Harmony Gold Mining Company Limited

Good day, everyone, and thank you for joining us. Today, Harmony released the interim results for the six months ended 31 December 2020. I'm joined today by Harmony Management, CEO, Curtis Yankum, Financial Director, Bupele Lukubo, Senior Group Executive, Mariam from the Vault, our CFO for Treasury, and our Executive Director, Mashiko Mashiko, as well as Jared Kutzer, who is the new head of IRR, and Jenison Glover from the team as well. My name is Max from the Investor Relations Team, and I will now hand over to Harmony's CEO, Peter Schlenker.

Thank you, Max, and good morning, everyone. I think without repeating the highlights published in both the results booklet and the presentation, let's give the media to what Harmony looks like in 2021. The exceptional performances achieved in the first half of 2021 the financial here now, substantiates the growth strategy that we set out to pursue at the beginning of 2016. Through astute acquisitions, we have successfully added quality answers and de-risked 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 significantly. and continue to make decisions that benefit all stakeholders. We have acquired assets and linked their lives and others no longer so fit to do so. All of these actions have resulted in better margins which we have been able to lock in through an 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 the facilities to deploy in both opportune or uncertain times. All of this has been done to ensure that we deliver positive shareholder returns through the sustainable mining practices. We are therefore pleased to declare an interim dividend of 110 South African cents. With that, I will hand over to you for any questions.

Thank you, Phil. Ladies and gentlemen, at this stage, if you would like to ask a question, please press star and then 1 now. If you decide to withdraw the question, please press star and then 2. Again, if you would like to ask a question, please press star and then 1. The first question we have is from Jared Hoover from RMB Morgan Stanley.

Hi, guys. Thanks for the call. Congratulations on a good set of results. A couple of questions for me, please. My first one is around the dividend. It looks like you've reinstated that and you've got a formal dividend policy in place now. So I just wanted to understand the exact definition of it. You talk about 20% of net free cash. So if you could just give me an indication of exactly what goes into that number going forward. And then my second question is around the... the all in sustaining cost guidance for the year. It looks like it's gone up slightly to about 700 to 720,000 grand a kg when there's a little bit of extra production that's coming out from the acquired assets from Anglo Gold. So if you can just talk through the mechanics of that and whether that's purely due to target. And then I've got one more that I'll follow up with after that. Thanks.

Thanks, Jared. I'll take the first one. So net free cash is defined as operating free cash flow after capital, interest, corporate, and other expenses. The dividend is, of course, at the discretion of the board. And, I mean, things that they'll be taking into account in considering a dividend would be future major capital expenditure on net debt to EBITDA not being greater than one. Obviously, your solvency and liquidity requirements in terms of South African Companies Act as well as our current bank cabinets. So it's really, yeah, I hope that answers your question.

Sorry, but you just broke up at the start of that. You're just defining the exact definition for me. It's operating free cash flow after CapEx, interest, corporate costs and other expenses. Is that correct?

And tax, yeah.

And tax. Okay, great. And tell me what's included in the other expenses?

So that would be everything, Jared. So your corporate, our care and maintenance, environmental, all of that, CSI. So the free cash is really taking everything into account.

Okay, got it. So if I was to just use your cash flow statement, I could purely just take the bottom line operating cash flows minus bottom line investing cash flows and multiply by 20% and that should get me to the dividends.

Yeah, so for instance, if you look at our cash flow statement on page 16, so if you take the cash generated from operating activities, that's about 5.8 billion, and you subtract the additions to PPE, that's about 2.4 billion. It will get you to roughly 3.4 billion rand, which was the free cash we generated.

Got it. Thanks for that.

Okay, Jared, I'll take the question on all interstating costs and maybe a little bit more detail that Pelo can also fill in. I mean, what we've done in the all interstating costs is obviously, you know, we have only had Anglo-Gold Ashanti assets into our portfolio in three months for the quarter that we're in. We're also looking at going forward, you know, we will have in the first start of this year We have the builders' break in Anglo. We have the mine out for about three weeks, which is an arrangement that was there with Angloville, the Shanti and Mpuneng mine. So the builders' break obviously will have an impact on this quarter, and then we'll have the final quarter in there. But also in that is obviously the higher royalties that we've now, you know, put into the thing, because obviously when we did the plan previously, the royalties were much lower. And then obviously the second thing is the COVID costs. We do have that. If we strip out the royalties and COVID costs, that is around about R25,000 a kilogram that we can possibly cut out of that. We also still have at this point in time the cost of Anglo up to the end of February. We're busy now with the migration onto our systems. And then we haven't got any of the so-called synergies into play yet because we're busy with that planning as we speak at this point in time with our planning process for the new year. So, I mean, all these outstanding costs, I think, is a conservative view, but it is a view that I think is very much our reality.

Thanks, Peter. Yeah, I guess that was going to be my follow-up, whether you're probably coming at the bottom end of that range, given the guidance is a bit conservative. And then my very last question is just around your surplus assets. I see that obviously the big assets were in Penang and mine waste solutions from Anglo Gold, but it looks like there's a bit of production coming from Copenang. So if you could just talk to the mechanics of that and where you're sourcing material and if it's going through the Copenang plant, just so I can have a better understanding of that piece. Thanks.

Now that's really the old waste dumps that we call in nowadays terms that we use as marginal oil dumps, but it used to be waste dumps in the past. which we're treating, and obviously at Koppenong plant, we're currently treating, we still have enough waste to treat. You know, we don't have a lot of waste, you know, available, and most likely one of the synergies that probably will come forward is that the Koppenong plant will be converted into a re-treatment facility at one point in time. And then obviously we have the similar thing at Weswits. And so, I mean, it's really... But the Mineway Solutions in itself is quite a sizable retreatment operation. There are potentially quite a few plants that can be converted now to retreatment. Again, the feasibilities of those are in the current, as we speak, are being conducted.

Okay, thanks, Peter. Sorry, just one more follow-up to that. So should we be expecting the surface synergies and conversion of plants to come before an impending deepening of Project Zyplus, as an example.

Typically, those are the really low-hanging fruits. If you look at when we did CPR and Funix and those things at the past, I mean, that low capital, good returns, payback within a very short period of time. So that probably will rank in any project capital will rank right up there.

Perfect. Thank you.

Thank you. Ladies and gentlemen, just a reminder, if you would like to ask a question, please press star and then 1 now. The next question we have is from Shillen Modi from UBS. Shillen, you can go ahead, sir. We can hear you now, sir. Okay, it seems that we have a problem with Chilin Modi's line. The next question we have is from Rene Hotreta from NOAA Capital.

Good morning, Peter. Well done on your results for the first half. Looks like you're going to beat most of the consensus forecasts for the year. So nicely well done, even after the COVID problems that you had in the first half of the previous year. Just a question on the reserves. I see you've now got 170 million ounces of resources. What proportion of that do you think will convert to reserves? And then my second question is on PNG. I see that you've got environmental approval and that there's going to be re-engagement with the PNG government. Could you comment on the latest relationship that you have with the PNG government and on any timing that you may have on Wafi Golpo. Thanks.

Thanks, Rene. Yes, first of all, I mean, the resources obviously is, you know, a big chunk of that is PNG, and that is really the Wafi Golpo project, and obviously that's all on the back of that project coming into play. From, you know, obviously the African assets and, you know, the resources we, you know, we will take I'm not precisely sure what our ratio is, but it will be quite a big chunk of that will be part of our mines. I mean, we haven't got resources really in areas that we don't believe we will be mining in the future, except obviously for target north and those kind of things we'd be currently drilling and that we need to bring in play. But I think, you know, obviously more important is the 43.8 million ounces of reserves that we currently have, and that gives us quite a big chunk of which the 43.8 you know, 43% of that is really PNG. And, you know, if we get that, build that project, and that project is going, you know, all of that will actually become into play as far as mining is concerned. Okay, so we had very good, you know, news in December where our environmental plan was actually approved by the SEPA, they call it in PNG, which is a conservation and, you know, protection authority, and And that included DSTP, which is quite a key for us to do, because this project cannot go forward if DSTP is not the preferred tailings facility, handling facility. So that we managed to get, and there was some opposition to that, really, from the governor of the Marawi province, but he's fairly on his own. He's not necessarily talking on behalf of the rest of the people. There's quite a lot of parties in this, and Most of the people support our environmental impact or environmental plan, and it's now been put into as a preferred one. As far as the licensing is concerned, as we speak, Johannes is sitting in Port Morrisby. He had to sit in isolation for a few days in a hotel to be able to go there, and we're trying to speak to the Prime Minister. Everybody's very keen for the project to go, and everybody's keen that we actually get things. But obviously there's still a lot of negotiations that still need to take place, especially on the fiscal side of things. Who's going to get what cut of the cake? So that in itself is – I don't want to be pessimistic or anything, but if we all a year from now get that thing landed, then I will be very glad in terms of – where we are, because there's a lot of different views from different stakeholders, and we still need to align all of them. We believe there's been quite a few discussions between the parties that are sitting on the government side, which is now the landowners, the province, and the national government themselves. But, you know, I'm not very optimistic that they have landed on a way forward yet between themselves. So, you know, there's going to be a tug-of-war between all of these groups. If we can get it within a year from now, I will be happy. Obviously, only after then we will start with the construction, and the first two years of that is fairly low-cost construction.

Yes, and you're not worried about getting into a barrack situation where you get your license taken away? Not that you've even got the license yet.

We don't have the license yet, Rene, but in their case, we obviously would like to have a 30-year-plus kind of license, Because what happened to Barrick is obviously what's going to happen after 30 years to us if we don't have a different way of thinking about it. But I believe there's a lot of things happening now with Barrick where there's some censors starting to prevail there. Because that meant my understanding and the government is using a huge amount of revenue in taxes and also of their share of the cake. So, yes, I mean, we get a license, and then after the period of, say, 30 years, after that, obviously, then, according to P&G rule, it must come back for review by the mine authority to, you know, to get. So, but, you know, when we build the mine, we'll build it for 30 years. I mean, that's, we won't, you know, at the end of the 30 years, it will probably be at the end of its life, you know. Probably can continue, but our capital is spent.

Thank you, sir. The next question we have is from Shannon Modi from UBS.

Hi, morning, everyone. Sorry about earlier. Just a couple of questions from my side. I know someone else asked about this earlier, the dividend. Just in terms of paying 20% of free cash flow out as a dividend, if you had to step up your project capex materially, does that mean your dividend could be at risk? The second question is around your hedging policy. So it seems like there's a subtle change to the hedging policy. Previously, you were looking at hedging, I think it was 20 or 25% of your production on like a going forward basis. And now currently, it looks like you're only going to enter hedges if you can lock in a margin of 25%. Can you clarify if that's a total cash cost margin and all in sustaining costs margin or a free cash flow margin? And what happens if gold price is suddenly change downwards and therefore you wouldn't lock in that 25% margin. What happens to the hedging policy?

Thanks. I'll take that. I think firstly on the dividend, so the free cash flow would be after CapEx. So should project capital increase, then obviously the dividend would decrease proportionately. So I think in that way, this is why we're saying that it's sustainable. It was important that the dividend is sustainable. the discretion of the board takes into account major future capital. So for instance, if there's a major M&A or things like that, then that's where that will come in. So on that one, it would adjust accordingly. In terms of the hedging policy, I think I must be clear, there's no change to the proposed hedging policy. So the 20% exposure of gold over 24 months, the 50% exposure of silver over 24 months, and the 25% exposure of the foreign exchange over 24 months, that's still in place. What we have done effectively, given the volatility in the prices that we saw in 2020, was amend the how and when we enter into the hedges. So we are targeting being more selective before we enter into a hedge. And with that, we will only enter to hedges when a margin of 25% above our cost can be locked in. Previously, that 25% was 12%. In addition to that, which is an important thing, is the inclusion of inflation in the future estimated cost base. So we believe that this how and when will reduce the future opportunity losses in terms of high market prices while we're still protected against the lower prices. So, for instance, if you look at the forward curve now, that's at around 850,000 rand a kilogram. For us to achieve that 25% margin, then the gold price needs to be at around 900,000 rand a kilogram. So, under these conditions, we will not hedge. So, that's what we're saying when we say, you know, being more selective around when we hedge.

Yes. If I may, Gillian, is that... I mean, we always intended for the hedge not to protect our margins, but to lock in higher margins. So this next effect will give us higher margins. And, yes, it will reduce the opportunities to hedge. But, you know, obviously also then we don't, you know, we just take it on the nose at the time, you know. But it will actually lock in a decent margin when we do hedge.

Yeah, so just a comment on that and maybe responding to Boy Pelo is, I would have thought the purpose of hedging is to, for example, protect your balance sheet when you're going through a capital spend or when you have high leverage on, like, you know, high levels of debt on your balance sheet. So, you know, only hedging when prices are much higher than your cost base kind of defeats that purpose because, for example, if tomorrow the gold price, the Rand gold price had to drop to $750, 750,000 Rand a kilo, you wouldn't hedge, but your margins would compress, which actually then puts your balance sheet at risk. And for example, if it dropped to 650, you'd be cash negative. So that's kind of where my question is coming from. And I'm just trying to understand your guys thinking around that. Because, you know, if you're locking in margins, effectively you're saying when prices are high, we'll lock in something, but when prices are low, we won't. So that's kind of what I'm trying to understand.

So I think if we go back, I mean, just to contextualize why we originally hedged, and you're right, it was to lock in those margins to repay our debt. And that was around, you know, cash certainty, which is one of the strategic pillars. And that objective we achieved. So we did, we realized quite significant gains. We did, you know, it added, it supported our balance sheet in terms of growth with the Anglo gold acquisitions and the reinvestment in Hidden Valley. So we're saying then what is the strategic intent going forward, and that's cash flow certainty. I mean, you must remember for us, in a low gold price environment, we suffer considerably more than our peers in terms of the margins that we have. So why we continue hedging is for certainty, you know, should the prices come down. And as I said, our net cash reduces quite proportionately in that. So, and it supports the cash flow when we need it most. And also remember, bear in mind that we only hedge 20% of production. So on the 80%, you benefit considerably from current spot.

But Sharon, maybe just to add a little bit, one more thing is we always said that we would never hedge to, you know, just to not to make, you know, to prevent us from making the tough questions when we have to restructure. If the wealth price for that matter to go down to 650,000 rand a kilogram, we have to restructure as companies. We cannot age ourselves out of it. So that is unfortunately our reality.

Okay, thanks.

Thank you. Ladies and gentlemen, just a reminder, if you would like to ask a question, please press star and then one now. The next question we have is from Tsepo from Value Capital.

Hi, good morning everyone. Thanks for taking my call. I see that the hedge loss on the gold hedge is a derivative instrument. You've put it under revenue. Can you please explain to us the rationale behind that? Because it seems like it's sort of to mask the 1.8 billion rand worth of the loss that you took on your gold hedge.

Okay. Just to answer that, we apply hedge accounting to our rand gold hedges. So all of the realized gains and losses from those contracts will be included in revenue. And that's quietly, it's accepted practice in line with international financial reporting standards. We do not apply hedge accounting to our silver and foreign exchange contracts. So those gains and losses will come, you'll see as a separate line item in our income statement. What you don't see, or you do actually see it, although we do have realized losses of $1.7 billion on the gold hedges included in revenue, you do, under the statement of other comprehensive income, sit with an unrealized gain of $1.5 billion. So you always have to contextualize it in terms of what has been realized and what sits as unrealized.

Yeah, but as things stand at the moment, this hedge book is seriously on the altar.

I beg to differ because the net derivative financial instrument sits at 411 liabilities. You'll recall that we came from levels of $4 billion. If you look at the current hedging table as it stands, which is published in the booklet, the average price... Yeah, from Q3, sorry, yes, from Q3 almost, yes. Yes.

From Q3 almost, it makes sense, yes.

Yeah, so if you look at the rain gold hedge, the average on that book is sitting at 892,000 rand a kilogram, which is higher than current spots. So, and you'll notice the hedges that we've locked in, you know, post Q2 of FY22 is above a million rand a kilogram. So, you know, that just goes back to, we have to contextualize the program and, you know, as it unwinds over time.

Yeah, just a final comment also on this. I mean, there's obviously, although we had a loss in revenue in hedges, we also had the best cash flows the company has seen in many, many years. So, you know, you have to, because remember, the other 80% of that is unhedged. So if the price is, if your hedge price is underwater, it means that the spot price of the rest of the ounces are much, you know, very, very high.

Peter, I think you'll let me maybe follow up with yourself, Peter. On an all-in sustaining basis, it seems like the costs are out of control across the group. What's the way forward in this? Because certainly you can't hydrate yourself out of the problem anymore.

Jared, I think I answered that when I answered Jared's, but I can repeat that answer again. Our all-in sustaining cost at this point in time I think is in line with our guidance, as you said. There are obviously two items there that is not in our forecast when we had the all-in-sustaining cost. The first one is the COVID cost, and the second one is the increase in royalties. But obviously, if we increase the royalties, it means that we're making a lot more money in profits. So that's why we're actually paying extra royalties. Looking at all our costs that we actually spent, I've talked about our total costs in RAND terms, and it's actually not a red line at all. It is right in terms of where we want it as far as our production is concerned, what we said we will do, except for these other things that obviously will change over time because of the things that we have. So our cost will be between $710 and $710. That is our guidance that we give.

Okay, thanks for taking my questions.

Thank you. We have a follow-up question from Rene.

Sorry, Peter. I got dropped as you were starting to talk about Barrick. What was Barrick's problem?

Sorry, Rene. I mean, Barrick obviously came at the end of their license and then had to renew the license. So they were running foreground operations for, I think, 30 years or plus and had to renew the license. And at that point in time, the minerals authority of PNG didn't want to renew it. But yes, I think obviously when we look at Wafi Golpu, we're looking at a 30-year life, and we will mine the mine out in that 30-year life. The capital that we spend will mine the mine out in the 30-year life.

Okay, fine. Thank you. Thank you, Peter.

Thank you. Sir, that was our final question.

Thank you very much. In conclusion, Harmony remains committed to safely operating our mines and expanding our reserves and margins while delivering on our ESG objectives. As we move forward to the next phase of our growth plans, we will continue to service our communities, stakeholders, employees by doing what we know best, mining gold. I thank you, ladies and gentlemen. Thanks for the call. As you feel free to reach out to our IR team or for any follow-up questions.

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