Johannes van Heerden
on the raging gold price
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.
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.
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%.
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.
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.
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.
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.
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.