Chairman’s letter
DEAR SHAREHOLDER
The past financial year has been challenging for the gold industry. The average United States dollar gold price received decreased by 19% to US$1 299/oz. Gold producers’ response to the lower gold price was to reduce costs, delay projects, dispose of non-core assets and close loss-making operations.
Despite the weakening in the United States dollar gold price over the year, the rand price received per kilogram of gold only declined by 5% to R432 165/kg. Harmony adapted to the lower gold price by focusing on cost control measures which included a significant reduction of 31% in capital expenditure for FY14. Operating costs were well maintained below mining inflation and capital expenditure was carefully managed resulting in a 4% (18% in United States dollar terms) reduction in all-in-sustaining costs to R413 433/kg (US$1 242/oz).
SAFETY
Safety remains a central priority for Harmony and we continue to be dedicated to mining safely and improving our lost-time injuries. The number of fatalities at our operations has reduced significantly over the past 10 years.
Tragically, 22 people lost their lives at our operations during FY14, including nine people at Doornkop in February 2014. The board, management and all Harmony employees join me again in extending our condolences to the families, friends and colleagues of those who died. While nothing can replace the loved ones who lost their lives at our operations, we acknowledge our duty to those left behind. The Harmony Education Benefit Fund has been established to support the educational needs of the dependents of all Harmony employees who lost their lives in the workplace. The benefits of the fund include school fees, books, uniforms and stationary for each child up to the age of 21. The beneficiaries of the fund are also eligible to apply for Harmony’s learnership programmes and bursaries.
Our aim is to eliminate all work-related injuries and illnesses. We are guided by our occupational health and safety policy, which we have developed over the years and is based on leading safety practices, at all our operations. Our inclusive and co-operative health and safety management framework involves the active participation of management, unions and the government.
Over and above regulatory compliance, the company has its own safety audits in place, led by the chief executive officer. We continually improve our safety performances, and each operation is monitored monthly, using a formal review system. Safety is a key performance indicator and a key component of performance reward for our people.
FINANCIAL PERFORMANCE
Harmony’s strategy of investing in new projects with higher-grade orebodies and longer-life operations has proven to be very successful. We had a year-on-year improvement of 5% in underground recovered grade and an increase in gold production of 3%. This was the second consecutive year of increases in underground grade. Further improvement in gold production is expected in the coming year.
During FY14, there was a significant increase in gold produced from Kusasalethu, Bambanani, Target 1, Phakisa and Hidden Valley. The increase in production from the above operations was unfortunately offset by decreases in production at Doornkop, Joel and Masimong.
We have decided not to pursue the development of Target 3 and the shaft decline project at Phakisa as these projects would place an unnecessary financial burden on our cash flow in the current gold price environment. The capital for the decline has been excluded from the life-of-mine plan resulting in an impairment of the Phakisa assets in the amount of R1.4 billion (US$133 million). This impairment resulted in a net loss after tax of R1.27 billion (US$118 million) for the financial year, but adjusting for the impairment and other non-recurring items leaves positive headline earnings of R114 million (US$12 million) for the year.
The company had net debt of R1 billion (US$98 million), placing the company in a financially robust and competitive position.
The company’s financial performance is detailed in the financial director's review while its operational performance appears under operations.
PAPUA NEW GUINEA
During the past 12 years we have gained extensive project development and operational experience in Papua New Guinea, building and operating the Hidden Valley mine and exploring for copper-gold porphyries.
We are pleased to report that Hidden Valley had an excellent year compared to the previous year by producing 25% more gold and making a production profit of R344 million (US$33 million) for the year.
Wafi-Golpu ranks among the highest-grade copper-gold porphyries in South-East Asia. We are confident that this orebody has the attributes in terms of size, grade and location that will underpin the development of a major mine in Papua New Guinea. We expect this mine to become a significant contributor to our revenues once built.
Harmony, together with its joint venture partner, Newcrest Mining Limited, is currently in the process of completing a pre-feasibility study of the Golpu project. We have the project development experience and support services in Papua New Guinea to successfully build and operate Golpu.
PARTNERING WITH OUR STAKEHOLDERS
Our contribution to the development and growth of the South African economy includes ensuring that our employees are appropriately remunerated and that their living conditions and standards of living continue to improve. We also contribute to the upliftment of our host communities by inter alia contributing to the provision of social infrastructure, initiating and participating in local economic development and investment projects.
We are converting the shared accommodation of our older single-sex hostels into single or family accommodation and providing housing to those of our employees who choose not to live on mine property. Our objective is to facilitate and assist our employees to acquire ownership of their own homes, in housing of their own choice and where health, education and other social services are available. Our Govan Mbeki award-winning Masimong housing project is one such example and we are in the process of completing a similar project at Merriespruit 3. These two housing projects will together accommodate more than 900 families.
CARING FOR THE ENVIRONMENT
The protection and conservation of the environment is an integral part of Harmony’s culture.
South Africa's National Development Plan supports the development of environmentally sustainable renewable energy initiatives to contribute to the creation of jobs and to this end, Harmony has commissioned its bioenergy project which is designed to reduce our carbon footprint, rehabilitate our land and create approximately 200 jobs for women and youth from our host communities.
The bioenergy project involves the construction of a bioenergy plant and the planting of energy crops on mine-impacted land in the Free State to generate natural gas as a substitute for fossil fuels.
OUR VIEW OF THE GOLD MARKET
Gold has been an investment, a store of value and an adornment for many centuries, and its fundamental value persists to this day.
Globally gold mine supply continued to increase as a number of large new mines ramped up their production. The investments in these mines were made before the dramatic fall in the gold price. The lower gold price has slashed the profit margins of the industry, forcing them to close loss-making operations and suspend exploration and the development of new mines. This is expected to result in a plateauing of gold mine supply in the following year, after which gold mine supply will be declining.
The physical demand for gold was exceptionally high in 2011, 2012 and 2013 and despite the demand being lower in 2014, it is still higher than the years before 2011. The main demand for gold jewellery and gold investments (bars and coins) continues to be from China and India.
Gold has regained its importance as a monetary reserve. The official sector (Central banks) have been net buyers of gold for a number of years. European Central banks have halted gold sales and Central banks from emerging market countries have been accumulating gold in an effort to support their currency.
The continued increase in physical demand for gold and the decrease in future gold production, will underpin the gold price in future.
The recent strengthening of the United States dollar has resulted in gold trading lower in United States dollar per ounce terms. The simultaneous weakening of other currencies against the United States dollar has however resulted in the gold price expressed in other currencies – such as the rand – remaining fairly stable.
Harmony is well positioned with our increased production to benefit from a higher gold price.
THANKS
I would like to express my gratitude to all the directors, the management and all the employees of Harmony for their commitment, sacrifices and contributions to the development and growth of the company. Our people are the cornerstone of our business.
I am confident that Harmony will continue to create value for our shareholders and also benefit our diverse range of stakeholders.
Patrice Motsepe
Chairman
23 October 2014