The decrease in cash operating profits from R188.8 million to R46.7 million can mainly be attributed to the lower recovery grade of 4.04 g/t achieved during the last 12 months. This is 14% or 0.65 g/t lower than the recovery grade reported for the previous financial year. These lower recovery grades impacted on both US$/oz and R/kg costs.
The planned closure of three of the original Harmony shafts is expected to be completed during the current financial year. However, growth in production from the Masimong operations – which have been the focus area an active development programme over the past two years – is expected to negate the impact of these closures over the long term. The Masimong operations should build up to an estimated 83 000 tonnes per month at a recovery grade of 5.2 g/t for the 2001/02 financial year, increasing to 95 000 tonnes at a similar grade for the following year.
The Freestate operations are being structured for optimal profitability and we believe that it will remain an important contributor to the cash operating profit of the company. Production is planned at 358 000 tonnes per month at a recovery grade building back to 4.4 g/t for the next reporting period.
Evander delivered growth in production as No. 2, No. 3 and No. 5 Shafts were re-opened for mining. Grades in the No. 8 Shaft decline area were generally higher than expected for the greater part of the financial year, and it is anticipated that these will return to slightly lower levels.
For the following financial year, the Evander operations are expected to produce approximately 183 000 tonnes per month at an expected recovery grade of 6.0 g/t.
Despite being loss-making at the time of acquisition some 12 quarters ago, the Evander operations now operate at a cash operating profit margin of 26%. When measured in US$/oz terms for the 2000/01 financial year, cash costs for these operations were at US$199/oz. During the June 2001 quarter, cash costs of US$194/oz were achieved.
The graph clearly shows that, even after capital expenditure on development of the declines and maintenance of the infrastructure, the acquisition of Evander has delivered real value to our shareholders. Measured on a cash operating profit basis, the company has recouped the full net investment of R415 million within ten quarters. In other words, payback of our investment was achieved within two and a half years. Inclusive of all capital expenditure, the full investment was recouped within a period of 12 quarters and we now own a world class operation.
The operations were adversely affected by the restructuring that followed the closure of No. 4 Shaft and the scheduled closure of the Lindum surface operations.
The impact of these closures will result in tonnage from underground and surface areas being lower. However, unit costs should reflect the benefit of closing the loss-making units.
Randfontein is an excellent example of an acquisition with turnaround potential that has been "Harmonised", resulting in increased operating margins. The above graph indicates that the company recouped more than half of the R750 million net investment it made with the acquisition of the Randfontein assets in January 2000.
The appeal of Elandskraal is that it has an orebody with 10 million ounces of high grade reserves, as well as significant turnaround potential. This acquisition has enhanced the overall quality of Harmony’s reserve base.
As part of implementing the "Harmony Way", the operations were staffed for productivity. This unfortunately necessitated the restructuring of the labour force, a process that has been completed and the benefits of which are evident in the operational results achieved.
Our focus on addressing unnecessary overhead expenditure and realising synergies with Randfontein, has already impacted on the profitability of these operations. Although a loss-making operation before the acquisition, Elandskraal has returned cash operating profit of R69.1 million since acquisition on 1 April 2001.
Our company is committed to the completion of the Shaft Deepening Project, the southerly extension to the Elandsrand mine. The project will extend the life of the mine to 2017 with an expected gold recovery of 7 234 000 ounces. The remaining capital expenditure of R550 million is scheduled over six years. The company plans to cover the high capital expenditure phase over the next three years with cash operating profit generated from the operations.
Elandskraal is expected to mill 220 000 tonnes per month from underground at a recovery of 6.7 g/t. Gold from surface sources should contribute approximately 51 kilograms per month.
Elandskraal will contribute significantly to our cash operating profit over the next 15 years and, as such, help us to deliver future value to our shareholders.
The recovery grade from the pit has, however, increased as the higher grade sulphide reserves have become available for mining.
These changeovers, although affecting the financial results during the reporting period, will improve the profitability of Kalgold during the forthcoming financial year.
The Kalgold operations are expected to mill 87 000 tonnes per month at a higher recovery grade of 2.2 g/t.
New Hampton, Australia
The company’s offer to minority shareholders was closed on 12 July 2001 at which point 96.2% of ordinary shareholders and over 95% of option holders had accepted our bid. In terms of the rules of the Australian Stock Exchange, Harmony is now proceeding with the compulsory acquisition of the remaining ordinary shares and options.
New Hampton has five different operational units: mills at Big Bell (capacity of 220 000 t/m) and Jubilee (capacity of 90 000 t/m), open pit mining at both the operations and underground mining at Big Bell. Applying our strategy of mining profitable reserves only, it is anticipated that production will be cut by 60 000 ounces to 220 000 ounces per annum. This level of production will be revisited once the sustainability of the underground operations at Big Bell has been determined.
Both Big Bell and Jubilee have finalised new plans which allow mining from current reserves up to the 2002/03 financial year. The overall focus is on generating replacement ore reserves through an aggressive drilling programme to convert current resources to reserves and on acquiring ore reserves and resources in the surrounding regions. Production from New Hampton is planned at 310 000 tonnes per month at a recovery grade of 1.9 g/t.
In line with our strategy of being unhedged by choice, the company has to date reduced New Hampton’s unnecessarily aggressive hedge book inherited at acquisition by 400 000 ounces to 576 000 ounces with an average strike price of A$514/oz (approximately US$257/oz). We will continue to manage these positions and restructure the book when opportunities arise.
In keeping with our approach of keeping overheads to an absolute minimum, the Melbourne office has been closed, with all functions being performed by the Perth office.
Over the next 12 months our operational focus at New Hampton will be on re-establishing development and mining on the lower levels of the Big Bell underground mine, which was severely affected by a seismic event in late 2000, as well as fully developing the Trojan open pit at Jubilee. Our corporate focus will be on acquiring more reserves for this operation.
Goldfields Limited of Australia
At 30 June 2001, the shareholding had a market value of R319.9 million and has been reclassified as a non-core holding.
Gold exploration activities
Progress with our exploration activities in Peru continues, albeit on a low cost basis. Peru has been identified as one of the next exciting exploration regions internationally that has the potential of delivering significant discoveries gold deposits.
Platinum exploration activities
Current activities include the drilling of infill boreholes, reviewing of orebody models, resource calculations and preliminary scoping studies on project economics.
As at 30 June 2001 the following in situ inferred mineral resource is estimated from borehole intersections:
Included in this resource are 1.3 million ounces at 2.25 g/t.
To further improve our confidence in the project, the company intends spending an additional R5 million by December 2001 on pre-feasibility test work involving drilling to confirm the geometry of the three priority reef zones and to obtain representative samples for further metallurgical test work. Although an overall recovery of at least 65% is expected, it has been determined that the metallurgical recoveries will be different for the various reef zones.
*Cautionary note to US Investors. The United States Securities and Exchange Commission (the "SEC") permits mining companies, in their filings with the SEC, to disclose only those mineral deposits that a company can economically and legally extract or produce. We use certain terms in this annual report, such as "resources", that the SEC guidelines strictly prohibit us from including in our filings with the SEC.