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OPERATIONAL PERFORMANCE 2014

WHY OUR OPERATIONAL PERFORMANCE IS MATERIAL

Gold mining and the production of gold are central to Harmony’s existence. Maintaining and growing our gold production as efficiently as we can is essential to sustaining our business and meeting our strategic objectives.

This includes delivering safely on our operational plans, reducing costs and improving productivity, maximising revenue and growing our margins. This will result in increased profits and cash flow, enabling us to pay salaries and wages to the people we employ, taxes to the national fiscus and dividends to our shareholders, to be an effective and responsible custodian of the environment and to give back to the communities within which we operate.

The revenue we generate and ultimately the profit we make are determined by the price received for the gold we sell, and this is determined principally by the prevailing gold price in US dollars on world markets. Furthermore, the prices received in our operational and functional currencies – the South Africa rand and the Papua New Guinea kina which affect 91% and 9% of our production respectively – are governed by the prevailing exchange rates in terms of the US dollar. (The kina is our functional currency in Papua New Guinea and these values are in turn converted into rands, Harmony’s presentation currency).

Regarding the gold price and these exchange rates, we are price takers since we have no influence on these. However, in most cases the effect of a lower US dollar price is mitigated by a decline in the exchange rate of the rand and/or kina versus the US dollar, which increases the rand price and/or kina price received per ounce of gold. The contra-cyclical behaviour of the US dollar price of gold and the rand-US dollar and kina-US dollar exchange rate often work to our advantage.

Relevant material issues: Achieving our business objectives

PERFORMANCE IN 2014

Safety-related production stoppages at several mines, and at Doornkop in particular following the fire and multiple fatalities, shaft flooding at Kusasalethu, and Joel, and the slower-than-expected turnaround and technical problems encountered at Kusasalethu – all presented significant operational challenges. By year-end, many of these challenges had been addressed and largely overcome and, as a whole, Harmony had begun making progress towards delivering on our operational targets and towards ensuring our sustainability and profitability. Gold production was 3% higher year-on-year at 1.17Moz. Positive contributors to improved production were Bambanani, Phakisa, Target 1 and Hidden Valley. Hidden Valley had a significant turnaround during the year and produced 25% more gold when compared with FY13. Production also increased at Kusasalethu following the slump experienced in the previous year owing to the extended three-month strike at this operation. These increases in production helped to offset declines at other operations.

The maintenance of good employee relations is essential to the sustainability of our company and has an impact on productivity. Given the volatile state of labour relations and violent industrial action in FY13, various initiatives were implemented to restore good relations between management and employees. This momentum was maintained in FY14 and our industrial relations are much improved. With the emergence of new labour union, Association of Mineworkers and Construction Union, in addition to National Union of Mineworkers, UASA and Solidarity, the challenge for us now is to promote coexistence, inclusion and collaboration in a multi-union environment. Our strategy remains to keep open the lines of communication with employees at all levels.

For more detailed information on our performance regarding employees, please refer to the employees section of this report.

FINANCIAL PERFORMANCE

There was much emphasis during the year on cost control and cut backs in the capital expenditure programme. Cost cutting and containment were priorities and as a result all-in sustaining costs declined by 4% to R413 433/kg (US$1 242/oz). This is largely in line with average production costs internationally in the sector. Allied to this cost saving programme was an initiative to improve productivity, discussed below.

Harmony’s planning is done at a gold price of US$1 300/oz (R425 000/kg). The focus is on producing profitable ounces, safely. At year-end, Target 1, Phoenix, Bambanani and Steyn 2 had an all-in sustaining cost of less than US$1 000/oz, while Tshepong, Hidden Valley, Kalgold, Surface dumps, Joel and Unisel were all below the target of US$1 250/oz (on which near-term strategic planning is based).

The average US dollar gold price received in FY14 was US$1 299/oz compared with US$1 603/oz in FY13, a decline of 19%, while the rand gold price received only declined by 5% from R454 725/kg to R432 165/kg.

As part of the initiative to cut costs, our capital expenditure was subject to a detailed review as a result of which expenditure was reduced by R1.1bn in FY14, mostly in Papua New Guinea – Hidden Valley and Golpu – and certain smaller projects in South Africa. Actual capital expenditure for the year was R2.5 billion. Priority was given to those capital projects which would contribute to sustaining our business and making us more efficient. The bulk of the capital expenditure retained was on mine development. A third was sustaining capital, and included maintenance, with the balance being spent on community investment.

MAJOR CHALLENGES

The major challenges faced during the year and their respective mitigation plans were:

  • Safety: Safety is Harmony’s foremost priority. The 22 fatalities, together with the section 54 notices issued by the Department of Mineral Resources to stop operations until declared safe, resulted in 71 days of lost production equivalent; to an estimated 1 230kg (39 600oz). An external review of our safety strategy was completed – the intent of which was to identify how our safety performance could be improved. For more detailed information on our safety performance as well as feedback on this review, please refer to the section on Safety in this report.
  • Infrastructure and equipment failure: This included the resultant flooding of shaft bottoms; water reticulation problems; and failure of major equipment such as winders, compressors and fridge plants. To address this, external and internal reviews of our engineering risks were conducted. In tandem with this, our senior engineering capacity was enhanced and our operational risk management improved.
  • Insufficient mining flexibility: This was largely a result of the failure to meet development targets, in turn a result of equipment failure and inadequate flexibility in mitigating geological risks and grade variability. Priority is being given to the management of high-risk areas regarding geology, grade variability and seismicity.
  • Productivity: Enhancing productivity is a priority and has involved a multipronged approach – improving the grade mined and the amount of gold produced by each employee.
    • Increasing the grades mined entailed shifting the focus of mining to the higher grade reserves (at Masimong, Bambanani, Phakisa, Target 3 and Target 1) and the closure of loss-making mining sections such as that of the Kimberley Reef at Doornkop. The average grade mined increased during the course of FY14. The average underground grade recovered for the year was 4.77g/t compared to 4.54g/t in FY13.
    • Improving productivity of our workforce has involved the restructuring and streamlining of our workforce. To address this problem, an at-work management programme has been initiated which is a joint effort between our health and human resources portfolios. This involved firstly a low key voluntary retrenchment programme aimed at those in 'non-mining' occupations such as services, support and administrative staff. Since many of our older employees have taken advantage of this programme, the average age of our workforce has declined, and as a result is relatively healthier and stronger.

      Secondly, to combat the high levels of absenteeism and sick leave taken, a more proactive approach to health care has been adopted. Healthcare has been decentralised and more easily accessible primary healthcare services are now available to employees on site (health hubs). Since our most serious healthcare concerns are high blood pressure and hypertension, these localised health hubs enable us to better monitor employee health and treatment programmes. This too has contributed to improved health levels and less absenteeism. For more information, please refer to the section on Health.

      The benefits of this were reflected in improved productivity rates at year-end with overall productivity per employee of 91.49g/TEC for FY14 (FY13: 85.72g/TEC) for Harmony’s underground operations.

    • In addition to various other bonuses, annual production incentives such as the chief executive officer’s bonus for category 4 – 8 employees have been implemented to encourage increased production. The chief executive officer’s bonus is tonnes driven and is triggered when 90% and 100% of the operations' planned tonnes are achieved.
All-in sustaining costs [graph]
Recovered grade by operation [graph]
Water use intensity by operation [graph]

* Note that as the Bambanani hostel accommodates employees from other operations as well as its own, its water usage per tonne treated exceeds that of other operations.

greenhouse gas emissions intensity [graph]

OUTLOOK FOR 2015

How we will improve performance and delivery in FY15 – addressing our challenges

Our annual production target for FY15 is 1.2Moz at an all-in sustaining cost of R410 000 – R430 000/kg (~US$1 150 – US$1 300oz1). This supports our medium and long-term aim to position Harmony as a competitive, value-focused gold mining company. Whether we achieve our targets will depend on the performance of our growth operations – Kusasalethu, Phakisa and Doornkop. The planned decline extension to the north of the Joel mine has the potential to yield additional reserves, as does the swop of ground with Sibanye Gold Limited. Improving the performance of our existing resources, increasing productivity, removing bottlenecks and managing constraints, addressing typical issues – including safety, logistics, services, environmental conditions, labour productivity and capacity constraints – will assist our operations in achieving their projected operational targets.

The focus on reducing absenteeism by means of a pro-active health programme (mine-based medical hubs) and improved infrastructure has contributed to a more motivated workforce and thus improved productivity. The benefits of this are expected to continue to be felt in FY15.

1 An exchange rate of R10.50/US$ was used

Improved planning: Our planning is aimed at increased mining flexibility so that development can be optimised by ensuring it is undertaken when and where needed. Short-term bottlenecks and constraints are being addressed.

Our planning process has been redesigned to take into account more realistic production parameters. This will ensure that the achievement of planned targets will become the norm rather than the exception. In addition, various steps have been taken to better understand and more effectively manage our operational risks. Emphasis is being given to the structured and controlled identification and management of operational risks. Planned improvements include the elimination of bottlenecks, better equipping and the optimising of development.

It is vital that unforeseen events be limited and we have therefore applied a far more realistic planning process for FY15, which will ensure stronger margins by allowing regular and frequent strategic reviews during the planning cycle to closely monitor the performance of low-margin and loss-making operations.

Management: With the appointment of a new chief operating officer in South Africa in March 2014, Harmony has continued to be committed to improving its performance across the board. At the same time, there is a greater emphasis on accountability, one of our five key values, so as to make Harmony more profitable.

Our planning process supports our strategy to optimise assets – our orebodies, our infrastructure and our people. This will ensure safer, more profitable production.

In line with this, senior management has been strengthened and restructured to focus on critical areas. Changes have been made to the organisational structure with the South African mining operations now grouped into three regions, each headed by a regional general manager. These three regional general managers have responsibility for operational improvement and optimisation; integration and alignment; business support and problem solving and for improving stakeholder relationships. These regional managers, and the operations they oversee, are as follows:

  • James Mufara, regional general manager responsible for Joel, Unisel, Bambanani and Masimong
  • Beyers Nel, regional general manager responsible for Tshepong, Phakisa and Target 1
  • Phillip Tobias, regional general manager responsible for Kusasalethu, Doornkop and Kalgold

In addition, three senior engineering managers have been appointed to support the group engineer and regional general managers, to guide and mentor inexperienced engineers and to assess and manage engineering and infrastructure risks.

Operational risk management: Gold mining is a value chain that can only be optimised if a risk management plan is in place and all supporting systems are functioning efficiently. This requires that from an infrastructure perspective all logistical constraints must be identified and resolved. Improved planning requires an understanding of where each operation is at and the identifying of those which are performing below par as well as the factors inhibiting their performance.

While management of operational risk is integral to the management of our business, we need to improve and fine tune its execution. Increased attention will be given to the identification of more specific operational risks and the weekly review of mitigating action plans. Greater attention will be given to a bottom-up approach and to mitigation plans that are simple and practical.

Kusasalethu – asking for help: An external diagnostic review of Kusasalethu has been conducted by the same agency which advised on the successful turnaround at Hidden Valley. The Kusasalethu review identified various improvement initiatives to increase throughput more cost efficiently. More needs to be done to identify cost-reduction opportunities.

Important note

For printing purposes only, Harmony’s annual financial statements are presented in a seperate document, the Financial Report 2014. This document is also available in the download manager.