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CNBC Power Lunch with Niel Pretorius

Presenter: Joining me in the studio is Niel Pretorius, Chief Executive of DRD Gold. Thanks so much for joining us in the studio this afternoon and of course we’re putting the future of mining in South Africa under the spotlight today, South Africa being one of the original mining countries, an economy, a stock market, a currency that is all driven by this sector when all things are looking pretty bleak in the world at this stage, where do we stand right now when it comes to the state of mining in South Africa in your view?

Niel Pretorius: There are two stories to be told. The one is gold. Gold is looking pretty robust because of the fact that gold has a safe haven attraction for investors so the gold mines are doing well in the sense that their product is selling at record highs. The other commodity-driven mines I think are probably facing a slightly more challenging environment. The prices of their products have gone down quite significantly. The price of diamonds is down quite a bit. Copper, chrome, zinc, nickel, the whole lot with the exception maybe of coal, all of those gone down quite significantly and those are unfortunately all consumption-driven so one probably has to wait out the current economic crisis and consumer trends to turn before you’ll see a trend in the price of those commodities.

Presenter: While we’re waiting for this cycle to turn we’ve got major stumbling blocks to contend with at the same time. We’ve got costs exerting huge pressure on mining house’s bottom lines. When it comes to BEE, when it comes to compliance, when it comes to labour, power shortages, skills as well, the list is pretty much endless on that front. Can the industry really weather this and ride out this cycle, because it’s certainly going to be tough.

Niel Pretorius: I think the good companies are certainly receiving support from their shareholders. One just has to look at some of the more recent newscasts or releases on capital that’s been raised in pretty large numbers at pretty steep discounts by large companies. But as a company with mines in operation they are in production and they have good quality assets so those in all likelihood would be able to weather the storm for a period of time, depending on how long this is going to take and what will initiate a swing in consumer patterns. The smaller ones that have recently been established and they are a little bit more marginal than the larger ones, they might be in for a bit of a rough patch I think.

Presenter: What kind of strategies do mining houses employ in this current environment?

Niel Pretorius: Well, one has to be very conservative in one’s investment decisions. You really want to invest in projects that have a near-term return on investment. You really want to focus on higher margin assets if you have those. You want to cut back or at least slow down projects with a large capital requirement and that will take a long time to come into operation and of course those that are burning cash are just being closed down.

Presenter: And given that, we’ve seen a lot of these miners reducing the amount of exploration that’s currently under way and also undertaking some very targeted exploration on significantly potential projects as opposed to just widening their scope and going for it all.

Niel Pretorius: Absolutely. I think there was a lot of hype around commodities and the shortage of commodities a few years ago and as a result maybe too much money was invested in exploration in particular and maybe the expectations that were created at the time were perhaps a bit unrealistic but, you know, we were talking about a $200 a barrel oil price at that point in time - so the same reason why one day these commodities are again going to be very expensive, is the reason why they are now closing down and that’s because they are early stage.

Presenter: If we have to even look at this glass half-full, even if demand was there, capacity to mine more, I mean there’s only so deep you can go, there’s only so safe you can get in getting to those levels and once again, costs. So what actual capacity do we have to do more than we’re doing in the first place?

Niel Pretorius: I think that’s a very good question. The global economy is probably going to have to reset significantly and I think consumption trends for the next few years - even after we see a recovery - will be significantly more modest than what we saw a few years ago. People will buy what they need and not necessarily what they desire and as a result you’ll probably see significant supply destruction and with supply destruction ultimately comes inflation once the cycle turns and once supply capacity is significantly below actual and real demand and then I think once again you’ll see that commodity prices will be extremely high - lower volumes but at much higher prices in a few years from now.

Presenter: In this context, what kind of leadership is the industry looking for?

Niel Pretorius: Well, I think the industry is looking for consolidation. The sort of leadership I think we are seeing the CEOs of the three major gold mining companies increasingly display - conservative, very clinical in their approaches to return on investment, mining towards quality as opposed to quantity and I think the leadership that we’re seeing emerging from the three major gold producing companies certainly is the sort of leadership that more and more companies will have to adopt.

Presenter: Does the current environment where we’re seeing huge lay-offs help an emerging market like South Africa in providing that ability and that opportunity for companies to retain and then attract incoming leadership?

Niel Pretorius: I suppose the ability to keep things together is going to become an important qualifier going forward, not necessarily grow your business. It’s a challenging environment. I think with a number of companies closing down, the solid leaders are certainly emerging - the ones that can still instil confidence in their shareholders and can still get the amount of capital necessary to sustain their operations.

Presenter: Of course, the ray of hope in all of that is that this is a cycle, it will turn. On that note, let’s leave it there. Thanks very much for joining me this afternoon.