Sibanye Stillwater Ltd Q2 FY2020 Earnings Call

Good day, ladies and gentlemen, and welcome to the Sibanye-Stillwater Interim Results Presentation. All participants will be in listen-only mode. There will be an opportunity to ask questions later during the conference. Please note that this call is being recorded. I would now like to turn the conference over to Neal Froneman. Please go ahead, Neal.

Good morning to those in America and good afternoon to those in South Africa and Europe. It's indeed a pleasure to welcome you to the presentation of our H1 2020 results, which I have the pleasure of presenting. As always, moving on to the second slide, that's a Safe Harbor statement. And I would urge you to take note of the forward-looking risks related to this presentation. Moving on to the next slide and the foundation of any business is, of course, strategy. And we constantly measure ourselves according to our strategy. And our strategy is simply strengthening our position as a leading international precious metals mining company by doing the following. And it really starts with, and I'm looking at the 12 o'clock position, building a values-based culture, ensuring safe production and operational excellence, deleveraging our balance sheet, addressing our South African discount, and then based on a strengthened equity rating pursuing value-accretive growth. Of course, all of that is pulled together by embedding our environmental, social and governance excellence as the way we do business. And I would like to move on to the next slide and actually just look at how we are progressing related to each one of those strategic goals. I'm not going to go through the slide in detail. But, first of all, looking at building a values-based organisational culture, we made good progress during COVID. We actually used the opportunity to accelerate our program, but still work in progress. As you can see, we think we're about halfway there. Ensuring safe production and operating excellence, I personally think that as a company, we did extremely well considering the COVID disruptions. From an operating point of view and a progress point of view, we've given ourselves a big tick. Embedding ESG excellence in the way we do work - we do business. And again, this is work in progress. We'll probably always be work in progress. We've put in a huge amount of effort, but I think, again, we can give ourselves half a tick. In terms of progress in deleveraging our balance sheet, I think this was one of the highlights of the quarter. We are well below our interim target of one times, and we are close to the type of leverage levels before we embarked on any acquisitions. As a result, we have a net debt-to-EBITDA, adjusted EBITDA of 0.55x. We can give ourselves a big green tick today. Addressing our South African discount, this is probably going to be something that is ongoing. Again, I think we can give ourselves half a tick. We've had very good engagements in South Africa with our regulators. I do believe we’re making progress, and as I say, half a tick there is fine. Pursuing value-accretive growth, when I get to the end of this presentation, I will show you very clearly that we are significantly undervalued and until we see a proper valuation of our stock or our equity rating, we will not pursue value-accretive growth. So there's still a lot of work in progress to be done. Moving on to the next section of the presentation, I want to start with the initiatives that we embarked on during the COVID-19 pandemic, which is obviously still at play. We made very significant contributions to ease the plight of our communities and other stakeholders. We contributed R23 million to the relief funds. We provided financial support to our employees that were not working to the tune of R1.5 billion, a very significant contribution and probably one of the biggest in the industries. Employee donations, interestingly, matched by the company amounted to R2 million, very significant and great to see the participation of our employees. Through a very difficult period, we provided counseling and psychological support, which was extended not just to our employees but to their families as well. We've provided over R14.5 million of support to small businesses. We provided R5.5 million of social relief through food parcels, water tanks, blankets, and mattresses. We contributed R3 million through sanitization and catch-up programs to school and education. One of the bigger contributions, of course, was preparing our business for quarantine and isolation facilities. We established a 2,196 bed facility. We also contributed PPE, oxygen tanks for health facilities, sanitization tracking, and tracing, which amounted to almost R60 million. Hard to quantify the amount spent on education and awareness and, especially with 80,000 employees, that's a very significant part of getting people to behave in the right way regarding COVID-19 as well. In my mind, a very significant step-up to the plate. Moving on to the next slide regarding social issues is really the commitment to renewal and restitution at Marikana. We acquired the Lonmin assets with our eyes wide open, which was referenced to the Marikana tragedy. We saw this as an opportunity to create a new future with all stakeholders. We do not intend to sweep this under the carpet; that is really an opportunity to do what I don't think has been done up until now. First of all, we've created sustainability by incorporating this business into our business, and it is profitable, substantially profitable. We are looking to progress fostering and healing and getting closer by providing ongoing counseling and emotional support for the widows and their families. You would have seen from the many media releases after our memorial lecture, the Marikana memorial lecture, that we intend pursuing unfulfilled justice on behalf of the widows and the communities and restitution for those affected that have not yet received restitution. We intend honoring the educational support and sustainability that was set in place by the previous owners and managers of Lonmin. There are 144 beneficiaries to that. And then, of course, honoring Lonmin’s outstanding SLP obligations that is a commitment we made at the Competition Commission, and we are now in the process of engaging on what we call SLP 3 commitments. It is important to look at the pictures on this slide; you can see we handed over 6 houses, and this is despite COVID, we have another 19 houses we intend to hand over before the end of the year, and the balance of the widows' houses will be completed next year. These are substantial and material houses. You can see a picture in the right bottom-hand corner of the slide of one of the houses. During the week of the commemorations or the week that the tragedy happened in 2012, we held pre-sessions. It is amazing to note that there has been no wall or monument unveiled, and we unveiled a wall of remembrance, which was erected in memory of the fallen mineworkers. I think these are very significant steps, and certainly in less than a year of owning these operations, a significant step-up to the plate again. One aspect that perhaps gets forgotten about is our investment in DRDGOLD. In our view, DRDGOLD is a smart commercial entry into the rehabilitation of legacy environmental sites in the South African gold mining industry. A number of ESG highlights are contained on this slide, and there has been continued investment by DRD in rehabilitation. Hundreds of hectares have been cleared, vegetating tailings deposits to reduce dust, which is a major complaint and problem for the communities in the Johannesburg area. So that's ongoing. DRD’s specific response to COVID-19 has shown in the last few bullet points. They established a quarantine facility with 50 beds that cost R600,000, R1.6 million in employee contributions to the Solidarity Fund, which is a voluntary contribution, and then over 5,000 food parcels supplemented with support relief from 2,500 urban farmers. So, again, one of our subsidiaries contributing to the COVID-19 pandemic in a very real and material way. In terms of recognition for our ESG efforts, remember what I said at the beginning of the presentation, I think we're only halfway there. We were admitted as ICMM members in February 2020. That’s not just an organization you apply to become members of or become a member when you pay your fees. There are very rigorous evaluation processes and standards required, and we are very proud to have been accepted as an ICMM member. You can see the CDP climate change disclosure; we received an A rating, making us one of only 179 companies globally and the only one from South Africa, which we believe is significant. We were included in the Bloomberg 2020 Gender Equality Index and we’re one of only eight South African companies over 11 sectors to have received that inclusion. We were reincluded in the FTSE Russell ESG index of the JSE, and we were very pleased to be recognized by the Rand Water Board as the most collaborative and water-saving company in the South African mining industry. Of course, we are very proudly members of the World Gold Council, and we subscribe to their protocols as well. One aspect that I would say is world-class in terms of the basis on which this agreement has been created is what we have at our U.S. PGM operations. We call it the Good Neighbor Agreement, and we have marked 20 years this year of environmental and community collaboration. In that period, we've had absolutely no litigation. This shows in a very litigious environment, mining companies can operate when they do the right thing and engage their communities in a proper way and become good neighbors. So we're very proud of those recognitions and achievements. The primary focus of this presentation is our H1 results, which consists of two parts: operational performance, safe operational performance, and, of course, the financials. I will cover the operational performance, starting with safety. Noteworthy is that we had zero fatalities in the group in the second quarter of 2020. That’s always pleasing, and it’s just part of the journey. Our South African gold operations have run fatality-free for almost two years now. We've had 710 days with 13 million fatality-free shifts. Unfortunately, we recently had a fatality, so that progress has been interrupted. We are seriously committed to achieving even better performance in our next part of the journey to zero harm. Our U.S. PGM operations have been fatality-free since October 2011, recording 3,194 days with 3 million fatality-free shifts. It's pleasing that our South African PGM operations were also fatal-free since March 2020, achieving 2 million fatality-free shifts. The graphs on the right-hand side reflect the safety and performance. The graph that deserves mention is the serious injury frequency rate. In my view, the difference between a fatality and a serious injury is marginal, and we track our serious injuries very carefully because, as we know, once you build up a number of serious injuries, you are most likely to have a fatality. What's encouraging with that graph is the continuous downward trajectory, and we will strive to take that even lower. We’ve also been recognized for our safety achievements at the South African mining industry's Safety and Health Excellence Awards. We received the JT Ryan Award, a very prestigious accolade. Our platinum division was recognized, coming in first place at the Bathopele operations, with Kroondal West in third place and our processing business ChromTech at our South African PGM operations taking first place, while our Precious Metals Refinery in South Africa secured second place. Moving on to the next slide, which is titled Responsible Approach to COVID-19, I want to spend a little bit of time on this slide. The COVID-19 approach, although similar in the U.S. and South Africa, had very different impacts. Our U.S. PGM business was largely unaffected outside of ongoing social distancing measures, which disrupted production and incurred higher costs. The U.S. production achieved 89% of what they planned in quarter two—commendable given the disruptions caused by contractor displacements, introducing sanitizing procedures, social distancing, and so on. The South African operations entered full lockdown from the end of March, only restarting at the end of April 2020. We were particularly careful in the rebuild process to prevent and manage the transmission of COVID-19. As a result, we achieved approximately 54% and 47% of planned output for Gold and PGM operations, respectively, in quarter two, which accounts for roughly half of what was planned during that time. By the end of H1, our South African Gold operation had called back about 73% of the workforce achieving 80% of output. The South African PGM business had increased staffing levels to 65% and was achieving a 73% output level, indicating improvements in productivity due to less constraints and easier logistics with lower staffing levels at this stage. We’re monitoring this closely to fine-tune our restaffing around these opportunities. Interestingly, we have introduced a protocol to protect employees with comorbidities. We’ve recognized that vulnerable employees are those with comorbidities. Just about every single death we recorded due to COVID-19 has been employees that had comorbidities, making this a moral issue. The protocol is in place and being implemented. Moving on to the next slide, I want to state right up front, these are record earnings for our company, despite COVID-19. Q2 was severely impacted by COVID-19, but we anchored it with a strong quarter one. Quarter one actually gives you an indication of the earnings potential of the company under normal conditions. We had an eight-fold increase in adjusted EBITDA year-on-year amounting to R16.5 billion versus R2 billion recorded in H1 2019. In dollar terms that's $990 million versus $142 million in H1 2019. Importantly, 94% of our earnings have come from operations we recently acquired, suggesting we have completed a very successful acquisition strategy, entering the PGM sector. As I stated at the beginning of this presentation, we have deleveraged back to pre-acquisition levels for net debt to EBITDA. I want to point out that it's not just output that delivers such results. During COVID-19, the Sibanye-Stillwater team sprang into action, managing potentially significant cost runaways due to lowered volumes and controlling capital and working capital management, all contributing to the results you see today. So it’s not just focusing on output, it’s about controlling costs as much as we can under these circumstances. Moving on to the next slide, the exposure reflected is what I’ve seen referenced as rock star commodities at the right time. The three-year performance of rhodium, ruthenium, palladium, iridium, silver, and gold are really at the top end of this table, and we have significant exposure to these metals. Notably, rhodium makes up 21% of our revenue, similar to gold. Platinum, however, is lagging. It’s safe to say we are well positioned for what we believe is a platinum market with strong medium and long-term fundamentals, and we look forward to benefiting from future upside in platinum as well. Next, I will discuss the individual operations in order of contribution. The slide titled South African PGM operations shows they contributed 54% of group adjusted EBITDA. Important to note, production is 5% higher than the previous year, but that is due to the inclusion of Marikana, creating some distortion that offsets the COVID-19 disruption. The ramp-up in platinum was executed smartly and risk-based, with production coming in at 47%. It was prioritized in mechanized sections, where higher productivity can be achieved. You may see lower grades during this period because focus was on UG2 Reef, which in mechanized sections is lower grade, but has a higher revenue per tonne due to contributions from rhodium and chrome. Staff levels have increased to 80%, and our adjusted EBITDA margin now sits at 42%, remarkable considering that previously most of these operations were loss-making or just breakeven, so we see very significant profitability from our South African PGM business. Always a source of questions around Marikana, I mentioned that at the last results presentation, we exceeded our own estimates of R730 million a year in overhead cost synergies, achieving R1.2 billion. I am pleased to report today that we have identified R1.85 billion of annual Marikana synergies now recognized. That’s more than double what we imagined, as highlighted in the annual benefits column to the far-right of this slide. This is very encouraging. There’s also additional upside from the future processing of Rustenburg when we decide to move it from Anglo Platinum processing facilities to our own. We haven’t made that decision yet. Now, moving on to the U.S. PGM operations, they contributed 36% of group adjusted EBITDA. The combination of mined and recycled production is detailed in the graph. Important to note, despite COVID, we achieved a 5% higher production output year-on-year. We were able to continue with these operations, but had to displace our contractors due to an agreement with health practitioners/regulators in the area which has affected our capital growth projects. The U.S. operations are high-margin underground operations with 60% adjusted EBITDA margins, and higher PGM prices increase taxes and royalties, estimated at about $14 per 2E ounce in the cost line. We were able to reduce our restocking inventory during Q2, which released about $300 million of working capital. Since then, collections have been slow. As I mentioned earlier, the Blitz build-up has been delayed. We have not brought contractors back on-site, and we expect a delay of 12 to 18 months due to contractor demobilization and force majeure declared on equipment. We are improving our understanding of the ore body and factoring that into the ramp-up. To be clear, Blitz will still achieve the same steady-state production; however, we are factoring in delays of 12 to 18 months. The Fill the Mill project is proceeding as planned. Moving on to gold operations, I’m pleased to state that they were profitable, albeit gold’s contribution to our business has become relatively small, making up only 10% of group adjusted EBITDA. We saw a 17% year-on-year increase in production, although that’s against a H1 2019 severely disrupted by the AMCU strike, while Q2 production levels were at 54%, offset by a 28% higher rand gold price, contributing to profitability. Today, we’ve increased staffing levels to 90%. It’s been a responsible ramp-up, ensuring we weren’t exposing our workers to health risks due to COVID-19, which has been exceptionally well managed across all sections of our business. We focused on higher-grade panels effectively and targeted high-grade areas. Our gold business operates at a 16% adjusted EBITDA margin, producing 77,000 ounces at an all-in sustaining cost of 605,000 rand per kilogram. At this stage, I’d like to hand it over to Charl Keyter to perform the financial review. Thank you, Charl.

Thank you, Neal. Good morning and good afternoon. It gives me great pleasure to share our financial performance with you today as we move on to the H1 2020 results. As highlighted throughout the presentation, COVID-19 had a significant impact on quarter two. If we start with our deleveraging profile, you can see that net debt-to-adjusted EBITDA, which to date has been our primary financial performance measure, reduced to 0.55 times, down from 1.25 times at half 2 2019. We are now well below our covenant limit, which is set at two and a half times. Net debt on an absolute basis reduced by 38%, or R5 billion, to R16 billion. Adjusted EBITDA considering the impact of COVID-19 increased to just below R50 billion. The conversion of the convertible bond, which is currently trading well above the soft call, will reduce debt and leverage significantly. As illustrated, net debt-to-adjusted EBITDA on a pro forma basis would have been 0.23 times at the end of H1 2020. Looking at the next slide, the group is in a very strong position from both liquidity and the debt maturity perspective. Our next meaningful debt maturity is for the 2022 bonds of $354 million. Gross debt at the end of H1 2020 was R28 billion, and our medium-term target is to reduce this to R15 billion as stated previously. We are close to our target, considering that we have R12 billion cash on hand at the end of H1 2020. In H1 2020, we already started repaying the rand and dollar RCF as the risk of access to these RCFs has abated. If we turn to the income statement, H1 saw a 54% increase in revenue. The main reasons for this were the inclusion of the Marikana operations for a full six months and basket prices being up 92% at our SA PGM operations, 43% in dollar per ounce terms at our U.S. PGM operations, and 45% at our SA gold operations. Our operations were obviously impacted severely by the production disruptions due to COVID-19. The cost of sales increased to R57.7 billion, mainly due to the full six months inclusion of Marikana operations and increased recycling costs. As highlighted by Neal, adjusted EBITDA of R16.5 billion increased eight-fold from R2 billion in H1 2019. The next significant item worth looking at on the income statement is the gain on the financial instrument, which relates to the downward valuation of the convertible bond, attributed to the movement in share price. Mining tax at ZAR2 billion can be directly linked to the profitability of the company. Looking at earnings for the period, it was just below R10 billion, or R3.51, or 351 cents per share, compared to a loss of ZAR200 million for the same period in 2019. Moving on to the next slide, the surge in earnings and our commitment to restoring dividends once our net debt to adjusted EBITDA was below one times has resulted in us declaring an interim dividend of $0.50 per share, amounting to around R1.3 billion. While the interim dividend of 15% of normalized earnings is conservative, it does consider the uncertain journey ahead due to COVID-19. While only representing 15% of normalized earnings, this is the single biggest dividend declared to date, highlighting the significant transformation of the company into a global precious metals company. If the current trajectory continues and commodity prices hold up, you can anticipate a significant dividend based on our full-year results. I will now hand it back to Neal to conclude the presentation. Thank you, Neal.

Thank you, Charl. I will now cover the last part of the presentation, starting with the PGM market outlook. I won't spend too much time on this because we are in a volatile phase that can change quickly. At this point, we estimate a 15% decline year-on-year on the supply side, primarily based on South African PGM production disrupted by the lockdown due to COVID-19. We also expect the recycling supply to decline by 15% year-on-year in 2020. On the demand side, auto demand is anticipated to fall about 20% year-on-year to approximately 17 million passenger vehicles, with passenger vehicle sales expected to return to 2019 levels by 2022. Previously, we expressed an overly bearish jewelry outlook, but we will again revise this down by 20% in 2020 and 2021. Therefore, looking at the market balance, our longer-term forecasts remain unchanged, with rhodium moving closer to balance in 2020 and 2021. Meanwhile, the platinum surplus is narrowing this year, but expected to increase in 2021 due to heightened production in South Africa. I have seen suggestions asserting that the substitution of palladium with platinum won't happen, but I assure you that it is inevitable, and it must happen as OEMs look to reduce costs to alleviate sustained palladium deficits. Overall, we remain positive regarding the basket price when these moves come into place, and I expect improved visibility of substitution from 2021. Moving on to our annual guidelines, I will briefly summarize that production in terms of ounces is down in all regions, but remains respectable considering the disruptions encountered in Q2. Costs are primarily up, driven by lower volumes. Unit costs will increase as a result of fixed costs remaining the same during lower production volumes. We've adjusted capital costs for the future, as reflected in the graphic on the right-hand side. Higher rand basket prices and gold prices have more than offset revenue losses from reduced volumes, leading to improved profitability in the latter part of the year. Moving on to the slide titled 'Offering Value', I want to emphasize the substantial value we present as an investment. As mentioned earlier, our strategy of value-accretive growth can only be realized under a strengthened equity rating. Our share price has increased, but we are still significantly undervalued when comparing various metrics like EV to EBITDA, price for free cash flow per share, and net debt-to-EBITDA. We are now significantly de-risked, and I believe that with introducing dividends, we will continue to witness further significant re-evaluation. Despite recent price increases, I remain bullish regarding how the market will reassess our company. Thank you for your attention. I now want to open the floor for questions.

Thank you. The first question comes from Arnold Van Graan from Nedbank. Please go ahead, Arnold.

Good afternoon. I have a couple of questions for you, Neal. The first one is could you quantify the COVID losses for this half? Maybe I missed it; I apologize if I did. Could you provide ounces per operation? My other question is in relation to Blitz. What exactly is the issue there? Are there geological challenges? Could you provide us an update on executive working countering? Lastly, from a cost perspective, given the delays and geological challenges, do you think you’ll be able to achieve your regional envisaged costs on that operation?

Thanks, Arnold. Let me address your questions in order. In terms of COVID losses, I don’t have the exact figures available, but if you look at what was achieved in quarter two, we reached roughly 50% production in South Africa for both Gold and Platinum, so you can put a number to that. Regarding Blitz, there is a myriad of issues. I’ll ask Chris to weigh in shortly, but let me start by saying our challenges began with ground falls, with some knock-on effects leading to concentrated mining and ventilation constraints. All of these are typical startup challenges with bringing a new mine online. The impacts of COVID made some capital expansion impossible as we had to remove many contractor laborers to maintain steady-state operations. Consequently, the ongoing impacts of COVID really affected the growth side of that business. We anticipate delays of about 12 to 18 months; we are redoing some of the planning around that. We aim to ramp it up to its original target of 300,000 ounces of additional production, expected to happen 12 to 18 months later. Chris, do you have anything to add?

Neal, about the COVID costs in the U.S., we incurred about $3 million in the first half as related COVID expenses, translating to around $10 per ounce. Currently, we're spending around $500,000 per month on COVID-related measures. As Neal mentioned, we did declare force majeure on several mill parts and had a short timeframe to respond to COVID outbreaks, which affected our capital growth projects. I am pleased to report good progress on the Benbow terminal, connecting the east and west sides of Blitz, aiming to finish in the first half of next year. We’ve navigated significant challenges and improved our ventilation via the development of 56th level while drilling to further define the ore body.

Thanks, Chris. Are we ready for the next question?

Yes, the next question comes from Laurence Heller from JPM. Please go ahead, Laurence.

Hello, can you hear me?

Yes.

Hello. This is Dominic from JPMorgan. I have three questions if you don't mind. The first relates to the gold assets. Looking at the guidance for the second half of the year, we may see a potential 50% increase in output. The reserves for your South African gold operations are based off 600,000 rand per kilogram, while the current spot price is over a million rand per kilogram. How should we consider the optionality and strategy regarding the gold assets? If you don't mind, I may follow up with two more quick questions afterwards?

Yes, Dominic, you’re correct about the significant upside in the second quarter. Our planning parameters were conservative, which opens up opportunities to scale up our gold business, taking cut-off grades into consideration. We would consider that going forward, though we prefer to retain margins over solely increasing output. We will continuously optimize our gold business, even though it might only represent about 15% of revenue in the future.

Two quick follow-up questions: The Lonmin synergy number has been increased again. How conservative is that number? Am I correct in assuming that there is no assumption for long-term mining synergies regarding the boundary between Marikana and Rustenburg? And my final question relates to M&A aspirations. Could you provide context around the urgency for pursuing value-accretive growth opportunities and what criteria the board is currently setting for considering M&A options?

Yes, regarding Lonmin synergies, our experience indicates that mining-related synergies, including boundary crossing and infrastructure costs, are potentially much larger than the overhead synergies we've presented. However, those benefits usually surface further down the line, requiring a commitment to progress specific projects. We initially considered the R730 million overhead synergies conservative, which has proven true. We had limited ability to conduct due diligence initially, hence conservative original estimates, but we won't extrapolate continual year-on-year increases. As for value-accretive growth, we clearly see drawbacks in fulfilling a commitment to shareholders first, which involved deleveraging. We’ve done a great job realizing opportunities for PGM entry, and when discussing value accretion, we're focused on cashflow per share among other metrics. If it isn't reasonably cashflow per share accretive in a brief timeframe, it simply doesn’t make sense.

Thank you very much.

The next question comes from Chris Nicholson from RMB Morgan Stanley. Please go ahead, Chris.

Hi, good afternoon, Neal. Good afternoon, Charl. I also had three questions to be quite brief. The first question is that it appears you have drawn down on inventory by about 150,000 ounces in South Africa. To what extent will you need to rebuild that later this year? So where are we regarding pipeline inventories? The second question is about Blitz. I find it interesting that your CapEx guidance for Stillwater remains unchanged this year, which is surprising given the slowdown seen in the Blitz project specifically. Can you highlight why that CapEx remains unchanged? Should we expect that with the extension of Blitz, CapEx exceeds R200 million to R250 million next year? Lastly, could you clarify the potential for share buybacks with the dilution from the convertible bond?

Yes, thanks, Chris. Regarding inventory drawdown, the 130,000 ounces figure is likely exaggerated; it's less than half of that. You are correct in considering the force majeure blocking and Anglo’s converter issue. As for CapEx, indeed, you're right on the number; we are trying to develop flexibility despite the Blitz delays, which might lead to increased total capital due to those delays. However, we are assessing Blitz with an updated plan to finalize the re-scheduling with an expected completion in the next three to four months, then guidance will be provided if there's any increase. As for share buybacks concerning the convertible bond, probably no. When we initiated the acquisition of Stillwater, we wanted to execute a larger rights offer to bolster equity, but limited support from some shareholders led to a smaller rights issue. Despite understanding the benefits of buybacks, that is currently not our plan. It’s not a final decision though, Chris.

Great, thank you on the points regarding inventory.

The next question comes from Adrian Hammond from SPG Securities. Please go ahead, Adrian.

Hi, Neal and team. Given the change in fortunes for boomers, could you reiterate your capital allocation strategy? Previously, you mentioned that cash flows from the gold business would be returned to shareholders, but it’s still underperforming despite record gold prices. What are your thoughts on this strategy moving forward? Would you consider divesting these assets as they may perform better under other producers?

Thanks, Adrian. We have no intent to divest our gold assets. In the long run, we recognize the inherent value of being a precious metals company and would want to enhance our gold profile at the right time if possible. Regarding capital allocation, we're prudent about our dividend declarations, we went conservative at 15% instead of somewhere between 25% and 35%. There might be volatility in the upcoming part of the year, and we want to remain well-positioned. As for final dividends, they may be substantially larger; however, I don’t want to firmly commit to that yet. Overall, cash that isn’t allocated to direct costs and capital isn't set for major growth at this stage, but that could shift depending on market conditions.

To clarify then, if you are going to reduce debt through the bond call, you should be approaching gross debt of 15 at no cost, other than new share issuance. So how do you plan to handle all that cash? Would you reconsider adjusting that policy to return more cash to shareholders or do you think that capital will go toward M&A?

If we cannot create more value than by returning it to shareholders, we will increase our dividend policy beyond 25% to 35%. We will see how it pans out, although it would be beneficial to return more cash to shareholders.

We have an additional pre-recorded question related to sales versus production at Rustenburg for the year, especially given the benefits from the pipeline in H1. Will there be a lag effect in H2?

Sure. In a high-level sense, as Neal mentioned, considering the COVID impact and downtime on the converter plant, we’re looking at about 50,000 ounces for Rustenburg that was delayed during the force majeure. Marikana benefitted similarly by treating material during that period. I hope that answers your question.

The next question comes from Leroy Mnguni from HSBC. Please go ahead, Leroy.

Hi, good afternoon, guys. A couple of questions, please. The first is regarding the Anglo Plats force majeure—when you processed your own material, how did your processing operations cope with the increased volumes? Were there any lessons or areas of concern experienced around throughput? The second relates to the substitution of platinum back in for palladium in the gasoline Autocat. Are there indications that this solution can be applied more broadly, or perhaps to smaller models? Lastly, regarding equity being cheap at the moment and the need to re-rate before you consider M&A, how do you gauge when equity is fairly valued? Is there a share price target? Do you simply use a peer group average?

Regarding force majeure, because it was such a quick transition from full lockdown to a restart, we faced minimal processing. Anglo Platinum repaired conditioners much quicker than anticipated. Thus, we couldn’t test capacity, but we learned valuable lessons. Introducing additional materials like PGM into processes outside standard pipelines is challenging due to chemistry and logistical planning needs but we are much better prepared now. Concerning substitution, larger vehicles remain a primary target market; however, there are ongoing efforts in both China and elsewhere. As for your inquiry about equity, it’s all relative. The last slide offers insight into whether we are valued appropriately, and it’s based on multiples relative to peers. An absolute number is less significant compared to group positioning.

Thank you.

The next question comes from Alexandre Ayoub from Waha Capital. Please go ahead, Alexandre.

Hi, thank you very much, and congratulations on the results. I want to gain more insight into the capital structure and your cash utilization. Can you remind us quickly about your debt strategy? What is the goal with the $1 billion gross debt? Would you be using some of that cash to decrease your gross debt?

Alexandre, I will turn it over to Charl to respond.

Yes, Alexandre. Good afternoon. We're in alignment with the goal of reducing gross debt to about $1 billion. Our first consideration was to bring leverage below 1x, which we have achieved. The next target involves reducing gross debt to $1 billion to ensure we’re comfortable during any market cycles. Some cash on hand will indeed be directed toward repaying the rand and dollar RCFs, as I mentioned previously. When lockdown started, we fully drew on those facilities, and we had adequate liquidity. We have since restarted repayment on those.

Sure, but you still have a lot of cash on the balance sheet. Would it be prudent to call the 2022 bonds? Are you intending to convert the convertible bond to shares without any cash burden?

We’re monitoring the convertible bond closely. It's trading above the soft call price, but as of now, we have no immediate plans to call the 2022 or 2025 bonds. We’re being cautious due to the unpredictability of the global pandemic. I want to ensure we maintain adequate liquidity.

Alexander, we prefer a balanced approach with some debt leverage, we do not plan to early call high yield bonds.

Got it. Thanks, very helpful.

James, I'd like to hand over to you for questions from the webcast.

I have a question from the webcast. One of them is about how our employees will benefit as women in mining.

As a champion for women in mining on behalf of the Minerals Council, I want to state that while the senior management demographic is largely male, we have a responsibility to create opportunities that positively impact the women in mining initiative. Increasing women's participation in this sector introduces expertise and capacity that can significantly benefit our company. We’ve set a goal to double our proportion of women in mining to the mid-20s over the next five years and work with the Minerals Council to drive to 40% by 2030. It’s an important initiative that we take seriously.

Thank you, Neal. The next question is about our long-term plan for the DRDGOLD investment.

We work closely with DRD executives. Our viewpoint is to offer guidance and support as shareholders while nurturing the evolution of DRDGOLD into a multi-commodity international player. We see considerable value in collaborating on environmental matters while ensuring we mind liquidity levels of our investments. We're proud of our current position and will remain supportive of DRD going forward.

Next question regarding mechanizing Marikana like Rustenburg and Kroondal.

Yes, we certainly plan to mechanize as much as possible. With the right ore body properties, we've mechanized our operations successfully. However, challenges remain with narrow, tabular ore bodies, making mechanization difficult. In principle, we will continue to mechanize wherever feasible, continually testing new low-profile equipment.

Concerning the South African discount, how we can reduce it?

The South African discount stems from various factors, but addressing investor climate in South Africa is crucial. Engaging with government is a significant part of this, and despite my disillusionment with leadership, we’ve made good progress with our dialogues and will persist in advocating for a favorable environment for business. Improving our standing outside of South Africa will offset this investor perception.

A question on recycling volumes and global expectations.

Recycling volumes normalized recently, with a reported overall decline of about 15% year-on-year. However, the most recent figures of our large recycler indicate they are back to normal levels, which aligns well with what we are seeing globally.

Follow up on Burnstone's potential under the current gold price environment.

There is potential for Burnstone, and we are reviewing the study; however, further investment in South Africa would need careful consideration, given the current climate. There are many projects in the pipeline that companies are ready to invest in if conditions become more favorable.

Caution regarding K4 and likely life of the Marikana asset.

K4 is a good project, but we need to assess how open the market is in developing additional platinum, palladium, and other PGMs. Developing K4 could be beneficial and it’s a project that requires thoughtful consideration and leadership to realize.

Finally, any insights on cost guidance?

Unit costs have risen primarily due to production capacity issues, which drove higher fixed costs. However, we have a strong inflationary cycle, rising costs linked to sanitizing measures, transportation, and social distancing protocols. We are working to ensure next year is normalized and prepared to regain cost control based on prior volume increases.

We have no further questions from the audio line. Would you like to make any closing remarks before concluding?

Thank you for participating. I appreciate everyone taking the time to ask questions. It’s been a tough first half of the year, but we are well-positioned moving into the second half. Thank you and I look forward to speaking with you next year with our full-year results.

Thank you, ladies and gentlemen. That concludes today’s conference. Thank you for joining us. You may now disconnect your lines.