| Tue 22 Mar 2005, 18:03 | | Strong recovery at Western Areas in 4th quarter |
|
Western Areas - Press release - Strong recovery at Western Areas in 4th quarter
WESTERN AREAS LIMITED
Incorporated in the Republic of South Africa
(Registration number: 1959/003209/06)
(`Western Areas` or `the Company`)
Share code: WAR ISIN No: ZAE000016549
ADR Ticker symbol: WARUY
CUSIP No: 957654304
PRESS RELEASE
STRONG RECOVERY AT WESTERN AREAS IN 4TH QUARTER
Unrealised revaluation gains on Dollar liabilities of R307 million boosted the
financial performance of Western Areas for the quarter ended December 2004,
allowing the company to report a modest year-end profit of R13,5 million.
Unaudited fourth quarter profit for the company was R189,9 million (171,8
cents/share) compared to a loss of R158,4 (148,2 cents/share) for the previous
quarter. As at 30 September 2004, Western Areas reported an accumulated loss of
R176,4 million for the year to date.
Year-on-year profit declined from R460,7 million to R13,5 million and headline
earnings decreased by 332 cents/share to 11 cents/share in 2004.
Full year results were illustrative of the currency and pricing issues that
impacted on the South African gold mining industry, according to CEO, Brett
Kebble. They also reflected the technical and management challenges at South
Deep Mine.
A major milestone had been achieved with the commissioning in November 2004 of
the R4 billion Twin Shafts complex at South Deep Mine, a 50/50 joint venture
with Placer Dome. The 2 993-metre Main Shaft now provided direct access for men
and materials to one of the largest untapped ore bodies in the world.
Kebble also announced today that Western Areas plans to issue convertible
preference shares to capture the revaluation gain of some R800 million in its
derivative structure. This would also ensure that the company could fund the
build-up to full production at South Deep.
Gold production for the year was 6 781 kilograms (218 025 ounces), slightly up
on the forecast of 6 600 kilograms (212 195 ounces). However, production
decreased by 3% from 6 974 kilograms (224 227 ounces) relative to 2003.
Kebble said this result was to be expected following the delays in the
completion of the Main Shaft and the circumstances in early 2004 that lead to
the management changes at South Deep in June.
`We now have a seasoned, hands on management team under CEO John Bredenhann.
They have proven disciplines in deep level mining and we are already starting to
see the benefits coming through,` he said.
1 119 000 tonnes were milled during the year, including 788 500 tonnes from
underground. This compared to 995 000 tonnes in 2003 and a forecast throughput
for 2004 of 1 055 000 tonnes. The yield achieved was 6.06g/t relative to the
forecast of 6.25g/t. The lower yield was primarily due to the increased
treatment of low-grade surface material to utilise the metallurgical plant
capacity more fully. The plant was now achieving consistent production results.
Excluding hedging losses, gold revenue decreased from R619.9 million in 2003 to
R573.6 million in 2004, and including hedging losses, from R582.4 million in
2003 to R381.4 million in 2004.
Cash costs per kilogram produced increased from R69 861/kg to R77 873/kg. The
average Dollar spot gold price achieved increased from $363/oz in 2003 to
$398/oz (excluding hedging) in 2004.
The benefit of the improved gold price was offset by the strengthening of the
Rand, from an average of R7.5735/$ in 2003 to R6.4904/$ in 2004, translating
into R88 300/kg for 2003 and R82 989/kg for 2004.
Countering the higher gold price were the sold call options in the derivative
structure, reducing the average gold price achieved to $298/oz compared to
$315/oz in 2003.
Operating cash flow from mining activities, including hedging gains and losses,
decreased from R43 million net inflow in 2003 to R147 million net outflow in
2004. Cost of sales, comprising total cash costs, retrenchment and
rehabilitation costs, changes in gold inventories and amortisation of mining
assets, increased from R580 million in 2003 to R628 million in 2004.
`The alarming cash cost trend was evident early in 2004 and we took action,`
says Kebble. `New management managed to slow the process in the second half but
we still ended up with an increase of R41 million to R528 million for the year.`
`It is noteworthy that over the previous four years, the South Deep cost
structures increased inordinately as a consequence of employing additional
supervisory personnel from offshore at salary scales well in excess of South
African levels. This increased South Deep on-mine employment levels above the
employment levels at the inception of the Placer Dome Western Areas Joint
Venture in 1999,` says Kebble.
Corrective action in 2004 resulted in retrenchment and rehabilitation costs
increasing by R11 million to R21 million. R9,8 million was incurred in the
fourth quarter.
Abnormal costs included R4 million in the third quarter for the purchase of a 3-
D seismic from Gold Fields that, said Kebble, had proven to be `worth many, many
times its weight in gold`.
Western Areas was now evaluating the potential of the contiguous mineral rights
with a view to incorporating these into an extended mining authorization.
Kebble explained that over the past five years, Western Areas had consolidated
the majority of its mineral rights into holdings contiguous with, or in close
proximity to, South Deep. Certain of these mineral rights had an Inferred
Mineral Resource of 17 million ounces (in situ). Although the mineral rights
were held by Western Areas or associated companies, an interest in the rights
was being transferred to a Black Economic Empowerment (BEE) entity, OrlyFunt.
`This will facilitate increased BEE participation in South Deep and also prevent
the possible sterilisation of the defined resources, which otherwise cannot be
exploited economically,` he said
The possibility of exploiting areas peripheral to South Deep, regardless of farm
fences, would also be a continued focus for the year ahead.
Kebble said the seasoned South Deep management team would also help to establish
the potential of the old South Deep mine, specifically the areas above 87 Level
that were suspended in October 1999.
`A full technical review of the older portion of the mine will reassess the
declared mineral reserves of 3 million ounces and establish whether these areas
can be brought to account sooner to more fully utilise the installed hoisting
capacity subsequent to the commissioning of the South Deep Main Shaft in
November last year.`
Capital expenditure of approximately R215 million would be invested at the South
Deep Twin Shaft complex during 2005, principally on station and lateral access
development on Levels 100, 105 and 110, installation of production and
development equipment and the commissioning of the main surface fans.
South Deep development and expansion
Kebble said Western Areas had an ambitious plan to fund the build-up to full
production at South Deep.
The company intended to restructure its derivatives to more appropriately match
the South Deep production build-up. In a similar vein, Western Areas was
planning to refinance the Dollar liability - incurred as part of the derivative
transaction in 2001 at R11.05/$ - into a convertible preference share.
`This will lock in the unrealised foreign exchange gain of some R800 million
achieved on this Dollar liability over the last three years and ensure a robust
financial position for the company.`
It was anticipated that some R1.2 billion would be raised to ensure that a
funding buffer existed for the ramp-up of production at South Deep. An
additional aim of the funding structure would be to increase the liquidity of
the Western Areas share.
Kebble says that following the commissioning of the South Deep Main Shaft,
hoisting capacity was now under-utilised and that South Deep was reviewing
expansion plans for the mine.
Expansion plans under consideration included an increase in mill capacity from
220 000 tonnes/month to approximately 330 000 tonnes/month and accelerated
development on the 100, 105 and 110 Levels.
`Should the joint venture board approve an expansion plan later in the year, a
ramp-up in production to more than 700 000 oz a year by the end of the decade is
possible,` says Kebble. `Real cash costs would be targeted at below R60 000/kg
by 2009.`
While Western Areas would be required to fund half of the capital expenditure,
the company will be entitled to 50.875% of the resultant gold production, said
Kebble.
South Deep pumping costs
Kebble confirmed that South Deep had told Harmony on Friday, 7 January 2005 that
it would stop pumping water from Harmony`s Randfontein Estates No. 4 Shaft. The
boundary plugs and pillars separating the mines had been thoroughly tested by
independent international experts and found to be satisfactory.
`The possible flooding of the No. 4 Shaft area would have no impact on future
production at South Deep but will result in a saving of up to R54 million a
year, or R3 000/kg produced, ` says Kebble.
Potential Placer Dome claim
Kebble confirmed that Western Areas was conducting a review to establish the
extent to which, following the formation of the joint venture and the management
of South Deep by Placer Dome, the project had suffered from poor planning and
execution of work, overruns of capital expenditure, delays in the commissioning
of the Main Shaft and possible contraventions of the joint venture agreement.
`Should this review indicate grounds for seeking restitution of losses incurred
by the joint venture and a negotiated solution of this matter is not achieved,
we may institute action against Placer Dome to claim for the losses incurred.
Preliminary indications are that losses were material`, he said.
Valuation: $/Reserve Ounce
According to Kebble, the under valuation of the Western Areas share price is
confirmed by the low market capitalisation per reserve ounce of gold held by the
company.
`Market capitalisation per ounce is a relative measure to value gold shares. `
Western Areas` attributable interest in the Proved and Probable Mineral Reserve
categories at South Deep amounted to 27.8 million ounces of gold.
At current levels of mining, the reserve alone was sufficient to support mining
activities for more than 60 years.
As at 31 December 2004, the market capitalisation for Western Areas`
attributable share of the South Deep mineral reserve was $18 per ounce.
Kebble said this was 3 times less than the market capitalisation per reserve
ounce accorded by the market to even the most marginal South African mines and
up to seven times less than the value accorded to comparable international
reserves, he said.
In addition, the company`s attributable resources were estimated at some 37.4
million ounces. Western Areas also had an interest in contiguous gold resources,
estimated at 17 million ounces, which could be accessed from the existing South
Deep mining infrastructure.
`It is our intention to improve our investor relations programme during 2005 to
ensure that investors are fully informed as to the long term value of the
mineral reserves and resources held by Western Areas,` he said.
Statement issued on behalf of Western Areas Limited by Brian Gibson Issue
Management (Contact Brian Gibson on 011 880 1510 or 083 253 5988)
22 March 2005
About Western Areas Limited
Western Areas is focused on investment in the African gold mining industry. The
Company`s principal asset is its 50% interest in the South Deep Joint Venture.
South Deep is a joint venture between Western Areas and Placer Dome SA (Pty)
Ltd, a subsidiary of Placer Dome Inc.
About the PDWA JV
The Placer Dome Western Areas Joint Venture (PDWA JV) was established on 31
March 1999. It is jointly controlled by Western Areas and Placer Dome SA. The
PDWA JV is administered and governed by a PDWA JV board in terms of a joint
venture agreement (JVA).
Western Areas and Placer Dome are each entitled to appoint three directors to
the JV board. The Placer Dome entitlement to appoint the chairman is dependent
on Placer Dome maintaining an interest in excess of 40% in the PDWA JV. The
chairman has the casting vote, except on a wide range of defined issues where
board decisions could have a material impact on the business, in which case the
decision must be unanimous.
About South Deep
South Deep is a joint venture between Western Areas and Placer Dome SA (Pty)
Ltd, a subsidiary of Placer Dome Inc.
Situated in the magisterial districts of Westonaria and Vanderbijlpark, some 45
kilometers south west of Johannesburg, the mine encompasses one of the world`s
largest gold mineral reserves, with an estimated 56.9 million ounces of gold in
the Proved and Probable Mineral Reserve categories. At its deepest, the mine
will be more than 3 300 metres below surface.
The South Deep Twin Shaft complex, built at a cost of some R4 billion, was
officially opened by the Deputy President of South Africa, Mr. Jacob Zuma, on 4
February 2005.
Date: 22/03/2005 05:58:23 PM
Produced by the JSE SENS Department
