Financial director's review

PERFORMANCE OVERVIEW FOR 2014

The year under review saw Harmony adapting to a lower gold price. Increased focus was placed on cost control measures which included the significant reduction in capital expenditure for FY14, positive operational results obtained from the improvements and restructuring implemented at the Hidden Valley operation in Papua New Guinea and voluntary retrenchment packages offered in South Africa, amongst other operational and cost efficiencies implemented.

The Harmony group recorded a 3% increase in production for the year. Underground grade improved by 5% in FY14. Our market guidance sees this trend continuing despite the closure of Target 3.

The Harmony group’s revised business plans for FY15 resulted in an impairment of R1.38 billion (US$130.3 million) for the Phakisa operation.

The labour relations climate in Harmony remained relatively stable with a new two year wage agreement signed in September 2013. The effect of labour stability is highlighted by the improved performance of Kusasalethu in FY14, as the operation begins to return to normal production levels following the closure and phased start-up process in FY13.

Harmony continued to reward employees by way of its employee share ownership plan and uplifting employees and communities through its social investment expenditure including the hostel conversion and improvements in FY14.

Harmony maintains a solid balance sheet. Low net debt and strong cash flows generated from operations enables Harmony to fund its own capital.

Key drivers of financial performance in 2014

¹Prior year figures restated for IFRIC20

Production during FY14 was affected as follows:

• Increase in production (+1 954kg) and gold recovery grade (7%) at Kusasalethu. The operation was significantly impacted by strikes in FY13
• The restructuring and operational improvements, including the commissioning of the new crusher, aided the turn-around at Hidden Valley (+648kg)
• Increases in production at Phakisa (+542kg), Target 1 (+526kg) and Bambanani (+970kg) due to improved volumes and gold recovery grade
• The underground fire at Doornkop resulted in the shaft being closed for a month. When mining resumed, it was on the lower grade levels as access to higher grade areas were temporarily blocked. Kilograms produced were 1 028kg less than FY13, with grade being 2% lower at 3.53g/t
• Decreases in production were recorded at Masimong (-898kg), Joel (-893kg) and Target 3 (-213kg)

The average gold price received in rand terms decreased by 5% following the continued decrease in the US$ gold price. This was partially offset by the weakening of the rand against the US$.

All-in sustaining costs reduced by 4% to R413 433/kg (18% to US$1 242/oz). The decrease is attributable to reduced capital expenditure, cost containment and the increase in gold sales.

Extract from the income statement

The revenue for FY14 of R15 682 million (US$1 515 million) is 1% lower than FY13 as a result of the lower rand gold price received, offset by the 4% increase in gold sold.

Production costs were well contained and only increased by 5% to R11 888 million, despite higher-than-inflation increases in electricity (8%) and labour costs (between 6% and 8%). The cost of consumables increased by 7%. Total production costs at Hidden Valley reduced by 6% due to the restructuring and operating improvements implemented.

An impairment of R1.44 billion (US$135 million) was recognised. The impairment at Phakisa, totalling R1.38 billion (US$130 million), was recorded following the decision to exclude the decline project from the life-of-mine plan, of which R1.31 billion (US$123 million) relates to goodwill.

The exploration expenditure of R458 million (US$44 million) for FY14 relates mainly to the various projects in Papua New Guinea, mostly Golpu. The rate of spend has decreased from the prior year as the drilling program reached completion and a site optimisation initiative was implemented.

Other expenses (net) includes R155 million (US$15 million) (2013: R351 million (US$40 million)) for the foreign exchange translation loss on the US$-denominated syndicated loan facility.

The loss from associates includes our estimate of the loss for Rand Refinery’s inventory discrepancy following the implementation of a new enterprise resource planning system.

The taxation credit in FY14 results from the reduction in the average deferred tax rates at the South African operations.

The net loss for the year was mainly due to the impairment of Phakisa and the recognition of the loss at Rand Refinery.

Net Debt

During the period, the syndicated US$ loan facility increased from US$210 million (R2 076 million) to US$270 million (R2 863 million). The total facility is US$300 million.

Cash and cash equivalents reduced to R1 829 million (US$172 million) from R2 089 million (US$209 million).

The decrease in the Nedbank term facility reflects the repayment of the term loan. The facility was refinanced by a new R1.3 billion (US$126 million) revolving credit facility with a three-year term to maturity.

An amended set of debt covenants were also agreed at the same time the term loan was refinanced and are as follows:

• The group’s interest cover ratio shall not be less than five (EBITDA¹/Total interest).
• Current ratio shall not be less than one (current assets/current liabilities).
• Cash flow from operating activities shall be above R100 million for the six months prior to the evaluation date.
• Total net debt shall not exceed R3 billion plus the rand equivalent of US$300 million.
• Tangible Net Worth² to facilities outstanding ratio shall not be less than six times.

1. ¹ EBITDA as defined in the agreement excludes unusual items such as impairment and restructuring cost
2. ² Tangible Net Worth is defined as total equity less intangible assets

Extract from the cash flow statement

Cash generated by operations decreased by 28% to R2 268 million (40% to US$291 million) mainly due to the decrease in revenue and increased production costs.

Capital expenditure reduced by 35% to R2 648 million (41% to US$256 million) in FY14 from R4 096 million (US$464 million) in FY13. Harmony’s focus is on capital expenditure that supports safe production and a sustainable future.

Net borrowings raised: During the year, we raised borrowings of R612 million, representing two drawdowns of US$30 million each from the US$-denominated syndicated loan facility. Borrowings of R467 million (US$44 million) was repaid on the Nedbank term facilities.

For more on this, refer to the consolidated financial statements.

OUTLOOK

Harmony operates from reserves of 49.5Moz of gold and gold equivalents, good growth projects, and a flexible balance sheet with low net debt.

Our business plans were approved based on a gold price of R425 000/kg (US$1 300/oz). We expect to produce 1.2Moz of gold in the next financial year at an all-in sustaining cost of between R410 000/kg and R430 000/kg (US$1 150/oz to US$1 300/oz)³. We believe that our plans will improve operating margins, generate free cash flow through higher grades and cost control to ensure future growth and profitability.

1. ³ Exchange rate of US$/10.50 was used