Chief executive officer discusses the major issues of FY14 and beyond
THE ACCIDENT AT DOORNKOP
The Doornkop accident, in which nine men lost their lives attempting to flee an underground fire and associated falls of ground, was a great tragedy. We are particularly grateful to the proto teams who worked tirelessly to reach their colleagues. I think we frequently overlook the fact that the proto teams are made up of volunteers who conduct their rescue work in addition to their full-time mining jobs, and so I’d like to thank them for their efforts during that difficult time.
This tragedy had a devastating impact on the company – a loss such as this takes its toll on everyone and we are doing all we can to prevent a similar incident in the future. I would like to again send my condolences to the families of the deceased. Our investigations, impacts and learning processes still continue. In the wake of the incident at Doornkop we suspended all South African operations for a period of 24 hours to refocus the attention of each and every Harmony manager and employee on safety. Our entire management team undertook site visits, inspections and training on the ground. I am pleased to say that we have seen a significant improvement in awareness and attitude since then.
As part of our introspection in the wake of this tragedy, we contracted an independent expert to undertake a thorough audit of our safety and health systems, our training and equipment, and behaviour. The outcomes were generally pleasing, indicating that the correct systems and procedures are in place. However, it also indicated that we need to be more proactive in some areas, and that we must continue being intolerant of non-adherence to safety standards.
SUCCESSES AND CHALLENGES IN FY14
Remaining South Africa’s lowest-cost gold producer, measured in terms of rands per tonne of ore, has been among our main successes. We succeeded in this by right-sizing our work force and by carefully managing input costs, such as electricity, where tariffs are beyond our control. The same goes for our projects in Papua New Guinea where we have right-sized and restructured our Hidden Valley mine to bring the cost of producing each ounce of gold well below the metal’s current price.
On the operational front, our main challenge, and one we hope we have risen to, has been to continue running our mines safely and profitably at a time when dollar gold prices had fallen by around 20%.
Our profitability has been achieved through a series of successes – year on year we increased gold production by 3%, reduced all-in sustaining costs by 4% to R413 433/kg (US$1 242/oz), improved underground recovered grade by 5% and cut capital expenditure by 31% to R2 528 million (US$241 million). The combined effort of this allowed us to remain profitable in difficult market circumstances, which is a key component of our strategy and, as such, our sustainability.
Post year end, we decided not to pursue the shaft decline at Phakisa in order to improve our cash flow. After careful consideration we decided that a portion of the Phakisa project area would be more efficiently mined from Tshepong and this has been included in its business plan. We will reconsider the Phakisa decline in future, but for now the amount of capital required to sink that decline shaft would have resulted in negative cash flows in the short to medium term. Although we manage our capital expenditure in a conservative manner, it is not done at the expense of safety.
Post year end we also placed Target 3 on care-and-maintenance. This operation has a five million ounce orebody but would require R500 million to develop over a period of two years. This decision can be reconsidered at a future date when market conditions improve.
We have made great strides in safety over the last few years but there is always more to do, particularly after a year that’s been as difficult as this one. We regret the increase in fatalities in 2014 and are committed to rectifying this. Apart from the safety audit and investigation at Doornkop, we have made a number of ‘daily’ adjustments to improve safety performance at our mines. These include regular underground visits by executive management, clearly defining leading safety practices at all operations, holding regular safety meetings at all levels, increasing safety messaging and training and doing a baseline risk assessment. Our people are the cornerstone of our business, making their safety central to what we do, is one of our company values and we will continue to work towards zero harm.
THE INVESTMENT CASE FOR HARMONY
Firstly, we are the most efficient South African gold miner, by focusing on ways to improve our safety, production and cash operating costs. In addition, we are a company that’s focused on the future. An investment in us is not just for short-term gain – we aim to provide increasing long-term benefits. We are able to do this primarily by funding our own capital, which puts us in control of our business and enables us to make decisions that have a real impact on our profitability.
Secondly, we produce more than one million ounces of gold and being a leveraged gold company means that should the gold price rise our margins would improve dramatically in percentage terms. Management clearly understands this and we continue to make tough decisions in loss-making operations when the gold price softens. However, Harmony has a huge potential upside when the gold price strengthens, as we believe it will in the medium to long term.
One of our key strengths at Harmony is our understanding of where we operate – on both an economic and a social level. The countries in which we operate and have experience, South Africa and Papua New Guinea, are both emerging economies. They are developing countries and we are able to contribute to local communities in a way that can make a lasting difference. For this reason, we wholeheartedly embrace our social licences to mine and endeavour to go beyond compliance.
The final reason to invest in Harmony is Golpu. It’s a resource that we’re sure will develop into a world-class copper gold mine, and will allow us to sustain our business well into the future.
HARMONY’S PROFITABILITY, PRIMARY COST DRIVERS AND COST-SAVING INITIATIVES
There is no doubt that labour and electricity are the main cost drivers in South Africa, particularly as our operations are relatively deep, aging and labour intensive. Having said that, our conservative financing and close attention to mining profitably and to containing costs have paid off in a year during which gold prices have been falling.
Increasing our production year on year has also had an impact on our cost profile. Our approach has been to treat every cost as a variable cost and therefore see every cost as something that can be controlled. We have spent a great deal of time working with our major suppliers to understand their business models, to determine how we can jointly save costs.
Management also has to look at producing more gold, either by improving the grade or improving productivity, and not only by saving on costs. We focus on labour productivity (including unique ‘keep healthy’ programmes) and on an ore resource management programme that aims to improve our grade as it has done over the last year.
PLANS FOR GOLPU
Golpu is a fantastic deposit – cylindrical and almost vertical with a diameter of 600 metres and, so far, a proven depth of 1 700 metres. Both copper and gold grades confirm that Golpu is one of the best copper gold porphyries in the world. In Golpu we have a gold and copper deposit that is open at depth, that has a life expectancy of at least 40 years and that will take five years to build.
We have accordingly revised our planning around Golpu in Papua New Guinea, which will now be developed as a high-grade, smaller, modular and profitable operation. This will require lower capital expenditure and will enable us to start development of this project, despite current market conditions. In addition, the scalability of the planned operation means that it could be scaled up to a much larger operation should the global market warrant such a step-change.
THE GOLD PRICE AND ITS EFFECTS ON HARMONY IN THE LONG TERM
We have planned using a gold price of R425 000/kg (US$ 1 300/oz). Our business plans for FY15 were designed to ensure that the company is profitable and cash generative at a gold price of R425 000/kg. Investors should certainly keep the rand exchange rate in mind in making any financial decisions as 91% of our gold is produced in South Africa.
We are gold miners; we are optimistic about the gold price. Gold has, for thousands of years, been an investment and a store of wealth, it is a beautiful metal and it is rare. We are gold bulls and therefore believe that the company must continue to be relevant in times of low gold prices so that when the gold price strengthens we will reap the benefits for all our stakeholders.
HARMONY’S APPROACH TO PRODUCTIVITY IN SOUTH AFRICA
There are many ways to address productivity, and one of them is to ensure we have a safe, healthy and motivated workforce. Under health you will read more about the success we are having with our wellness programme in improving the health of our workforce in an effort to address the high levels of absenteeism.
We have, in the last two years, managed to stop the declining trend on productivity (measured in ounces per employee). We are now seeing improvements in this trend. By its nature a productivity programme is long-term and requires dedication and persistence, both of which we will continue to demonstrate.
FUTURE EXPANSION OPPORTUNITIES
We are already engaged in the Golpu project in Papua New Guinea – a world-class orebody – in partnership with Newcrest. As such, our main focus is on converting resources into reserves, and bringing them to fruition. Presently this is taking precedence over greenfields exploration which we have reduced while we concentrate on developing mines.
We also intend identifying acquisition opportunities, most likely in countries in which we are comfortable operating in - starting with South Africa and Papua New Guinea. However, an acquisition of this kind will not be made at the expense of Golpu.
HARMONY’S CONTRIBUTION TO THE TRANSFORMATION OF THE SOUTH AFRICAN AND PAPUA NEW GUINEAN ECONOMIES
Our contribution to host countries is a vitally important issue. Something we aim to do at Harmony is to give back more than we take out, and we see our contribution to socio-economic development as part of this. We invest substantial amounts in the fiscus, our employees, local economic development and corporate social investment.
Our business is not just about making a profit, though this has to be the primary focus. Working with and in the communities and countries in which we operate enables us to perform as we do. It is basically a business transformation imperative. Transformation is therefore about more than the economy; it is also about making our employees’ lives better. In developing nations, like the ones we operate in, having people in stable jobs stabilises the economy.
2014 MINING CHARTER TARGETS
The South African Mining Charter targets come to an end in December 2014, so we have spent time this year reflecting our progress towards these. While it is important to meet the Mining Charter targets we also want to ensure that any contribution we make is meaningful and lasting. For example, we have developed community housing projects that can be integrated into local municipalities.
This type of project requires immense planning to ensure we sufficiently meet the needs of both our employees and the municipality, and so its development is slower and more costly than a straightforward hostel conversion. That said, we’ve seen great success – particularly the award winning Masimong 4 Housing Estate, which recently received the 2014 Govan Mbeki Award for commercial rental units – and we will continue to take this approach as we believe it is the right one. The similar Merriespruit 3 housing project is currently underway and due for completion by December 2014.
Apart from housing, we have achieved the Mining Charter targets. Our historically disadvantaged South African ownership is at 38%, above the recommended 26%. Our employment equity ranges from 45% to 55%, and we are above target for consumer and capital goods procurement.
THE CHANGING LABOUR ENVIRONMENT IN SOUTH AFRICA
Our approach to labour unions and employees is this: our employees are, first and foremost, employees of Harmony and so they have a relationship with and duty to Harmony while we, as employers, have a relationship with and duty to them, our employees. This relationship is our primary focus.
We understand and respect the right of employees to be represented by a union or unions. Any union that represents a significant number of employees is important to us and we seek to engage readily, openly and honestly with them. However, we must also ensure that the rules of the game – the law, recognition agreements, and rules of civil society – are followed.
I also believe that our employees recognise that our industry and business cannot survive further disruptive industrial action.
OUTLOOK FOR FY15
Our strategy will continue to focus on operating safely and profitably and ensuring that all our stakeholders benefit equitably in the value created by Harmony. Obviously much of the longer-term success of the company depends on the gold price but management has to continue to keep costs in check and improve productivity. Tough decisions may still have to be taken should operations not be successful at turning a profit.
In conclusion I would like to express my gratitude for the efforts and contribution of all our colleagues throughout the company. Without them we would not be the efficient company that we strive to be.
Graham Briggs
Chief executive officer
23 October 2014