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Harmony announces cost, capex cuts - Graham Briggs

CEO Graham Briggs talks about measures that will be taken to cut costs before financial year-end, adding “we need to be profitable at a level of $1 400/oz.”

Publication: Mineweb

Interviewers: Hilton Tarrant

Hilton Tarrant: Harmony, South Africa’s third-largest gold miner, came out with results for the third quarter as well as the nine months to March 31. Chief executive Graham Briggs joins us now.

Graham, for the nine months to March the average gold price was at about $1 670/oz. Today that number is round about 12 or 13% lower. We have seen some relief in the rand/dollar exchange rate, but you are being forced to cope with the reality of a lower gold price.

Graham Briggs: You know, Hilton, one sees these things and you have to start reacting and, when it comes to cutting costs and the like, you have to do it quickly. We saw the gold price going down to below $1 400 and so we reacted. And we've given some information about what we did in April, so that’s post a quarter, but we are planning to get those measures through before we start the next financial year. So during this quarter we’ll try and get those measures through. We need to be profitable at a level of $1 400/oz.

Hilton Tarrant: What are those measures, Graham?

Graham Briggs: There are several. We think there’s about R400m savings in corporate costs, in services, in looking at supply contracts and the like, contractors and consultants in the various forms that come in. Then we have a savings of about R400m in South African capital. We think that will come out. And then R1bn in PNG, and that is mainly out of the Wafi-Golpu one. A little bit of it is out of Hidden Valley, but mainly around there. And the reason for that really is that there’s been a re-look at the whole area of the Golpu project post the drilling that we've done in the last few quarters. We've got some good results and that looks like now we have a bit of a scalable project, so we are re-looking at optimising that project.

Hilton Tarrant: As far as the supplier contracts go, a couple of analysts – and Peter Major springs to mind – whenever we chat about the gold industry he always points out that it seems that the suppliers, given how those costs creep up year on year, are perhaps the only ones making money out of the gold industry. How aggressive are you going to be on the supply contract side of things?

Graham Briggs: Well, obviously it goes supplier by supplier. I mean, our biggest single one is Eskom. That’s obviously a bit of a process, because there are all sorts of complications around that. One needs to look at everything in that contract and how we can spend less on it. There are different rates at different times of the day and so on and so forth. So we've got a team looking at that.

We've got to look at our big contracts like various big suppliers and see how we can get them to join the party, if you like. It's going to be a bit of a process, Hilton.

Hilton Tarrant: At this stage you are not envisaging any shaft or mine closures?

Graham Briggs: No, not at all. No.

Hilton Tarrant: If we look at the highlights of the third quarter, you completed the Evander sale to Pan African. Production down 15% in the quarter. Take us through that. Obviously seasonality comes into play, given the slow start after the Christmas break.

Graham Briggs: Ja, there is a fair amount of seasonality into it, but if you look at Kusasalethu, it produced basically nothing for the quarter, and that’s about 1 600kg out of the quarter. So that’s a big number. If you look at the effective Kusasalethu over the last two quarters, you are looking at 2 500kg, so that’s 2.5 tons of gold, roughly worth R1.2bn. Now most of the costs were in in the last two quarters, so obviously Kusasalethu and the cost of that labour action and the resultant costs – that's quite a steep bill to pay. I think very rarely do we see a situation where we can actually count the numbers because we are getting it back in production, but we are shoring it up for the long term. So it's not that we made any of the wrong decisions there, it's just an expensive process.

Some of the loss of production came from Phakisa. Phakisa’s got a ventilation shaft which we are busy attempting to repair.

And then the rest of it is basically a bit of seasonality. But generally the quarter wasn’t too bad. It was disappointing, but the rest of the operations a bit of seasonality.

Hilton Tarrant: If we look at the costs in the quarter moving in the wrong direction – but obviously all these one-offs come into play – and the seasonality, on a normalised level are you happy with where costs are?

Graham Briggs: Yeah, if you look at the longer term, and if you look at the longer term without Kusasalethu, so if you look at the last nine months, cost per kilogram basically has gone up 10%. So ja, it's still going up higher than I think everyone believes the official inflation is, but it's not as bad as it looks when you compare quarter on quarter. And you’ve got to remember that when you look at quarter on quarter you are comparing a poorer quarter with a very good quarter from the previous quarter. So there’s a bit of comparison magic in this thing as well.

Hilton Tarrant: Are you seeing noticeable improvements on the productivity side?

Graham Briggs: Ja, we are. You know, the Christmas season is a difficult one. We had part of Easter in this first quarter as well. But one of our payment methods is sharing in the profits. So people have been linking their pay to profits and obviously if we don’t have a good quarter then we have a poor profit share. So I think there are some areas that we are really looking at and gaining some productivity measure.

Hilton Tarrant: Graham, just to close off with, obviously the events of last year have changed the way that mining companies interact with organised labour. How are wage negotiations likely to work in 2013?

Graham Briggs: “With difficulty” I think is the first answer to that. But there are different players in the space. There are more operators now than there have been before because of the various transactions. Pan African is in there, Gold One is in there, Sibanye obviously as well as Gold Fields and AngloGold, Harmony. So there are about seven owners that are in there now.

And then it’s further complicated by another union. That union for us is difficult because most of our operations have a dominance of NUM, and only one of our operations, which is Kusasalethu, has a dominance of AMCU. So it is going to be a difficult measure for us. And assuming that sort of centralised discussions and everything continue we don’t know yet whether AMCU is going to be involved in that, but somehow they are going to have to obviously be involved in the discussions and the wage discussions.

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