine and target higher-grade ounces? And I know at the current gold price, it almost seems counterintuitive, but maybe the gold price doesn't go up forever. -------------------------------------------------------------------------------- Peter William Steenkamp, Harmony Gold Mining Company Limited - CEO & Executive Director [36] -------------------------------------------------------------------------------- Yes. Arnold, I think, obviously, when the price change, we will make different plans. But certainly, where we are now, the plan that we have is the best plan that we can possibly put in for, but it also gives us a highest NPV for the operation. So we're there. I think that concludes it now, Marian. So thank you very much for joining us. We really appreciate that, appreciate your time. And obviously, we are available for questions, the team and myself, or I've mentioned quite a lot of people that secured appointments to speak to me and Boipelo. Thank you very much.