Jo­hannes van Heer­den

on the rag­ing gold price

Financial Mail - Investors Monthly - - Front Page - Jo­hannes van Heer­den CEO for South­east Asia at Har­mony Gold

Q How does it feel to see the rally in the gold price, and also Har­mony’s own shares? Do you be­lieve it will con­tinue? A We’re feel­ing great — a whole lot bet­ter than in De­cem­ber, to tell you the truth. But we’re just fo­cus­ing on the things we can man­age, mak­ing sure we meet our pro­duc­tion tar­gets in­ter­nally, that we fo­cus on safety and keep on watch­ing our grades.

The risk in this type of higher gold price en­vi­ron­ment is that peo­ple drop their cut-off grade and start push­ing more vol­umes be­cause it’s very tempt­ing.

But we’ll keep our fo­cus on main­tain­ing mar­gin be­cause this is what see as key to mak­ing sure we pay our debts, that we re­ward share­hold­ers and that we can then progress some of th­ese longer-term projects that we have ahead of us.

We’re not try­ing to form a view on the gold price or even the rand ex­change rate. What we’re try­ing to do is fo­cus on the stuff that’s within our con­trol. That’s work­ing on pro­duc­ing safe, prof­itable gold at R450,000 a kilo­gram. Our bonuses are also linked to safety, pro­duc­tion and cost — not to the gold price. Q Have you learnt from pre­vi­ous mis­takes, when the gold price started run­ning? A If you look at our his­tory, in 2001/2002 we had a pro­duc­tion pro­file of three to four mil­lion ounces a year, so I don’t know whether that was a mis­take or not but it was painful when the gold price pulled back. It was fun while it lasted.

What I’m try­ing to say is that you’ve got to make sure that you stand strong against that siren song be­cause it is so volatile and er­ratic that you can get caught when there’s a pull­back. [Then you find that] sud­denly you’ve got a lot of marginal or loss-mak­ing pro­duc­tion and in an op­er­at­ing en­vi­ron­ment where you don’t have the flex­i­bil­ity to turn things on and off in the blink of an eye, that po­ten­tially ex­poses you. That’s the chal­lenge. Q How will the gold price play into wage de­mands? Could this pre­cip­i­tate some con­flict be­tween man­age­ment and staff? A Last year we signed a three-year agree­ment with unions and this will re­main in place un­til June 2018.

Where shafts are prof­itable, they are mak­ing very good bonuses at the mo­ment be­cause they are pro­duc­ing in line with their plans. So we haven’t heard any fur­ther de­mands.

With a higher gold price, it might be that unions ap­proach us to re­open some of the op­er­a­tions we’ve closed.

But we have to be care­ful not to switch things on and off again be­cause that will bulk up our costs if the gold price de­creases again. Q Are you con­sid­er­ing hedg­ing any pro­duc­tion now? A That of­ten comes up for dis­cus­sion but our board has said ab­so­lutely no hedg­ing. Ev­ery so of­ten it does make it to the ta­ble for dis­cus­sion, but noth­ing has been de­cided. Q Har­mony is pin­ning much of its hopes on the mon­ster Golpu cop­per and gold pro­ject in Pa­pua New Guinea. It’s a big deal, con­sid­er­ing that at full stream, Golpu could pro­duce 500,000 ounces of gold. But that’s only in 2027 — so why the big mar­ket­ing blitz now? A Like all th­ese un­der­ground de­vel­op­ments, it takes a lot of time. There is just no way that you can rush sink­ing a shaft. We’re not just hyp­ing the fu­ture: what we’re putting for­ward is a time­line which is ap­pro­pri­ate.

When you talk about the fu­ture and re­place­ment ounces of Har­mony, you would see that we have a sig­nif­i­cant re­serve and what we’re look­ing at is when those re­serves start be­com­ing de­pleted, which is in that 2025 time­frame on­wards.

This is demon­strat­ing to our share­hold­ers that we’ve got a very at­trac­tive pro­ject which re­places those fu­ture re­serve ounces that will drop off 10 years from now and we’ll be able to re­place them with a highly pro­duc­tive, mech­a­nised mine on the low­est pos­si­ble po­si­tion of the cash cost curve. Q Where on the cost curve will this mine be? A If you were to look at the cash cost, this mine will be pro­duc­ing cop­per at US$0.59 a pound. Now, we all know that cash cost isn’t a real re­flec­tion of the cost to run a mine, so once you in­clude sus­tain­ing cap­i­tal, you’ll see that this mine will be pro­duc­ing at $0.89 a pound. That will put us firmly in the low­est

quar­tile for the cop­per uni­verse. The cur­rent, de­pressed cop­per price is $2 a pound, so [for us to pro­duce cop­per] at $0.89, this mine will have in­cred­i­ble mar­gins. And that $0.89 is the av­er­age cost for a 27-year mine life, af­ter cap­i­tal spend.

QHow

much will Har­mony have to spend for its 50% share of the pro­ject? A Cur­rently Har­mony and [Aus­tralian gold miner] Newcrest are par­tic­i­pants in this pro­ject, so it’s 50% of $1.8bn — call it $900m for Har­mony’s ac­count. The Pa­pua New Guinea govern­ment has the right to ex­er­cise a stake up to 30%. It will have to con­trib­ute as an equity par­tic­i­pant go­ing for­ward. At a 35% sce­nario for Har­mony it’s only $500m, so the con­ver­sa­tion with govern­ment is part of our mine de­vel­op­ment con­tract.

QWould

you want govern­ment to take a 30% stake? A We think there’s a ben­e­fit from govern­ment par­tic­i­pat­ing. I think it’s a good thing to have some of your re­gional stake­hold­ers as equity par­tic­i­pants. Per­son­ally I would pre­fer it to be a bit less than 30% — prob­a­bly 15% to 20%.

QHow

much time does Har­mony have to come up with the money to move ahead with Golpu’s de­vel­op­ment? A For the next two years we’ve got a very low ex­pen­di­ture pro­file be­cause the pro­ject will ba­si­cally be study op­ti­mi­sa­tion and a bit of data gath­er­ing while the per­mit­ting process takes place, so we see our­selves spend­ing only $20m a year — which is nei­ther here nor there from a cash flow per­spec­tive. If we [be­gin] our min­ing lease in June 2018, we’ll start our earth­works con­struc­tion and at a 50% ba­sis that will cost us about $115m a year ...

Then in 2021, the ex­pen­di­ture pro­file ramps up, and if we’re still a 50% par­tic­i­pant, we’ll look at ex­ter­nal fund­ing to sup­port that phase of de­vel­op­ment.

QYou

talk pri­mar­ily of cop­per — is gold just go­ing to be a by-prod­uct? Will Har­mony be­come more of a cop­per com­pany? A It’s unashamedly a cop­per mine with gold by-prod­uct: 70% of the rev­enue will be driven by cop­per.

QIsn’t

it all a shot in the dark with such long-term projects to work on a cer­tain cost ba­sis and rate of re­turn — in this case, 16%? A This goes back to the whole point of where you sit on the cost curve. There’s no fore­cast out there which sees cop­per below $1 a pound. We will be mak­ing sig­nif­i­cant free cash flow so this thing will still gen­er­ate cash, pay down debt and, of course, if the cop­per price goes up, we’ll make more money. That’s the se­cret — you’ve got to make sure you can po­si­tion this in the low­est cost quar­tile.

QYou

must feel in good com­pany, now that An­glo Amer­i­can has cho­sen cop­per as one of its three re­main­ing busi­ness pil­lars, de­spite the cur­rent price weak­ness. A Yes. If you look at all the ma­jor com­pa­nies — if you look at Rio Tinto and BHP, and even South 32, ev­ery­one has very pos­i­tive views on the long-term fun­da­men­tals of cop­per. That’s one of the ar­eas where they are still look­ing at projects and ex­plo­ration ex­pen­di­ture and po­ten­tial ex­pan­sion.

It’s not just a Har­mony view that the world will go into a cop­per deficit in a five- to eight-year hori­zon; even Glen­core sup­ports that view.

QWhat

about div­i­dends to share­hold­ers? A That also re­mains a pri­or­ity. It will come up for dis­cus­sion again at the end of our cal­en­dar year, which is June 30.

Har­mony has been do­ing ex­ten­sive work in Pa­pua New Guinea.

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