Harmony Gold Mining Company Limited (HAR) Earnings Call Transcript & Summary

Welcome to the Deutsche Bank Depository Receipt of Virtual Investor Conference, dbVIC. I'm pleased to announce that our next presentation will be from Harmony Gold from South Africa. Before I hand you over to the speaker, a few points to note. Please submit your questions in the questions box below the slides. Once the Q&A session has ended, don't log out. You'll automatically transferred to the Harmony booth and continue to ask questions via the chat facility and access shareholder materials. On a final note, all today's presentation is recorded and can be accessed by Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Boipelo Lekubo, Finance Director of Harmony Gold, which trades on the JSE under the symbol HAR. And on the NYC as HMY. Welcome, Boipelo, and over to you.

Thank you, and good day to everyone, and welcome to the presentation by Harmony Gold Mining Company Limited. Just firstly, before we kick off, please take note of our safe harbor statement. Harmony's strategic focus remains the production of safe profitable ounces and improving margins through operational excellence and value-accretive acquisitions. Our values and former strategic pillars ensuring resilience against uncertainty, profitability at any gold price and the unlocking and sharing of value. And its people have shown its resilience once again during extremely trying time earlier this year with the hit of the COVID-19 pandemic. As we take you through our operational and financial results, you'll see that we've done well to deliver against these strategic pillars. And this delivery growth and leverage to the gold price puts us in an ideal position to benefit in the months and years ahead. Pleasing that notwithstanding the challenges presented by the COVID pandemic, we've been able to deliver into the S of ESG during this time of crisis, bringing emergency health and support in various forms to our employees and families most in need in our laboring communities, both in South Africa and Papua New Guinea. We were pleased to learn that Harmony outperformed the gold and basic metal sector on the FTSE4Good Index in June. And as you know, the global index aims to measure the ESG performance of company, and our rating is testament to our drive to create a sustainable environment and communities who will benefit from our presence beyond the immediate future. Our stakeholders are critical partners in ensuring a sustainable future and we'll continue to nurture our relationships with them and operate our mines in a responsible manner. Looking at operational excellence, our attributable gold and gold equivalent mineral resources as of June 30, 2020 were 118.6 million ounces. This was a 1.12% increase year-on-year from the 117.3 million ounces declared as of June 30, 2019. And this was really mainly due to the increase at our Tshepong operation, Moab Khotsong and Kusasalethu. The total gold contained in the mineral resources at the South African operations represents 62% of the company's total, with the PNG operations representing 38% of how many total gold and gold equivalent mineral resources as of 30 June, 2020. Attributable gold and gold equivalent mineral reserves amounted to just over 36 million ounces. A small increase from the 36.45 million ounces prepared at 30 June, 2019. This was mainly due to a slightly longer life that we had at Masimong. South Africa's gold reserve ounces represent 48%, while the PNG gold and gold equivalent ounces represent 52% of Harmony's total mineral reserves as of 30 June, 2020. Important, of course, is that return resources into results. Based on our planning for the 2021 financial year, we believe we'll be able to produce between 1.26 million to 1.3 million ounces of gold at an all-in sustaining cost of between ZAR 690,000 a kilogram to ZAR 710,000 a kilogram. Once we've integrated the newly acquired assets and have applied our own planning parameter, we'll share the updated guidance with the market. In short, there is upside to our production profile. Our exploration strategy is aimed -- is to pursue brownfield exploration targets close to existing infrastructure. This will, of course, drive short to medium-term organic ore reserve replacement and growth to support our current strategy of increasing quality answers and to mitigate the risk of a depleting ore reserve base. Key work streams underpinning the 2021 financial year exploration program include brownfield exploration at both our Hidden Valley and Kalgold operations to optimize existing open pit operations and extend mine life as well as brownfield exploration at our underground operations in South Africa. We have a pipeline of projects to either supplement or replace some of our mine ounces. Wafi-Golpu, of course, remains a significant potential game changer for Harmony, we, together with the Wafi-Golpu joint venture partner, Newcrest Mining Limited, look forward to reengaging with the state of Papua New Guinea and progressing discussions on the special mining lease for the Wafi-Golpu project. Both Mponeng and Mine Waste Solutions are good fits for our portfolio. Both contribute quality replacement ounces to our reserve and resources and present potential synergies with our existing service infrastructure, adding to our cash flows. We have a proven track record, both in terms of extending the economic life of mature, deep level underground mines like Mponeng and operating successful lower risk surface retreatment operations like Mine Waste Solutions. Harmony assumed full ownership of Mponeng mine, Mine Waste Solutions and related assets on the 1st of October 2020, and integration of these assets is currently underway. We expect cash flows to be boosted as we unlock value through potential synergies with existing surface and service infrastructure as well as adding quality replacement ounces to the company's reserves and resources. As I've indicated previously, we will provide an update to our current market guidance at the company's these half year results, which is in February 2021. It is also important to note the continuing strength in the Randgold price, which continues to lend gold assets meaningful support in the current environment. Moving over to our balance sheet. Despite the challenges of last year, we've created balance sheet flexibility by creating adequate headroom and reducing our net debt significantly. In June 2020, we raised USD 200 million through a share placement to part fund our acquisition of Mponeng mine and Mine Waste Solutions. This was oversubscribed 4.75x. The cash portion of the acquisition was paid in full, as previously stated, as we became the official owners on the 5th of October 2020. We were able to hedge approximately 120,000 ounces of Mponeng's production at over ZAR 1 million a kilogram knocking in a high gold price. On the back of higher production, supported by a higher gold price, we managed to improve our net debt-to-EBITDA ratio from a normalized 0.8x in June to 0.5x by the end of the September quarter. Net debt was ZAR 3.25 billion or USD 194 million at 30 September, 2020, after paying for the new assets. We've created sufficient headroom and flexibility to support future growth. Our operating free cash flow is highly leveraged to the gold price as updated, in particular, the rand per kilogram price. You'll note that for each ZAR 100,000 per kilogram increase in the rand per kilogram gold price, there's almost a ZAR 2 billion jump in our operating free cash flow. Our operating free cash flow almost tripled quarter-on-quarter to ZAR 1.8 billion at 30 September, 2020,, compared to ZAR 603 million in the previous quarter. And this was by and large due to higher production and a 5.4% increase in the rand per kilogram gold price quarter-on-quarter. Our capital allocation is ultimately aimed at insuring returns. We look -- we prefer rather a lower risk profile, assessing financial safety routes. Our capital is spent at our longer life mines, and we only pursue a project if the IRR is higher than 16%. We prefer lower get balance sheet and target a net debt-to-EBITDA ratio at below 1x. We are currently at 0.5x, as I previously stated, and we'll be able to reduce our debt much quicker as current gold price heals. Ultimately, our aim is to pay dividends, but more importantly, sustainable dividends. I've already mentioned the pipeline of projects that we have. And with newer lower cost operations, we will be able to secure higher net cash margin and thus see an increase in our share price, backed by a stronger gold price, of course. Whilst our share price performed relatively quite well in the last 15 months, we've seen the impact that's successful -- we've seen the impact that a successful COVID-19 vaccine will have on the gold price, and therefore, on our share price. We remain highly geared against the rand per kilogram gold price as illustrated earlier in Slide 11. We are delighted that a possible vaccine is forthcoming. But as you can see on the next slide, we continue to manage what is in our control. Global health and economic risks continue to support higher gold prices. And while there's still much uncertainty in the world, gold remains a classic investment but we are a price taker. And while the bull price is expected to continue, it's run in the short to medium term, this is, of course, out of our control. Like always, we continue to actively manage the aspects of our business within our control. As an experienced emerging market gold miner, who has operated in South Africa for 70 years and in PNG for over 10 years, we remain confident that we'll continue producing safe profitable ounces and unlock value from our newly acquired assets. In addition to having been included in the FTSE/JSE top 40 index in September this year, we have also been acknowledged by our local mainstream newspaper the Sunday Times for creating wealth and value for shareholders. Another acknowledgment for being a top gender empowered company in South Africa is from Zenith Bank, which is a leading commercial bank in our country and on the continent. In conclusion, and this is the only bit of information you take with you today. Harmony is growing. We are growing quality ounces to more than 1.6 million ounces per annum. We continue to benefit from strong gold prices. We have a number of opportunities to further grow our ounces and our margins, and our balance sheet supports our growth aspirations and our focus remains on maintaining a strong balance sheet and enhancing our shareholder returns. Thank you. And with that, I will hand over to you for questions.

Thank you very much, Boipelo. This is Marian van der Walt; also from Harmony Executive for Investor Relations. Boipelo, perhaps just a couple of questions I want to share with you first from the audience. Jeff Russo asked about Harmony's most recent reported quarterly sales of ZAR 14.85 billion, which represented growth of 50 2%. Just wanted to know whether this rate of growth is actually sustainable?

It is sustainable, Marian. If you look -- I mean, bearing in mind that we do come from a lockdown period. So the operations are building up. We had a solid performance if you look quarter-on-quarter. So the performance that we've seen in this quarter should improve going forward.

Thanks, Boipelo. And just had a follow-up question. Do you agree with being categorized as a high cost producer?

I mean it would be incorrect for us to assume that we are not a high cost producer. Labor, electricity accounts for a large chunk of our cost base, and we are aware and are appreciative of it. We do sit quite high on the cost curve, but those are things that we manage and have been able to manage as we've operated for over 70 years, generating meaningful cash flows and return to shareholders.

Thanks, Boipelo. And just to add, very important is that we believe that if we do achieve our production targets, we actually don't have a cost issue. And our assets are viewed as marginal due to the fact that we take over assets from companies who know longer wish to operate lower grade assets. And as Boipelo has mentioned, we have, over the years, managed to generate very meaningful cash flows. Alex wanted to know, Boipelo how we rank on the health and safety compete with other South African miners?

Definitely. I mean operating deep level underground mine does pose some risk. We continue to be vigilant in the management of safety. Regrettably, if we did have 3 employees that died in work related incidents during the September quarter, but we've adopted global best practice and safety standards. And we've developed and implemented a 4-layered risk management-based approach, which will introduce modernized safety system, and there's also an intense focus on leadership development and training to address behavior. I think the most important aspect is the behavioral aspect, which the team has been working on quite diligently.

Thank you, Boipelo. And Alex, just to add to Boipelo again, Harmony actually took the lead during the time that COVID struck South Africa earlier this year, very specifically implementing standard operating procedures to deal with COVID in preventing and mitigating the impact of COVID and ensuring that our employees remain safe and healthy. And yes, quite a number of health programs that have been launched throughout the company over the last couple of years with every single mine having its own medical hub, so people do have access, and this is exclusive to harmony, in fact. So all of our employees have access to medical treatments and the doctor each of these medical hubs also serve as part of the mine operational team. So we believe we are leading the health and safety initiatives in South Africa. Then a question, Boipelo, we get quite often, this is from John Corona, can you share how you hedge against movements in the USD and price of gold? Boipelo?

Apologies. I was on mute, speaking to myself. So in terms of our hedging program, we operate -- we obviously have 20% of our total gold production, which is hedged. It obviously leaves 80% of revenue-linked to the actual gold price. We also have 25% hedged on ForEx, and we had 50% hedged on silver. And this is over a 24-month period. We do, on a quarterly basis, publish our hedge position. So you will have seen a position as at the end of September in our operational update, which we published on the 9th of November. So overall, we've generated net gains over the last 5 years since 2016 of ZAR 2.2 billion. So we've completed hedge, as I mentioned, on our newly acquired mine, Mponeng, in excess of ZAR 1 million per kilogram. So that will increase the average gold rand, gold price or price on our hedge book, which currently sits at ZAR 743,000 to ZAR 846,000 per kilogram. So we believe we run quite a conservative hedge book. It is not a speculative by nature, and it's set us in quite a state over the last 5 years.

Thank you, Boipelo. Ben Copper also wanted to know why we have seen a lower production at our underground operations? And perhaps, Ben, quarter-on-quarter, certainly, we haven't seen lower production at the underground operations unless you referred to a different period. But of course, you are aware that we lockdown restrictions in South Africa restricted us from mining underground for a couple of weeks, we were only able to generate surface sources. So that's certainly impacted on our annual production. But from the results that we've recently published, it was clear that we're now getting back to normalized levels with all of our employees being back at work. Boipelo, I'm not sure whether you would like to add anything?

Perhaps if I can just add a little bit around Hidden Valley because we did see a 19% decrease in production from Hidden Valley quarter-on-quarter. And that was really due to -- we were impacted quite heavily by a planned major shutdown of the processing plant as well as lower mined -- lower grade as the main transitioned between the various stages of the reinstatement. So that's an impact on the production but as you've frankly said, Marian, production has come up following the lifting of the lockdown.

Thank you, Boipelo. And well, we are in PNG, we own 50% of a Tier 1 gold, copper porphyry. But we often get asked what our plans are with Wafi-Golpu and how we are progressing. Would you mind just addressing that question as well?

Yes. I think that Wafi-Golpu -- it's almost 2 tiered. I think the first concern, firstly, though, let me say that it is a Tier 1 asset and is it will be a significant game changer for Harmony. The #1 issue that perhaps people would have is really concerned around the political situation in PNG. We, as Harmony, maintain quite excellent stakeholder relations with the government of PNG. And we've managed or rather, we believe that the political disruption should not have any impact in terms of the project. The granting of the special mining lease has been delayed, but the team is working quite actively in reviewing those engagements. The Prime Minister of PNG has notified Harmony of the government's desire to progress permitting discussion and it's obviously quite a significant project for PNG themselves. And we've obviously indicated our willingness to do so. So it's just a matter of waiting for when we can get back to the table.

Thanks, Boipelo. And you saw in the investment case that we focused on maintaining a strong balance sheet and enhancing shareholder returns. Does the Harmony Board have any intention of paying dividends again?

Yes, of course. The Board -- a dividend discussion happens at each interim reporting period. There's always the intention to pay dividends. However, it is dependent on circumstances such as production performance, cash flow, et cetera. We do come -- we are on the back of an acquisition and a capital raise. So the dividend was not necessarily on the cards at the time. Now given the fact with the high gold price environment and the fact that we're repaying our debt quite quickly, the dividend is definitely on the table in terms of discussions, subject to, obviously, discussions with the Board. But for us, it's more importantly, a sustainable dividend that will be important. So definitely, those discussions are on the table.

Thank you, Boipelo. I'm going to hand over to the audience, perhaps just give it a minute to see whether we have any further questions, please. Boipelo, it doesn't look like any further questions are coming in. So perhaps just on behalf of Harmony, Boipelo and the IR team, I wish to thank all the members of the audience. Thank you so much for taking interest in our story. Do reach out to the Investor Relations team, Max and myself. If you have further questions, we would be happy to share a further Harmony information do visit our website, harmony.co.za, also for further information, and always happy to share the Harmony story. Have a very good day. Thank you, Boipelo and Max.

Thank you.