Financial review

Quarter ended 31 December 2010 compared with quarter ended 30 September 2010

Revenue

Attributable gold production decreased by 1 per cent from 908,000 ounces in the September quarter to 898,000 ounces in the December quarter.  At the South African operations, production decreased by 2 per cent from 497,000 ounces to 485,000 ounces. Attributable gold production at the West African operations decreased by 2 per cent from 172,000 ounces to 169,000 ounces.  Attributable equivalent gold production at the South American operation decreased by 13 per cent from 86,000 ounces to 75,000 ounces.  At the Australian operations, gold production increased by 10 per cent from 153,000 ounces to 169,000 ounces. 

At the South Africa region, gold production in the December quarter at both KDC and Beatrix was 4 per cent lower than the September quarter at 310,600 ounces (9,661 kilograms) and 99,000 ounces (3,080 kilograms) respectively.  This was mainly due to lower volumes mined and processed at KDC and lower underground grades and volumes mined at Beatrix.  At South Deep, production increased by 7 per cent from 70,700 ounces (2,198 kilograms) to 75,500 ounces (2,349 kilograms) due to improved mining volumes.

At the West Africa region, managed gold production at Tarkwa decreased by 5 per cent to 176,600 ounces for the quarter mainly due to decreased heap leach throughput and a lower CIL head grade.  At Damang, gold production increased by 7 per cent from 56,500 ounces to 60,400 ounces, with the newly installed secondary crusher allowing more hard higher grade ore to be processed.

At the South America region, production at Cerro Corona decreased by 11 per cent from 105,800 equivalent ounces in the September quarter to 93,700 equivalent ounces in the December quarter. This decrease was due to planned lower plant throughput, lower gold head grade and a reduction in metal recoveries.

At the Australasia region, Agnew has reverted back to historical levels of production with gold production increasing by 25 per cent to 44,300 ounces, due to an increase in yield and underground volumes.  At St Ives, gold production increased by 6 per cent from 117,900 ounces to 125,100 ounces mainly due to an increase in underground tonnes. 

The average quarterly US dollar gold price achieved increased from US$1,223 per ounce in the September quarter to US$1,366 per ounce in the December quarter.  The average rand/US dollar exchange rate at R6.92 was 6 per cent stronger than the September quarter level of R7.36 and the average Australian dollar strengthened 9 per cent from 90 cents to 98 cents to the US dollar.  The resultant rand gold price increased from R289,329 per kilogram to R303,958 per kilogram.  The stronger Australian dollar mostly offset the stronger US dollar gold price, resulting in the Australian dollar gold price being similar quarter on quarter at A$1,384 per ounce. 

Operating costs

Net operating costs decreased from R5,132 million (US$697 million) in the September quarter to R5,015 million (US$724 million) in the December quarter.  Total cash cost decreased from R164,898 per kilogram (US$697 per ounce) to R161,894 per kilogram (US$728 per ounce). 

At the South Africa region, operating costs decreased by 4 per cent from R3,075 million (US$418 million) to R2,964 million (US$428 million) mainly due to cost reductions through business restructuring of R66 million (US$10 million) as well as lower electricity charges.  Total cash cost at the South African operations decreased by 1 per cent from R195,627 per kilogram (US$827 per ounce) to R194,115 per kilogram (US$872 per ounce).

At the West Africa region, operating costs including gold-in-process movements, decreased by 3 per cent from US$143 million (R1,051  million) in the September quarter to US$139 million (R960 million) in the December quarter despite increases in power costs.  Total cash cost at the West African operations decreased from US$616 per ounce in the September quarter to US$540 per ounce in the December quarter due to the reduced operating cost base combined with a once-off royalty credit adjustment.

At Cerro Corona in South America, operating costs including gold-in-process movements amounted to US$37 million (R252 million), which was US$2 million less than the September quarter.  Total cash cost at Cerro Corona increased from US$354 per ounce in the September quarter to US$449 per ounce in the December quarter as a consequence of the lower production. 

At the Australasia region, operating costs including gold-in-process movements increased from A$109 million (R716 million) to A$124 million (R840 million).  At St Ives, net operating costs increased by A$11 million to A$95 million mainly due to the increase in production.  At Agnew, operating costs were A$3 million higher than the previous quarter at A$28 million due to the increased production and increased mining equipment maintenance costs.  Total cash cost for the region decreased from A$735 per ounce (US$658 per ounce) to A$731 per ounce (US$719 per ounce).

Operating margin

The net effect of the changes in revenue and costs, after taking into account gold-in-process movements, was a 8 per cent increase in operating profit from R3,921 million (US$533 million) in the September quarter to R4,240 million (US$610 million) in the December quarter .  The Group operating margin was 46 per cent compared with 43 per cent in the September quarter.  The margin at the South African operations increased from 31 per cent to 35 per cent.  At the West African operations the margin increased from 52 per cent to 57 per cent.  At Cerro Corona in South America the margin was 72 per cent compared with 71 per cent in the previous quarter, while at the Australian operations the margin was 48 per cent, similar to the 47 per cent achieved in the previous quarter.

Amortisation

Amortisation decreased from R1,443 million (US$196 million) in the September quarter to R1,334 million (US$193 million) in the December quarter.  This was mainly due to an estimate adjustment at Tarkwa during the quarter.  Amortisation at the remaining mines was in line with production.

Other

Net interest paid of R65 million (US$9 million) in the December quarter compares with net interest paid of R70 million (US$10 million) in the September quarter.  In the December quarter interest paid of R140 million (US$20 million) was partly offset by interest received of R56 million (US$8 million) and interest capitalised of R19 million (US$3 million).  This compares with interest paid of R120 million (US$16 million), partly offset by interest received of R35 million (US$4 million) and interest capitalised of R15 million (US$2 million) in the September quarter. The higher interest received in the December quarter was due to higher cash balances in the December quarter.

The share of gain of associates after taxation of R11 million (US$1 million) in the December quarter compares with a loss of R218 million (US$30 million) in the September quarter.  The December quarter includes R7 million (US$1 million) relating to a translation adjustment on Rusoro and R4 million (US$0 million) gains from the Group’s 34.9 per cent interest in Rand Refinery. In the September quarter R236 million (US$32 million) related to a translation loss as a result of Rusoro applying hyper inflation accounting to its investments in Venezuela, and R18 million (US$2 million) related to gains from Rand Refinery.  

The gain on foreign exchange of R1 million (US$0 million) in the December quarter compares with a loss of R11 million (US$2 million) in the September quarter.  These exchange differences relate to the conversion of offshore cash holdings into their functional currencies.

The gain on financial instruments of R10 million (US$1 million) in the December quarter, compares with a loss of R3 million (US$0 million) in the September quarter.  The December quarter relates to a positive valuation of listed warrants.  The loss in the September quarter related to losses on outstanding US$/ZAR and A$/ZAR forward cover contracts.  Refer to Hedging / Derivative of this report for more detail.

Other costs increased from R24 million (US$3 million) in the September quarter to R80 million (US$11 million) in the December quarter.  This increase was mainly due to a write-off of costs incurred on the Abosso Deeps feasibility study at Damang of R22 million (US$3 million).

Exploration

Exploration expenditure increased from R124 million (US$17 million) in the September quarter to R223 million (US$32 million) in the December quarter attributable primarily to:

i)   increased expenditure at Chucapaca of R36 million (US$5 million). Expenditure for the quarter amounted to R48 million (US$7 million);
ii)  increased expenditure at Far South East (FSE) of R21 million (US$3 million). Expenditure for the quarter amounted to R21 million (US$3 million); and
iii)  increased expenditure at Yanfolila of R14 million (US$2 million).  Expenditure for the quarter amounted to R28 million (US$4 million).

The balance of the increase was due to increased exploration activity across all projects.  Refer to the exploration and corporate development section of this report for more detail of exploration activities.

Feasibility and evaluation costs

Feasibility and evaluation costs of R66 million (US$9 million) were incurred in the December quarter compared to Rnil (US$nil) in the September quarter.  R43 million (US$6 million) was incurred at the Chucapaca project in Peru and R23 million (US$3 million) was incurred at the Far South East (FSE) project in the Philippines.

No feasibility and evaluation costs were incurred at these two projects in the September quarter due to work programmes only beginning in the December quarter.

Non-recurring items

The non-recurring items in the December quarter of R2,329 million (US$327 million) were mainly as a result of a series of empowerment transactions which included share-based payments for the Employee Share Option plan of R1.2 billion (US$172 million), share-based payments for the South Deep transaction of R825 million (US$116 million), share-based payments for the GFIMSA transaction of R73 million (US$10 million), voluntary separation packages of R95 million (US$13 million) and business process re-engineering and restructuring costs of R84 million (US$12 million) at all our operations.  Refer to empowerment transactions for more detail.

The non-recurring items in the September quarter of R138 million (US$19 million) were mainly as a result of voluntary separation packages of R118 million (US$16 million) and costs incurred of R24 million (US$3 million) on business process re-engineering and restructuring at the South African, Ghanaian and Australian operations partly offset by profit on the sale of assets and investments of R4 million (US$0 million). 

Royalties

Government royalties decreased from R218 million (US$30 million) in the September quarter to R92 million (US$14 million) in the December quarter.  The decrease was due to the once-off royalty credit adjustment at the Ghanaian operations.

Taxation

Taxation for the quarter amounted to R561 million (US$81 million) compared with R632 million (US$86 million) in the September quarter. 

Normal taxation increased from R459 million (US$62 million) to R680 million (US$97 million) in line with the increase in taxable profit.  Deferred taxation moved from a charge of R172 million (US$23 million) in the September quarter to a credit of R119 million (US$16 million) in the December quarter.  This movement was due to a R377 million (US$53 million) credit as result of a decrease in the deferred taxation rate at the South African operations. 

In South Africa the mining operations are taxed on a variable rate that increases as profitability increases.  The tax rate used to calculate deferred tax is based on the Group’s current estimate of future profitability when temporary differences will reverse. 

Earnings

Net loss attributable to ordinary shareholders amounted to R777 million (US$106 million) or 110 SA cents per share (US$0.15 per share), compared with a net profit of R701 million (US$95 million) or 99 SA cents per share (US$0.13 per share) in the September quarter.

Headline losses i.e. losses excluding the after tax effect of asset sales, impairments and the sale of investments, amounted to R776 million (US$106 million) or 110 SA cents per share (US$0.15 per share), compared with headline earnings of R699 million (US$95 million) or 99 SA cents per share (US$0.13 per share) in the September quarter.

Cash flow

Cash inflow from operating activities for the quarter amounted to R3,889 million (US$557 million), compared with R2,251 million (US$308 million) in the September quarter.  This quarter on quarter increase of R1.6 billion (US$249 million) was mainly due to higher operating profit, positive movements in working capital and lower royalties and taxation paid. The release of working capital of R802 million (US$109 million) in the December quarter compares with an investment into working capital of R753 million (US$102 million) in the September quarter. 

Dividends of R149 million (US$20 million) were paid to non-controlling interest holders at Tarkwa and Damang in the December quarter, compared with dividends paid to ordinary shareholders of R494 million (US$67 million) in the September quarter.

Capital expenditure increased from R2,225 million (US$302 million)  in the September quarter to R2,414 million (US$347 million) in the December quarter.

At the South Africa region, capital expenditure decreased from R1,317 million (US$179 million) in the September quarter to R1,257 million (US$182 million) in the December quarter mainly due to lower capital expenditure at KDC.  Capital expenditure at South Deep amounted to R511 million (US$74 million) in the December quarter compared with R492 million (US$67 million) in the September quarter, with the majority of the expenditure on development and the ventilation shaft deepening and infrastructure.  Expenditure on ore reserve development (ORD) was R8 million less at R485 million.  KDC’s ORD decreased from R396 million to R387 million and Beatrix’s ORD increased from R97 million to R98 million quarter on quarter.

At the West Africa region, capital expenditure increased from US$74 million to US$99 million due to expenditure on mining fleet and equipment at Damang as we transition to owner mining.  In South America, at Cerro Corona, capital expenditure increased from US$11 million to US$20 million due to timing of project expenditure.

At the Australia region, capital expenditure increased from A$42 million to A$44 million for the quarter.  At Agnew, capital expenditure increased from A$11 million to A$16 million mainly   due to a new ventilation system and new fans at the Waroonga underground mine.  St Ives decreased from A$31 million to A$28 million.  The majority of capital was spent on exploration and mine development.

Purchase of investments of R43 million (US$6 million) mainly relates to 1.6 million shares acquired in Atacama Pacific Gold Corporation of R31 million (US$4 million) and a R12 million (US$2 million) loan made to one of the Group’s mining contractors at St Ives secured against their mining equipment. 

Net cash inflow from financing activities in the December quarter amounted to R358 million (US$55 million).  Loans received in the December quarter amounted to R6.8 billion (US$986 million) as a result of the bond issue on 7 October 2010.   Loans repaid amounted to R6.5 billion (US$941 million), consisting primarily of an offshore facility of R3.4 billion (US$500 million), R2.6 billion (US$370 million) of the South African commercial paper programme, R290 million (US$42 million) of working capital loans and a partial repayment of the non-recourse term loan at Cerro Corona of R68 million (US$10 million).

Notional cash expenditure (NCE)

Notional cash expenditure is defined as operating costs (including general and administration) plus capital expenditure, which includes brownfields exploration, and is reported on a per kilogram and per ounce basis – refer to the detailed table of this report. 

NCE per ounce influences how much free cash flow is available in order to pay taxation, interest, greenfields exploration and dividends.

NCE margin is defined as the difference between revenue per ounce and NCE per ounce expressed as a percentage.

The NCE for the Group for the December quarter amounted to R243,506 per kilogram (US$1,094 per ounce) compared with R238,348 per kilogram (US$1,007 per ounce) in the September quarter.  The NCE margin for the Group improved from 18 per cent to 20 per cent.

In the South Africa region, NCE decreased from R284,118 per kilogram (US$1,201 per ounce) to R279,715 per kilogram (US$1,257 per ounce).  The NCE margin of 7 per cent in the December quarter compares with 1 per cent in the September quarter.  The higher margin was due to the decrease in operating cost and capital expenditure and a higher rand gold price received.  The overall NCE margin is impacted by the ongoing funding of the South Deep growth project.  The NCE excluding South Deep decreased from R256,433 per kilogram (US$1,084 per ounce) in the September quarter to R252,202 per kilogram (US$1,134 per ounce) in the December quarter.  The NCE margin excluding South Deep of 16 per cent in the December quarter compares with 11 per cent in the September quarter.

In the West Africa region, NCE increased from US$883 per ounce to US$1,009 per ounce and the NCE margin decreased from 28 per cent to 26 per cent due to the lower production and increased capital expenditure at Damang linked to the move to owner mining.

In the South America region, NCE increased from US$456 per ounce in the September quarter to US$650 per ounce in the December quarter due to the decreased production and increased capital expenditure.  The NCE margin decreased from 64 per cent to 54 per cent. 

In the Australia region, NCE reduced from A$1,062 per ounce (US$951 per ounce) in the September quarter to A$986 per ounce (US$970 per ounce) in the December quarter due to the increased production resulting in an improved NCE margin of 29 per cent compared with 22 per cent.

Balance sheet (Investments and net debt)

Investments increased from R885 million (US$126 million) at 30 September 2010 to R1,079 million (US$160 million) at 31 December 2010.  This was mainly due to a positive marked to market valuation of the listed investments.