Good morning. Thank you for joining us today for the Harmony interim results for the first six months of the financial year ending 2022. Presenting today will be Peter Steenkamp, CEO, and Boipelo Lekubo, Financial Director. Once the presentation is done, you may ask questions either through Chorus Call directly or on the web link. Thank you very much. Over to Peter.
Good day and thank you for joining us for the presentation of the half-year results for the 2022 financial year. Please take note of our Safe Harbor Statement. I would like to start today with a brief recap of Harmony strategy, the progress we've made to date, and our performance for the first six months of the financial year 2023. Mining with purpose describes our way of operating at Harmony. We believe that these words form the foundation upon which our strategic decision-making process is based. The Harmony strategy is to produce safe, profitable ounces and to improve margins through operational excellence and value-enhancing acquisitions. As South Africa's largest gold producer by volume, we have delivered against our strategy while positioning ourselves well for the future growth and value creation.
Despite what may seem a difficult set of results in the short term, we continue to succeed in executing our long-term strategy. While the past six months have indeed presented numerous short-term headwinds, we have already addressed these issues and continue to improve safety and increase our production. At the end of our previous financial year, we announced a number of key projects alongside our ongoing safety journey to ultimately achieve zero loss of life, increase production and drive costs down in the medium term. However, these projects are big and require time. There is a Greek proverb which says, and I quote, "A society grows great when old men plant trees in whose shade they shall never sit." Unquote. Many of our projects, such as Zaaiplaats, will only see their full potential in a few years' time.
The challenge is therefore to deliver short-term returns while investing for the long-term growth simultaneously. We are seeing continuing progress and improvement across all aspects of ESG. Our safety metrics continue to improve. As part of our sustainable development strategy, we have clear ESG targets. I will provide more information on this later. COVID-19 remains with us and is still considered a material risk to our business. There is continued coordination from all stakeholders, management, and employees towards fighting the pandemic in both South Africa and Papua New Guinea. Our vaccination rollout has been successful, and 90% of our employees have voluntarily vaccinated. Creating shared value for all our stakeholders, evident in the success of three-year wage agreement, which we signed with all five unions in September 2021.
We are also moving forward with our plans to decarbonize and have begun an aggressive renewable energy rollout plan, which will see 167 MW of solar power in place by FY 2025. We had somewhat disappointing operational performance in the first six months, with production profit down 26% to ZAR 5 billion from ZAR 6.58 billion. While we deliver our 5% increase in production year-on-year, this was offset by higher cost and lower grades. I must re-emphasize that the importance of our large surface operations, which alongside Mponeng and Moab Khotsong, have transformed our portfolio. We now have a portfolio positioned for growth. This, we are investing in long life and surface assets. Further optimization, development into higher grades alongside cost reduction are all key to ensure that we deliver on our second strategic pillar of operational excellence.
Financial highlights include a 2% increase in revenue to ZAR 21.951 billion, while net debt to EBITDA has remained steady at 0.1x . As we continue investing in our long life assets, effective allocation of capital is necessary to ensure that we replace ounces and whilst meeting our growth objectives. I'm therefore pleased to announce our interim dividend of ZAR 0.60 for the first half of FY 2022. We are indeed a very different company with a vastly diverse portfolio from what we had six years ago. In financial year 2016, the structure of Harmony's portfolio was such that free cash was driven by our existing underground assets, which consisted mainly of the Free State operations. Since then, our portfolio has changed significantly. We acquired Moab Khotsong in 2018 and Mponeng and related assets in October 2020.
Now, only 80% of the operating free cash flow is attributed to those older assets. In fact, 63% of our operating free cash flow in the first half year was from Mponeng, Moab Khotsong, and Hidden Valley, while 90% was generated from surface operations. The first six months of the financial year brought numerous short-term headwinds. This contributed towards lower than planned production. Much of Harmony's success over the past seven decades has been on our ability to manage and learn from these kinds of operating conditions, and to emerge not only stronger, but more resilient and determined than before. Of all the challenges we face in the first half, the most critical remains the safety of our employees. While none of the individual challenges we face were entirely new to Harmony, it was uncharacteristic to experience them all at once.
The COVID-19 related disruptions, such as vaccinating all our crews was essential, but is now largely completed. As travel restrictions fall away, our highly skilled South East Asian team can again frequently visit Hidden Valley, thereby ensuring more effective management. This will go a long way towards the prevention of future infrastructure failures, such as what happened to the overland conveyor belt. The amount of rain experienced in the Free State was unlike anything we had faced in recent memory. Yet despite the rain, our tailings dams all stood firm. The freeboard levels are well in excess of what is legally required and ensure the stability of our tailings facilities. This demonstrated the ability to withstand the record levels of rainfall this summer. This is just one example of our stringent integrated risk management strategies prevailing throughout Harmony.
Our focus remains on allocating our capital in such a way that we deliver positive risk-adjusted returns and create long-term value regardless of its circumstances. By executing on our four strategic pillars, we improve the structural profitability of Harmony, creating a high margin of safety and improving returns for our shareholders. Before we unpack the South African and Papua New Guinea operations in more detail later in the presentation, let's look at the high-level overview of the key production metrics. Our operations now include 10 underground mines and one open-pit mine in South Africa, the Hidden Valley open-pit mine in Papua New Guinea, and of course, we have one of the largest surface retreatment operations globally. Volumes mined have increased by 33% year-on-year to 27.6 million tons, with a 5% increase in gold production to 24.2 tons.
While underground grades have decreased slightly, we are confident of achieving our original guidance of 5.4-5.57 grams per ton for the full year. Despite the increase in production and volumes inflated, inflation-related increases and some production challenges, particularly at Hidden Valley, this resulted in the group all-in sustaining costs being higher than the original guidance. Although our overall all-in sustaining costs increased by 12%, I need to reiterate our cost increase were in line with plan. The main cause of the all-in sustaining costs miss was due to the lower-than-planned production at some of our underground mines and at Hidden Valley. Capital expenditure for the six months was lower than the previously guided due to the delay in permitting of the Kareerand tailings facility at Mine Waste Solutions.
Our approach to spending capital is based on obtaining certain approvals, and we will not commit any capital until we have certainty. Due to the Hidden Valley belt failure in January, we have adjusted our group production guidance lower to 1.4-1.57 million tons. Group all-in sustaining costs guidance increased to ZAR 822,000-ZAR 835,000 per kg, aligned with our recent production update. The South African all-in sustaining costs remains unchanged at ZAR 765,000 -ZAR 800,000 per kg. Well, this is the same slide in USD and the rand conversions. During our FY 2021 results last year, we shared our key capital projects for FY 2022. I am pleased to say that all of our projects are now underway with the exception of Kareerand Tailings expansion.
These projects are expected to increase the net present value of Harmony by 30%-40%, creating value for all our stakeholders. We remain firm, we remain firmly committed to each of these projects, both in South Africa and Papua New Guinea. As the global focus on decarbonization increases, we understand that we too have an important role to play to reduce our Scope 2 emissions and reduce our carbon footprint. We have made a strategic decision to accelerate the rollout of renewable energy over three phases. The first phase is the 30 MW through a power purchase agreement in the Free State. Commercial close for this project is imminent and will generate 75 GWh of power per annum. We expect it to be completed in FY 2024.
The second phase of the 137 MW will be completed by the end of FY 2025 and will be funded internally. The project is expected to cost approximately ZAR 1.5 billion and will deliver over ZAR 500 million electricity cost savings per annum and 343 GWh of energy each year. The third phase of 56 MW was still in planning phase for the conclusion FY 2026. These projects contribute towards the 2045 aspiration of being carbon net zero. They de-risk our business while delivering significant economic value to Harmony and improving the well-being of our host communities for many years to come. In total, our reengineered portfolio and the leveraged balance sheet has given us an opportunity to open the door for the abundance of new opportunities.
We have solid building blocks in place to pursue our growth path while ensuring we mine sustainably. Our integrated ESG practice, combined with our hedging strategy, will ensure our balance sheet remains strong and flexible. This will deliver positive returns to our shareholders and stakeholders throughout the cycle. Let us now unpack the performance of our operations. Mines operate on the momentum, and each time we have a stoppage on the back of infrastructure breakdown or a safety incident, it has a meaningful impact on delivery. It is for this reason we have five key operational areas which we focus on, namely safety and health, production excellence aimed at enhancing productivity, capital allocation prioritized to drive margin growth, ensuring infrastructure reliability, and active cost management. In addition to these operational focus areas, we have a business improvement initiative called Safety 300 or S300.
This initiative aims to focus on various strategic and operational efficiencies. We are aiming to ensure on average our crews produce 300 sq m per month safely, and thereby improving the overall productivity and profitability. Safety is and will remain the cornerstone of our commitment to mining with purpose. More than just a moral imperative, safety underlies all we do as a business. It is our first value, and it's a leadership priority. Eliminating all work-related safety incidents is a key to our successful delivery of our strategic objectives. We have implemented and integrated a number of systemic components to ensure that we have controls and daily safety data available to prevent accidents before they occur. The most important aspect however is changing human behavior and embedding a proactive safety culture aligned to our five values. This humanistic or cultural change is called our Thibakotsi journey.
We have built the foundations, empowered our leaders during the first two phases of our safety journey, and have progressed to phase three of our four-phase model. This phase entails operational specific interventions and ensuring everyone across all levels truly believes in what we are doing to improve safety by changing the hearts and the minds of all our employees. This is a vitally important part of our journey to ensure zero loss of life and a safe working environment at all times. We have seen improvement in our lost time injury frequency rate to 5.74 per million hours worked. Our fatal injury frequency rate is at 0.14, and we are reaching more and more safety milestones, such as the first ever loss of life free January in 2022.
Our total injury accident frequency rate has seen steady improvement over the past decade and is now at 6.99 per million hours. This is an important metric considering the size of the operations we are acquiring over the past few years. We have grouped our African operations in three distinct categories. These are based on the characteristics and life of mine for the purposes of reinforcing the fact that our asset portfolio has been re-engineered. Much of our major capital has been allocated to our long life assets to ensure that they deliver higher grades and better volumes, so we can further extend the life of mine of these assets. 50%-62% of our production in the first half came from these mines, which have a life of mine ranging from 7-20 years.
Many of our renewable energy plants will be aligned to, along to these long life assets, and there's a lot of value to be created through these investments. Our surface sources, those consist of retreatment operations and of course, gold, which all of our combined life of mine is longer than 12 years. While this is approved life of mine for our surface operations at 2 million tons a month, which is what Mine Waste Solutions is currently processing, we could potentially re-mine our Free State dumps for the next 80 years. Our short life assets, Bambanani, Masimong, and Kusasalethu are in the harvest mode, and as such, we are not allocating major capital to these operations. Masimong has approximately 18 months left.
Kusasalethu, three years, and we have had to take the tough decision to close Bambanani at the end of this financial year for various reasons. I will unpack this in more detail shortly. Our mine sites are Moab Khotsong, Mponeng, Doornkop, and our surface operations will receive the majority of our project capital. We are investing in these assets to prolong their economic life. The Moab Khotsong operations will expand through the Zaaiplaats, while we will also mine out the Great Noligwa shaft pillar. We are conducting studies for the potential deepening of Mponeng and also the mining of the TauTona and Savuka shaft pillars. We are subject to further analysis. Our surface operations include Kalgold and the retreatment plants and form an important part of our business.
We are investing in expanding the deposition capacity of Mine Waste Solutions while conducting studies to understand where else it makes commercial sense to invest in surface retreatment operations. Kusasalethu has been a significant improvement in the production since we moved the processing nearer to the more efficient Mponeng plant. Recoveries are approximately 2% higher at the new plant. Our higher cost mines, namely Kalgold, Target 1, Tshepong, and Joel all have very clear strategies in place to ensure that production increases. They are, for example, developing into the high-grade sections of our mines such as sub- 75 levels at Tshepong, undercutting the reef at Joel to improve grade, and moving infrastructure closer to the face of Target 1 to increase production by 50%.
While the all-in sustaining costs of these mines seem high, we have been busy with the recapitalization process while at the same time continuing our mining activities. Once these projects are complete, the cost profile at these mines is expected to fall in line with other operations as CapEx reduces alongside increased production. Bambanani is a mine that has served us well for many years and sadly has reached the end of its economic life. The last guided life of mine for Bambanani was three years, and now only 17% of the shaft pillar remains. Bambanani will be put on care and maintenance at the end of this financial year. Our rationale behind the decision is clear, as we are no longer able to mine there in line with our strategy of producing safe and profitable ounces.
We have seen an increase of large seismic events every month for the last five months. We believe that we will only be able to mine this mine safely up to the end of June 2022. Around 1,500 of our employees will be redeployed within the company, and we don't envisage any forced retrenchments. We have also implemented a reclamation program, and rehabilitation of the mine and surrounding areas will commence post-closure. Harmony differentiates itself through acquiring mines that no longer fit the strategies of other companies and creating further value for shareholders. We call our approach embedded ESG or ESG in action. This chart on the left is a perfect example of the success of our operating model, where we extended the life of Bambanani by over 12 years.
Bambanani has delivered a total of ZAR 4.5 billion in operating free cash since FY 2010, against a capital expenditure of ZAR 610 million. These returns generated by Bambanani have benefited all stakeholders in many ways. Employees, the communities, suppliers, shareholders, but to name a few, have all directly benefited from this value created through Bambanani. This example of shared value is replicated at all our operations through the ESG focus operating model. As per our previous updates, the conditions over the past six months at Hidden Valley has been rather tough, with a number of things impacting on production. These included mining geotechnical complications on the eastern wall of the Stage 6 cutback impacting the grade, repair work at the crushers as well as on the overland conveyor, and we lost five days of production due to a labor-related work stoppage in December.
Our operating costs and capital expenditures remain under control despite the addition of COVID-19 costs. As such, the increase in all sustaining costs was mainly a function of reduced production. We have addressed all these operations and issues and are now moving towards a more normalized operating environment. Costs are elements that we are able to control. Adding the cost of Mponeng and related assets were not unexpected, and although it had an impact on the year-on-year cost, the majority of this was largely offset by the increase in gold production. There were only three months of production on Mponeng and related assets in the first six months of the financial year FY 2021, compared with the full six months cost of production in this half.
Cash operating costs, excluding Unisel, which was closed in the second half of FY 2021, and Mponeng and related assets were only up 7% year-on-year. Comparing this half with the previous six months, one can see that the real impact on costs have been driven by the labor, consumables, and electricity. These items mainly resulted in the 9% increase in cost compared to the previous six months, ending the second half of 2021. Our business model has succeeded on the basis that gold has always maintained the store of value and indeed acted as a protection against inflation since we started operating 71 years ago. A safe mine is a profitable mine. The various projects and initiatives that we have discussed are aimed at increasing the margins and reducing our own sustaining cost. Here is the same chart in U.S. dollar per ounce.
Boipelo, I will now hand over to you to share the Harmony financial results.
Thank you, Peter. The first half of this financial year delivered a mixed set of results, but we've maintained a strong balance sheet with net debt to EBITDA steady at 0.1x . We have headroom of ZAR 7.5 billion, or $500 million, through cash and available undrawn facilities. EBITDA decreased by 24% to ZAR 4.2 billion from ZAR 5.6 billion, while net profit declined by 69% to ZAR 1.4 billion from ZAR 4.6 billion. The lower rand gold price received and higher cash operating costs eroded our margins, resulting in a 65% decline in headline earnings per share to ZAR 2.48 from ZAR 7.13 year-on-year.
As Peter mentioned previously, cash operating costs against 30 June 2021 went up 9% in just six months, mainly as a result of labor, consumables, and electricity. Operating free cash flow margin thus decreased from 22% to 11% for the period. As per our dividend policy of returning 20% of net free cash to investors, we have declared ZAR 0.40 or $0.027 per share for this reporting period. This is just the same information in U.S. dollar terms. As we execute on our strategy of delivering safe, profitable ounces, it's necessary to make various strategic trade-offs to ensure we reward shareholders alongside achieving our growth aspirations. When determining how we allocate capital, we assess all options available to us and allocate capital based on where best we can create value and deliver meaningful returns on our capital.
We've invested internally through the various key projects, and we'll consider acquisitions provided they meet our investment criteria. Paying a consistent dividend is a priority and also provided it is paid from net free cash generated. Delivering shareholder returns while growing our ounces is important. 74% of our revenue is allocated to operating expenditure, with capital expenditure being the other large ticket item at 15%. Net cash generated by the business amounted to ZAR 1.3 billion, or $84 million during the first half of the financial year. Our flexible balance sheet has ensured we have capacity to reinvest internally while also declaring an interim dividend.
As per our dividend policy, 20% of this amounts to ZAR 252 million, or $17 million, which equates to the dividend declared of ZAR 0.40 per share, or, as I said before, $0.027. Looking forward, while much of the Harmony investment case is built on the gearing towards the ZAR per kg gold price, we have improved the quality of the portfolio and introduced a higher margin of safety. This chart illustrates how the operational free cash flow changes under various gold price scenarios on the back of our existing portfolio. During the previous planning cycle, we budgeted a gold price of ZAR 800,000 a kg into our models.
Keeping all inputs constant, for every ZAR 50,000 increase in the ZAR per kg gold price, we expect to see an increase of approximately ZAR 500 million to operating free cash flow. Certainly a position worth noting. At the same time, we continue to hedge responsibly to protect some of our cash margins during the gold cycle. The following is just a similar illustration, just in U.S. dollar terms. I'll now hand back over to Peter to conclude.
Thank you, Boipelo. There are a number of catalysts that will see our margins improve as CapEx spend decreases at our surface retreatment operations as the Franco-Nevada streaming contract comes to an end at the same time as the Kareerand project is completed. This will unlock a margin of Mine Waste Solutions as the gold will then all be sold at prevailing market prices. We are investing in our higher-grade, long-life underground mines, and we will see our shorter life assets reach the end of their economic lives over the next few years. We are investing in a margin expansion and improved profitability as we develop into the high-grade ore bodies and optimizing our production of our long-life mines. The Wafi-Golpu project is a further catalyst that could significantly enhance Harmony's value. Discussions between Wafi-Golpu joint venture and the state negotiation teams are ongoing.
We do believe that we are close to reaching an agreement in the not-too-distant future. Embedded ESG practices will ensure that we maintain our social license to operate, while at the same time playing a role in transitioning to a greener future, both here in South Africa as in Papua New Guinea. While Harmony has aligned itself to United Nations Sustainable Development Goals, a global and shared responsibility is required to meet these goals as we transition to adjust economy. We are committed to a greener future and have made great strides in reducing the overall environmental impact from our operations. We have increased our water recycle rate by 103% over five years. We have also reduced our greenhouse gas intensity by 34% while reducing 1.2 million tons of CO2 equivalent emissions since 2016.
ZAR 51 billion in total socio-economic value was distributed in FY 2021. Another important point to mention is the proper protection of human rights, which is articulated in our human resources policies, charters, and contracts of engagement. Ethical leadership equals ethical mining. 50% of our board consists of highly skilled, independent, non-executive directors, and we have exceeded our targets for diversity and ensure we strive for complete transparency alongside good corporate governance at all times. We believe we are a partner of choice, whether in mining areas yet to be explored, in communities where we are already joined hands with our stakeholders, or in a diversified share portfolio. Our embedded approach to ESG alongside an exciting growth pipeline will ensure Harmony remains well-positioned to deliver positive stakeholder and shareholder returns.
We have a strong balance sheet and a portfolio of quality assets providing exposure to the rand per kg gold price. As we deliver on our four strategic pillars, Harmony remains a sound investment case. Our objective remains to produce safe, profitable ounces by doing what we have always done, mining with purpose. I thank you. I will now hand over to Jared, our Head of Investor Relations, to take any questions first from the calls and then from the webcast. Thanks, Jared.
Thank you very much, Peter and Boipelo. Do you have any questions coming through from calls, Paula, at this stage?
Yes, we do. Thank you. The first question comes from Adrian Hammond of SBG Securities.
Hi, Adrian.
Hi. Good morning, Peter and Boipelo. Thanks for the presentation. Peter, for you, a couple of questions. You've begun discussions again on Wafi-Golpu. I assume this is relating to the special mining lease. Are you discussing new fiscal parameters or what exactly is holding up the progress of this project? Perhaps you could also give us or remind us when you expect potential first production and what the revised CapEx on that project is. Secondly, you talked about M&A as a potential option for growth. How do you justify M&A in this current climate, given where gold prices are? I see you searching for assets below $1,100. You recently acquired Mponeng with an AISC of more than $1,700.
So, you know, are you able to get this asset, you know, in line with where you consider your investment criteria, or what's the story with Mponeng? For Boipelo, have you revised the CapEx for this year? Is that ZAR 7.7 billion on slide 18 for this year? I think you previously guided ZAR 8 billion. Just on your renewable energy rollout, could you just perhaps repeat what was said? Did you say ZAR 1.5 billion CapEx? Is that what you're gonna fund yourselves on balance sheet? Are there any wheeling contracts with Eskom for that? Thanks.
Thanks, Adrian. Let me take the first two questions. Yes, we are currently in discussions with the state negotiation team, as I said, you know, on the mining, the conditions of the mining lease. Yes, we have not concluded their discussions yet, but we are currently busy with that. The good thing is that we in actual fact are sitting down and having discussions. Yeah, I think the process and after we finish with the, you know, the final agreement is that we obviously have to redo that feasibility study. That feasibility study was done in 2016. The world has changed quite dramatically since then. I mean, even gold prices, copper prices went up, but also I think, you know, inflationary costs in terms of things.
We have to redo that thing and then obviously take it back to the board for investment decision. There's still a long road to go. I don't wanna necessarily put a peg in the sand in terms of when we start building. It is still a process to go. Yes, I'm in M&A mode at the moment. Given where the gold price is here at the moment, there's not a lot of. It's quite difficult to find the right type of asset to buy. We're constantly looking at it. At this point in time, there's nothing on the cards that we certainly would like to do.
We're actually busy at the moment building new mines and you know.
Mm-hmm.
Which we think is, it's you know the right way to do because we actually have these mines really paid for and we have very very good projects on the side. As far as Mponeng is concerned, yes, that was on an all-in sustaining cost basis. It was outside of our you know that $1,100 that we got it and certainly thinking about Mponeng is really about all the other potential and synergies that potentially can come along. The deepening of this mine makes it a very very long life mine. Obviously also about you know some of the very high grade shaft pillars that can come into play.
I've been to that mine, two, three days ago, in on Thursday, to look at the shaft pillars and what we're doing there. I'm quite excited about potential that is out there. Mponeng is a long life mine, and it is also a mine that has got fairly good grades. We are going to mine it to better grades going forward, in the next year or so. Certainly a mine that we believe belongs to Harmony. It's a natural fit for Harmony. We've been only here-
Yeah.
over two years.
[On slide 18] . Adrian, that ZAR 7.7 billion that you see is obviously actuals for the first half and then our just a forecast for the remainder of the year. I think Peter did speak to it, the fact that, I mean, all the major projects have started, with the exception of Kareerand. That's where that difference comes in. We didn't revise CapEx guidance.
Sorry, I'm a bit confused. ZAR 7.7 billion for the H1. I mean, I think that H1 you got just over ZAR 3 billion.
Yeah, ZAR 7.7 billion is the forecast for the year.
For the year.
For the year.
Thanks.
Yeah.
Thank you.
Then the green down, Boipelo.
The green? What was the question?
The question on the CapEx of the renewable energy CapEx. That's the second part of it.
At the moment, we haven't guided on that.
Yeah.
Yeah. Apologies, I didn't get that question.
Sorry, are you planning on funding on or off balance sheet your renewable rollouts?
The first phase is off-balance sheet. The second phase will be on-balance sheet, so internally.
Okay. Thank you so much.
Thank you. The next question comes from Patrick Mann of Bank of America.
Hi. Good morning, Peter, Boipelo, Jared. Thanks for the opportunity. Actually just mostly follow-ups from Adrian's question actually. You said you're redoing the feasibility study for Golpu. Can you give us an idea on timeline on that? Then I suppose a second question is also timeline related. In terms of the shaft pillar potential at Mponeng, and again, looking at your slide on Bambanani, that's, you know, obviously been quite a lucrative activity for Harmony. You know, if you can repeat that at TauTona and Savuka, that's obviously pretty, and Great Noligwa is pretty attractive. When do you think you'll have a better idea of when you could do that and when you'd be able to give us kinda more concrete project parameters? Thanks very much.
Yeah. Patrick, maybe just on what we go through to get. We are currently still have not had a SML, Special Mining Lease at this point in time. The moment we get that, we will review that feasibility. I can't give a timeline on that because that's dependent on obviously, obtaining the SML. As far as the shop floor is concerned, you know, like I said, you know, I've been involved in a kind of pillar extraction workshop, which I, you know, found very good to go to on Thursday with all the role players.
You know, I don't really want to put a timeline onto that because there's a lot of interactions in terms of potential. We can, you know, if we mine, for instance, the pillar of TauTona, the Carbon Leader pillar, which is the highest grade part of it, first, we can potentially sterilize quite a big part of the blue block, as we call the TauTona block that's left. There's a lot of interactions there. A lot of work needs to be done still. I think we're very excited about the opportunity. It's certainly not something I think will come into play in the next two years or three years. It's probably after that.
It can be a you know, exciting thing. Obviously, there's Savuka too, which has got a very good Carbon Leader grade, but for specific mining conditions. Then there's you know, opportunity VCR block is also there, although the Savuka block is not very high grade of the VCR. Then, I mean, there are much better grades than, or you know, the three of those intersections. One of them has got the same grade as Bambanani, but the other two has got significantly higher grades than Bambanani. It is obviously more tricky to mine, and for that reason, we need to find a safe way and also a way of mining it thing.
Still a long way, Patrick, to really get to, you know, when the thing will. We'll keep you posted as we continue with the development of the feasibilities.
Okay. Thank you. A quick follow-up on Golpu then, if I may. So once you get a better idea of the financial parameters in terms of a special mining lease. Then you would still need to redo the feasibility study. I mean, how long would it take to redo the feasibility study? And then would you begin that initial decline while redoing the feasibility study? I'm just trying to get an idea of, you know, if everything goes according to plan, what's the kind of timeline from granting of SML to actually producing? Thanks.
Patrick, I don't have those timelines. I mean, you know, it will be a decision in terms of if we do get the SML, we will do like early work type of work. I mean, we still have to talk about that with our JV partners. We have no idea if we will continue that or not. It is still a very good project. It is still, you know, given the copper prices moved in the last few years and what the current outlook looks like, and then obviously also where gold prices are now, we have to redo that. I don't wanna put a specific timeline on that, Patrick. Let us just say that we will move as fast as we possibly can.
Understood. Thanks, Peter. I appreciate it's outside of your control. Thank you very much.
Thank you. The next question comes from Jared Hoover of RMB Morgan Stanley.
Afternoon, Peter and team. Thanks for the call. Yeah. I think a lot of my have also been answered, but maybe one on Hidden Valley, please, 'cause I mean, obviously you've alluded to Golpu taking some time and the TauTona and Savuka shaft pillars potentially being at least 2-3 years away. In the meantime, you really need Hidden Valley to produce to plan. It hasn't done that, obviously for geotechnical issue that's at Stage 6. It looks like you've changed the plan there, you've done a new pit design. But what sort of comfort do you have that the new pit design isn't going to result in any further issues? Because it looks like the geotechnical issues have been recurrent.
And on top of that, do you have a feeling for what the underlying issue really has been with the conveyor belt? 'Cause I think that's happened a good few times over the last 18 months. I'll leave it there for now, and I'll follow up with one or two more. Thanks.
Thanks, Jared. Let me just start with Hidden Valley and what we have to add there. What we picked up is that the western wall of the pit was, you know, we felt uncomfortable with the stability of the wall. We actually did the right thing, you know, from a safety perspective, at the time, we actually brought that wall down. It is an area where there's quite a few faults and also inclusions from dikes in that particular area together. It actually is on a very tricky part of the window of the Hidden Valley. We've actually had to mine away a mountain. It's not like we have an open pit. We're actually mining a mountain, you know, in a mountain.
We kind of, you know, here it's gonna be very tricky, but we took the right decision to in actual fact postpone the mining of that bottom part of Stage 6 and move mining away from it. That had an impact in terms of our guided grade, because we actually, obviously the other ones were not as high grade as we had, and we also had to bring in some low-grade stockpiles to the plant. We've mined it back, so that, you know, we took the wall back, and we're now in a position to in actual fact mine the grades of the higher grade areas.
We're comfortable that where we are now, and we in actual fact putting it on stockpile because we can't take it to the plant. As far as the conveyor system is concerned, I mean, the conveyor is a pipe conveyor. It is at the higher end of technology. I think it's probably the, you know, the most technology challenged application of a pipe conveyor in the world. Having said that, I think we also have some of the best people out there to manage it. Certainly our engineers, they are. Well, in the six years I've been involved with Hidden Valley, we had a small failure six months ago. Then we had for the first time this big one.
This particular thing, we actually felt what was disappointing about it is that we actually did pick up that this specific splice is not suspect. It tripped the belt on two occasions, but the belt was unfortunately restarted. Only then it was in our top system, which triggered actual response plan. We should actually have escalated to higher levels of decision making much earlier. When the decision was set up, stop the belt immediately, unfortunately at the same time, it actually just we had this massive failure. We are disappointed about that because I think we could have prevented that. It is what it is, and we have to now fix it.
What we've done is obviously, I think, our continuous monitoring systems are working for us. We just need to re-react to them properly. We also in the meantime have now introduced a permanent X-ray machine at Hidden Valley, which we didn't have before. We only had it there at times when we wanted to do certain specialized work. We have it now there, so we can actually do more preventive work. The pipe conveyor in itself is also a risk because of the you know, kind of, you know, pipe conveyor is not something that is an easy thing to maintain and to run. Yes, you know, we had like a good run for six years on that pipe conveyor belt. We hope to see not a failure again.
Other than that, I think Hidden Valley is in a good shape. I mean, we've used the time now to do all the relinings and everything in the plant too, to make sure everything is up and going. What I'm glad to say is that the plant has restarted, and then also the pipe conveyor will start on the second of March. We're just replacing one or two small splices, which we now X-rayed and thought that they probably would be better if we also have the belts are standing by to replace them now. We are doing that. The pipe conveyor is turning, and it is going at this point in time.
Okay. Thanks for that. It is quite comprehensive. I guess there probably should be minimal production in the third quarter then. That's just a follow-up to that. Also on Golpu. I mean, as Patrick said, we can't really get much more on timing, but am I right in saying that all the work teams on the ground are still disbanded? Hypothetically, if you had to get the Special Mining Lease tomorrow, it would still take you another 18-24 months to reconstitute those teams. Very lastly, on CapEx. I just want you to be clear that you haven't actually revised your CapEx guidance. In the first half, the underspend, was that largely just due to the clearance project?
Or was there also underspend anywhere else, particularly at Tshepong where you've got, or you've had flexibility issues? I'll leave it there. Thanks.
Thanks. As far as Golpu is concerned, you're 100% correct. They don't have nobody on the ground except for people working on the SML. Then obviously the care and maintenance on the plant security, et cetera, that we have on those areas. We have to restart that, you know, the teams when we actually get to go ahead to start the mine. We were quite a few years ago, a couple of years ago, production ready. Unfortunately, we had to let everybody go. Now, as far as the capital expenditure is concerned, before people just look at the forecast, I just wanna say that, yes, the Waterkloof was like a big issue there.
We obviously Tshepong, you know, normally when you plan a thing, you have, you know, on many of the capital projects, when you start a capital project, you know, don't start from day one. You have to get the teams going and et cetera. Tshepong was actually 100% on target because Tshepong was already going at the time when we, you know, the start of the year. I think Saaiplaas was a little bit late in terms of just getting the crews to start up, but they are in full flight now. They are busy with all the development that we need to do on one-on-one level. Everything is going, you know, according to plan. The capital will be spent during much higher profile in the next second part of the year.
Philip, what you just-
Yeah. Just to confirm, we did not revise CapEx guidance.
Mm.
Yeah.
Okay. Thanks, team.
Thank you. The next question comes from Leroy Mnguni of HSBC.
Hi. Good morning, guys. Thanks for the opportunity. I've got a few questions on the dividend policy. I think you've previously mentioned that you'd sort of review your dividend policy once your margins are above 25%. If you look at where spot is now in terms of the gold price and what your costs have been for the last half, your cash cost margin is about 29%. You know, how does that work practically? Do you need to see that for an extended period of time? Or does that mean you're kind of currently reconsidering your policy? In terms of the CapEx for phase II of your renewable project, should we think of that in terms of the way you see free cash flow?
Would that kind of be ring-fenced and excluded when you look at the free cash flow to declare your dividend, or should we be deducting that from your free cash flow to determine what your dividend is going to be? My third question, just on the non-redeployment of that 1,500 employees, how are you sure that that is going to be that they're going to be productive? In other words, that you aren't keeping costs that will be generating additional revenue. I'll keep it to those for now. Thanks.
Thanks. I'll start on the dividend. Our policy is 20% of net free cash, so not necessarily looking at the margin. I think you're confusing it with the hedging, where we look at the 25% margin before locking in those hedges. With regards to the loan, I mean, as I mentioned to Adrian, the first phase, yes, is off balance sheet. The second phase will be on balance sheet. We are looking at various sources of funding for that. I would exclude it from the free cash when you're looking at a dividend going forward.
Yeah. Leroy, maybe on the Bambanani thing. We've got 1,500 employees at Bambanani. That's quite easy to bring them or to integrate them within our organization. We have quite a turnover of employees per month. You can see we have stopped all new recruits some time ago in anticipation of this. We obviously always open up for voluntary separations. There's always some uptake on that. We don't foresee any issues that we will end up unproductive labor. We'll, you know, very soon be in the things. Obviously, we also have, you know, contractors that we can replace. We manage it quite well. We just recently did the Unisel.
We were 2,000 employees at Unisel that we you know, that we closed down and eventually only 1,000 on the pillar, but you know, for 2,000 over a period that we've managed to integrate into our operations. The crews of Bambanani is obviously some of our best possible mining crews that we have. So we certainly would like to hang on to them and make sure that they are integrated into the rest of Harmony. We don't foresee any issues with that. It's also been very well discussed with all our stakeholders and everybody know and understand where we're going. We keep everybody very close to our long-term plans.
All right. Thanks. Thanks for that. My apologies. I'd misunderstood the application of that 25% margin requirement. Thanks for the clarity. Maybe just one last question, if I may. So it looks like your surface operations are becoming quite relevant in your portfolio. Has that kind of changed your strategic thinking around that? Would you look to acquire some surface operations? Also maybe some of the mines that have recently closed or are going to close in the next couple of months, are there any opportunities to utilize some of that surface infrastructure for sort of tailings retreatment operations?
Yeah, good question, Leroy. Yeah. I mean, obviously these surface operations are very profitable at this point in time, and they're doing very, very well. As plants close down, where we have less and less, you know, like for instance, Kusasalethu plant at the moment, we take Kusasalethu ore to Mponeng plant. That plant at the moment is doing what we call MOD, marginal ore dumps. But it's the moment that's finished, it will most likely be converted into a tailings retreatment facility. You know, we still have a little bit of MOD to do, so we don't make the decision now. It can easily be transferred or transformed into that.
Obviously, we in the process now of doing the Savuka plant to make it a tailings retreatment facility. Very, very low capital. We only talk about ZAR 36 million, small capital, but that's certainly something that we can do. Yes, I think the important question is if there are potential to do something more bigger, and that we you know we haven't you know decided on anything like that like that yet.
Certainly, you know, in the Free State, we have a huge amount of tailings at our disposal, and certainly something that if you could potentially build a brand new plant one day and build on that, you can, you know, there's a real, you know, I think a very good outcome for that going forward. Having said that, I mean, we're also closing down some of our mines now. There's gonna be Masimong, there's gonna be Bambanani. So that creates an opportunity in our current plants for more tailings retreatment.
Okay, thank you. That's very clear.
Thank you. That concludes the questions on the lines. I'll hand over now for questions on the webcast.
Thank you very much. We don't have any questions on the webcast at this stage. Yeah, nothing's come through, so I think we can end there.
Just to thank you all for joining us this morning. It's really good. Hopefully, we can one of these days be seeing you face to face. I hope that this results presentation we will be in that position, but certainly seeing the world is opening up a bit. Yeah, thank you very much for joining us.