South Deep project

Gold production decreased by 26 per cent from 2,471 kilograms (79,400 ounces) in the December quarter to 1,840 kilograms (59,200 ounces) in the March quarter mainly due to a decrease in reef tonnes mined and processed as a result of the Christmas break. The weaker performance in the March quarter was further compounded by the inevitable initial disruptions caused by the implementation of the transformation process, which came at the expense of short-term momentum in production, destress mining and development.

The main aim of the transformation process implemented in the March quarter, which is ongoing, is to establish a modern mechanised mining culture and create an operating environment conducive to optimal equipment availability and utilisation, improved performance of front-line operators and achievement of targets. In addition to changes to senior, middle and line management personnel, a team of mechanised mining specialists from Australia are assisting South Deep to transform itself into a world-class mechanised mine. We are de-congesting the mine by:

Total tonnes milled (included 38,000 tonnes of off-reef development in the March quarter compared with 119,000 tonnes in the December quarter) decreased by 33 per cent from 578,000 tonnes to 389,000 tonnes due to the Christmas break and lower waste mining. Underground reef yield decreased by 3 per cent from 5.38 grams per tonne to 5.24 grams per tonne due to the cleaning of the lower grade longhole stoping backlog tonnages in 95 1W and 87 IW. The combined yield (ore and waste) increased from 4.28 grams per tonne to 4.73 grams per tonne due to less waste dilution. The plant recovery factor increased marginally from 96.3 per cent to 96.4 per cent.

Development decreased by 27 per cent from 2,263 metres in the December quarter to 1,645 metres in the March quarter mainly due to the transitional arrangements with respect to moving from contractor development to owner development. The new mine capital development in phase one, sub 95 level, decreased from 228 metres to 135 metres. Vertical development decreased from 122 metres to 30 metres. Development in the current mine areas above 95 level decreased from 1,912 metres to 1,479 metres. Development areas in 95 2W and 3W level were negatively affected by seismicity during the March quarter. Destress mining decreased by 44 per cent from 14,504 square metres in the December quarter to 8,157 square metres in the March quarter.

Apart from the impact of the Christmas break, the declines in mining, development and destress mining rates were temporary in nature and mainly due to the implementation of the transformation process. Specifically, the decrease in development was related to the transitional arrangements with respect to moving from contractor development to owner development. After the close of the March quarter, the transformation interventions started to show evidence of bedding down. Mining and destress mining rates are expected to return closer to planned levels during the second half of the year.

During the March quarter, the current mine (95-level and above) contributed 80 per cent of the ore tonnes and the new mine (below 95-level) contributed 20 per cent. The long-hole stoping method accounted for 21 per cent of total ore tonnes mined.

Operating costs decreased by 9 per cent from R781 million (US$77 million) in the December quarter to R714 million (US$66 million) in the March quarter. This was mainly due to lower stores consumption, lower contractor costs and other restructuring costs.

Operating profit decreased from R249 million (US$24 million) in the December quarter to R119 million (US$11 million) in the March quarter due to the lower gold production, partially offset by the lower net operating costs.

Capital expenditure decreased from R365 million (US$35 million) to R282 million (US$26 million) in line with increased focus on capital optimisation and scheduling. The majority of the expenditure was on development and infrastructure costs.

All-in sustaining cost increased from R454,581 per kilogram (US$1,399 per ounce) in the December quarter to R469,227 per kilogram (US$1,345 per ounce) in the March quarter due to the lower gold sold. The total all-in cost increased from R466,908 per kilogram (US$1,436 per ounce) to R557,078 per kilogram (US$1,597 per ounce) due to the lower gold sold.

However, we expect that the transformation process will continue to gain traction through the June quarter and should result in greater stability and improved productivity during the second half of the year, which is also characterised by fewer interruptions from public holidays, compared to the first half of the year.

This should provide a strong foundation for improved performance from South Deep and to de-risk the momentum and sustainability of the new build-up plan, as published on 13 February, 2014. The inevitable consequences of the transformation process have resulted in expected production to be around 10 per cent lower than the fullyear guidance of 360,000 ounces. Destress mining is expected to be on guidance at 54,600m², providing an important underpin for the build-up plan. South Deep is expected to achieve its AISC guidance for the full year of US$1,290 per ounce and AIC of US$1,350 per ounce. Capital expenditure is expected to be around R1.34 billion for the full year.