Harmony Gold Mining Company Limited (NYSE:HMY) Q1 2023 Earnings Call Transcript

Harmony Gold Mining Company Limited (NYSE:HMY) Q1 2023 Earnings Call Transcript February 28, 2024

Harmony Gold Mining Company Limited isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Peter Steenkamp: Good morning or good afternoon, wherever you may be across the world. I am Peter Steenkamp, CEO of Harmony. Thank you for joining us virtually today as we present our Interim Results for the Half Year Ended 31st of December 2023 for the current reporting period. Please take note of our safe statement. Let me begin with a summary to remind you who we are and what our strategy is. Harmony is a specialized gold producer with a growing international copper footprint. We also produce small amounts of silver and uranium. We have over 73 years of gold mining experience in South Africa and have been operating for over two decades in Papua New Guinea. Our strategy is aimed at producing safe, profitable ounces and improving margins through operational excellence and value-adaptive acquisitions.

Our mineral resources and mineral reserves declaration of 138 million ounces and 39 million ounces respectively, presents an incredible opportunity to convert the quality ounces into shared value for our shareholders and stakeholders. Our gold tailings re-treatment business or recycling as you may know it, is the largest globally and is set to grow supporting the circular economy. The Tier 1 Moafie Gold Project in Papua New Guinea and Eva Copper in Australia give Harmony a sizable copper gold footprint, which will be transformational. Currently, our diversified portfolio of operating assets including nine underground mines, two open pit mines, and a significant failings re-treatment business. Production comes from four business areas, namely our South African high-grade underground mines, our South African optimized underground mines, a large and growing surface sources business in South Africa, and a growing international copper gold portfolio, of which Hidden Valley is the only producing mine at this stage.

Mining with purpose ensures that our stakeholders share in the benefits of the minerals we extract. In our presentation today, we will provide further insights in how we are creating long term value, shared value for all of us. Over the past few years, we have set ourselves ambitious goals, and I'm proud to say that we've largely achieved them. Reflecting on the first half of the financial year of 2024, we have delivered significant improvement in safety with our last time injury frequency rate improving to from above seven in 2017. The 9 or 5.19 per million ounce worked in a supporting period. We maintain the belief that the safe mine is a profitable mine. We have reduced our gearing and built a strong balance sheet, which is now in the net cash position of ZAR 74 million or US$ 4 million.

Through organic growth and investment, we continue to convert our mineral resources to quality mineral reserves, focusing on higher grades and margins. This is evident of our comprehensive pipeline of projects in execution. Group all-in sustaining cost improved to ZAR 843 and ZAR 43,000 a kilogram or US$1,403 per ounce. We achieved higher underground recovered grades at 6.29 grams per tonne. Harmony generated a record operating free cash flow of ZAR 7.1 billion or $381 million. This equates to a group operating free cash flow margin of 24%. Our acquisitions have transformed Harmony completely, having added quality ounces and copper to our asset portfolio. We are a new company with a long and exciting future ahead of us. The effective allocation of capital has created is in a position to return capital to our shareholders, rewarding them for investing in Harmony story.

Allow me to unpack the operational performance for this reporting period. The stellar results in this reporting period were a result of our ongoing investment in operational excellence. This has enabled us to deliver consistency throughout the gold cycle. We are, therefore, well-positioned to take advantage of the current high gold price. Let me give six reasons why I strongly believe Harmony will continue to deliver. First, everything we do starts with safety, which I again want to emphasize is non-negotiable. This is supported by a healthy organizational culture. Operational flexibility and predictability in our planning ensures that we consistently deliver on the tonnes alongside higher-grade ounces. Harmony has always controlled what we can with cost being one key factor.

With the rand cost base, we have a stable and predictable cost structure. The strong partnerships that we have built with our stakeholders enable us to maintain a social license and continue operating successfully. Our substantial mineral resource based on other 174 million ounces, presents an abundance of opportunity to grow our mineral reserves through internal investments. Let's look at the numbers supporting these statements. We are seeing a continued improvement in safety performance. It requires a daily commitment, and we are confident that we will ultimately achieve this zero of – the goal of zero loss of life. Our proactive culture of safety and care has resulted in our lost time injury frequency rate trending lower. Group lost time injury frequency rates improved from 5.1 — improved to $5.19 per million ounces worth in the first half of this financial year.

Our operational results demonstrate that the safe mine is a productive mine. An incredible amount of work goes into ensuring that our workplaces are made safe. We have continued safety awareness initiatives to reinforce that safety always comes first. Regretly four of our colleagues have lost their lives in the mine-related incidents since the start of this financial year. Each loss of life is a sharp reminder that more needs to be done. We mourn the passing of these colleagues and we work tirelessly to ensure that each Harmonian [ph] returns home on safely. Improved planning allows for better flexibility and predictability. This combined with the acquisition of higher-quality assets resulted in a multiple improvement in recovered grades. Underground recovered grade in this reporting period increased by 11% to the 6.29 grams a tonne from the 5.6 grams per tonne year-on-year.

This now exceeds the upper end of our full year guidance. This has primarily been driven by the high-grade underground mines in Penang at North Tshepong. Consequently, production increased by 14% to 36 tonnes of gold or 832,000 ounces, and we expect to meet or exceed the upper end of our FY 2024 production guidance. These charts perfectly illustrate our effective capital allocation has transformed Harmony. We continue to see an improvement in our all-in sustaining costs in both rand and US dollar terms. Our rand all-in sustaining costs improved by 5% to 843,000 rand a kilogram. However, we delivered a remarkable 12% improvement in US dollar all-in sustaining costs to just over $1,400 per ounce. This considerable shift down in global all-in sustaining cost growth has been a function of the higher grades, well-managed cost increases and increased the production and prices of [indiscernible] at Hidden Valley Mine and Moab Khotsong operational, respectively.

With over 90% of our input source in South Africa, we have been largely protected from the rampant global information. In addition, our labor electricity cost increases are predictable, allowing us to manage our cost effectively and deliver this guidance. We're a proud South African gold producer and are fortunate to sell our gold in U.S. dollars. As a result, our all-in sustaining cost margins are now over ZAR 350,000 per kilogram or $600 an ounce. Improved safety and higher-grade grades translated into high production. This was further supported by a strong rand per kilogram gold price received. This allowed for higher margins, driving record operating free cash flows. Total operating free cash flows increased by 265% to ZAR 7.1 billion, while operating free cash flow margins expanded to 24% from the 9%.

In U.S. dollars, we generated $381 million in operating free cash flow, up 237% year-on-year. To put this in perspective, we generated more operating free cash flows in rand over the past six months than we have in the previously full year period. The majority of our total free fresh operating flow comes from our South African high-grade operations at Hidden Valley in Papua New Guinea. Our South African high-grade underground mines contributed 51% of the total production, but delivered 45% of operating free cash flows at a margin of 34%. Let me remind you that the South African optimized underground assets continue to serve the company well. This mine produced 40% of the total production and generated 90% of group operating free cash flows at a margin of 11%.

Bearing in mind that we are investing significant capital to expand our South African surface operations. These assets produced 17% of the group production, generating 11% of the operating free cash flow at a margin of 17%. Hidden Valley produced at 12% of the group production but contributed 25% to the total operating free cash flows and had a phenomenal 50% margin. Sustainability and ethical mining are integral to our operating model at Harmony. The sub-multiples stewardship is about managing all aspects of ESG. We support the circular economy through decarbonization, more specifically through energy efficiencies, renewable energy programs and green energy mix. Effective waste management through waste rock and planning street treatment. We also donate waste rock dumps to our communities for aggregate production.

We promote good water stewardships good for the prioritizing the recycling and efficient use of this scarce resource. And we contribute to the resilience and the prosperity of our host committees through benefit sharing. This makes Harmony a partner of choice. Mining with purpose is what we are all about. Through sustainability is embedded in all we are our decisions that we make. At Harmony, we believe in actions over words. As a result, we continue to receive positive external recognition for our efforts in sustainability. We have once again been included in the FTSE4Good Index. On inclusion in the Bloomberg Gender-Equality Index for five consecutive years demonstrate we foster gender diversity and inclusivity. We always treat our employees fairly without bias or prejudices of any kind.

An open pit mine with heavy excavation machinery toiling away against the backdrop of a hidden valley.

We have received a score A from the CDP for best practice in water management strategy in 2023. And our near-term and longer-term carbon reduction targets have been validated by design-based target initiative as we aim for net carbon zero by 2045. Because Life of Mine is finite, we are continually investing in converting our resource to reserves, while striking a balance between capital intensity and shareholder returns. Harmony presents a substantial opportunity to invest in an exciting gold copper story. Our resource base, which includes copper is to big to ignore. We are in a fortunate position that we can deliver on our long-term plans for internal investment, as we convert these resources to reserves. Our production profile has been significantly derisked and future production will come from combination of South African surface and underground gold, Papua New Guinea copper and gold and Australian copper.

Our quality growth pipeline is aimed at creating long-term value, as we take our projects up the value curve. Feasibility studies to determine the possibility of safely extending Mponeng and conducting the pillar extraction of the Tau Tona have been completed. I'm delighted to announce that we have received Board approval and will commence with the life of mine extension project at Mponeng in the West region. I will impact more on Mponeng in the next few slides. We are conducting various exploration drilling activities across all other jurisdictions. The Eva Copper feasibility studies are being updated and negotiations to permit Wafi-Golpu are also continuing. We are making good progress with various projects currently in execution. The Moab Khotsong extension, Mine Waste Solution, TSF Extension and Hidden Valley extension are all progressing well and further details are available in the next year.

Now moving to Mponeng life of mine extension project. Mponeng was acquired in 2020, we began a comprehensive update of the feasibility study to determine if we could extend Mponeng life of mine. After the two-year study, we now have an optimized mine design, which ensures we can extend the life of Mponeng both safely and profitably. The project means all our investment criteria. Mponeng is in incredible mine with an existing world-class infrastructure. There's a mine with access to both — to two excellent ore bodies, namely of carbon leader and the [indiscernible]. Both of these economic horizons have exceptional grades north of nine grams a tonne. This major project will convert over three million ounces into mineral reserves, delivering at an average steady-state production of 260,000 ounces per annum or 8 tonnes per annum of gold.

Once the project is complete, we are forecasting a cash contribution of about ZAR 2.5 billion per annum from this project at a real gold price of ZAR 1.1 million kilogram. Because of this high grade, the projects will have an attractive real all-in sustaining cost of ZAR 768,000 a kilogram or $1,290 per ounce based on current assumptions and estimations. The life of mine will be extended from the 7 to 20 years, ensuring Mponeng remains a top performing asset in our portfolio until at least 2044. Capital expenditure for these projects will be manageable and affordable. This project will be self-funded through internal cash flows. With a substantial mineral resource of 24 million ounces, that's another example of how we continue to extend our reduced production profile by converting mineral resources to mineral reserves.

We are proud that in our hands, Mponeng will reach its true potential and deliver a significant positive social impact. This embodies our Harmony creates long-term value for the shareholders and stakeholders. A derisked modular approach will be taken to access three high-grade blocks. State Health were at the forefront of our design methodology and mining practices. The project will focus on mining the two ore bodies landed the VCR and carbon leader. This will ensure that we maintain a high level of flexibility. The extension is only about 270 meters deeper. This will target early gold by accessing the Harmony go through a ramp system at 120 level and the VCR will be actually through the West and the eastern side. Lastly, we will also remind the VCR portion of the Tau Tona shafts pillars, which provides additional high-grade ounces.

This is truly for illustrative purposes and includes both approved plans and projects still in feasibility. Adding the Mponeng extension, Eva Copper and Wafi Golpu, Harmony going to remain at 1.5 million producer well into the future. Importantly, the Mponeng extension combined with Moab Khotsong extension will deliver over 400,000 ounces high-quality, low-cost ounces per annum for more than two decades. This will ensure strong future cash flows at higher margins. There is a significant potential within our asset base for further value to be unlocked through future mineral resource conversion. Bear in mind that this illustration also excludes any potential future value-accretive acquisitions that form part of our strategy. Capital guidance for FY 2024 remains unchanged.

Capital for early work development from Mponeng was provided for in the FY 2024 capital budget. We estimate a ZAR7.9 billion in project capital over the life of the project in real terms. Capital guidance for FY 2025 onwards will now include the Mponeng extension project. Mponeng generated ZAR1.9 billion in operating free cash flow in the reporting period in this particular six months. At an annual estimated CapEx of ZAR1 billion or approximately US$50 million, this project is therefore affordable and at a low capital intensity. Harmony is sizeable and well-sequenced project pipeline. Our project timing is deliberate and ensures our project capital remains affordable and does not put pressure on our balance sheet. These projects are catalysts for meaningful, sustainable production and expand our margins within driving costs down in the future.

Now allow me to hand over to my colleague and Financial Director, Boipelo Lekubo to run through the financials. Over to you, Boipelo.

Boipelo Lekubo: Thank you, Peter. I'm pleased to present our exceptional financial performance for this reporting period. All US dollar figures and conversions are in their exchange. Group revenue for this financial half year increased by 35% to ZAR31 billion. EBITDA increased by 114% to ZAR17 billion. As a result, headline earnings per share increased by 226% to ZAR 956 per share. With ZAR 9.8 billion in available headroom through cash and undrawn facilities, our balance sheet is well positioned to execute on our project pipeline and acquisition ambitions. Through operational excellence and consistent production, we have healthy margins at current gold prices. At ZAR1.2 million per kilogram or $2,000 an ounce, our all-in cost margin is at 33%.

This is essentially the margin available after all major capital. Our all-in sustaining cost margin is 42% and our cash operating cost margin is 68%. We are therefore well positioned with good buffers to absorb any adverse movements in the gold price. We have an effective hedging program in place with 20% of our production hedged over 24 months. The Rand gold hedge book was maintained at 20% or 558,000 ounces at an average forward hedge cover of over ZAR1.256 million a kilogram. Returning cash to shareholders alongside our growth aspirations remains a key priority. Harmony's dividend policy is to pay a return of 20%, net free cash generated to shareholders, at the discretion of the directors — of the Board of Directors. The strong operational performance and exceptional net free cash generation, resulted in a record interim dividend of ZAR1.47 or US$ 0.80 per share declared, which will result in a record payment to shareholders of over ZAR1 billion.

This has resulted in a 12-month dividend yield of just over 2%. Cumulatively, we've paid ZAR2.7 billion in dividends, since 2016. With ongoing confidence in our plans, controlling what we can, such as safety, production and costs, we aim to fed true to our dividend policy. Thank you, and back to you, Peter.

Peter Steenkamp: Thank you, Boipelo. So in conclusion, Harmony is a company that delivers sustainable, predictable and flexible operational performance with a well-managed, fixed cost structure. Our guidance for FY 2024 remains unchanged. And we are confident that we will reach the upper-end of our production guidance and the lower-end of our cost guidance. Through our embedded sustainability practices and quality ounces, we have a company with a long reserve life. Our geared exposure to the Rand per kilogram gold price continues to provide us with good tailwinds on both the revenue and marginal perspective. We have two significant international copper projects that complement our existing gold assets. We understand our ore bodies.

We have a strong technical and exploration capabilities. And we are the partners of choice wherever we operate. As Boipelo mentioned, our flexible and strong balance sheet supports our growth pipeline. As a gold mining specialist with a growing international copper footprint, we are passionate about what we do and about transforming our goal into long-term value for all stakeholders. This is mining with purpose. Thank you. And I'll now hand over for questions.

See also Top 20 E-Commerce Companies in the World and 16 Longest Lasting Jeans Brands of 2024.

To continue reading the Q&A session, please click here.

Matt Earle

Matthew Earle is the Founder of MiningFeeds. In 2005, Matt founded MiningNerds.com to provide data and information to the mining investment community. This site was merged with Highgrade Review to form MiningFeeds. Matt has a B.Sc. degree with a minor in geology from the University of Toronto.

By Matt Earle

Matthew Earle is the Founder of MiningFeeds. In 2005, Matt founded MiningNerds.com to provide data and information to the mining investment community. This site was merged with Highgrade Review to form MiningFeeds. Matt has a B.Sc. degree with a minor in geology from the University of Toronto.

Comments are closed.

If you would like to receive our free newsletter via email, simply enter your email address below & click subscribe.


 Daily Gainers

 Lincoln Minerals Limited LML.AX +125.00%
 Golden Cross Resources Ltd. GCR.AX +33.33%
 Casa Minerals Inc. CASA.V +30.00%
 Athena Resources Ltd. AHN.AX +22.22%
 Adavale Resources Limited ADD.AX +22.22%
 Azimut Exploration Inc. AZM.V +21.98%
 New Stratus Energy Inc. NSE.V +21.05%
 Dynasty Gold Corp. DYG.V +18.42%
 Azincourt Energy Corp. AAZ.V +18.18%
 Gladiator Resources Limited GLA.AX +17.65%