In the media

DRDGOLD needs to let go of alter ego

[] -- DRDGOLD must be keeping an eagle eye on developments at Gold One International, the gold junior which has seen its share price gain nearly a third since the middle of March amid speculation of a "change in control".

DRDGOLD must be keeping an eagle eye on developments at Gold One International, the gold junior which has seen its share price gain nearly a third since the middle of March amid speculation of a "change in control".

Particularly instructive for DRDGOLD was Gold One’s tactically savvy decision to split its high-risk exploration assets - dotted east and south of Johannesburg and crystallised in Goliath Gold - from its operating asset, which produces gold at a profit. Investors know what they’re getting in Gold One, a decisiveness in strategy DRDGOLD may want to adopt for itself when its board gathers for a crucial meeting on April 10.

DRDGOLD has kept itself alive over the last three years by developing its surface retreatment assets in Crown and Ergo while scoping down its underground mines, keeping only Blyvoor, the 70-odd-year-old Carletonville mine. Even then, Blyvoor has only just survived, having gone into judicial management last year.

While that strategy has served CEO Niel Pretorius well, including resumption of the dividend, it has also worked to confuse matters about where DRDGOLD is heading, and what it thinks its proposition should be in the gold market. The question DRDGOLD’s board wants to ask is whether it’s "running to or away from risk", as Pretorius terms it.

The market has been informed of the strategic divide DRDGOLD has before it: whether it should sell or separately list (demerge) Ergo, and in the process relaunch DRDGOLD as an undergound, marginal gold producer with Blyvoor as its foundation asset.

Pretorius has some interesting concepts for such a DRDGOLD, which could include creating a vehicle consisting of other marginal shafts belonging to Gold Fields and AngloGold Ashanti. Talks have taken place but no one’s calling in the lawyers yet, as I understand it.

One idea is to create an advisory board that would help manage Blyvoor and other marginal shafts contributed or vended in by the gold majors. The marginal shafts would share infrastructure, enabling the majors to derisk the rump of their company asset mix in South Africa. For its part, DRDGOLD would then sell itself in the US again as a share capable of responding quickly to dollar and rand gold price shifts, up and down. That’s the theory, with Pretorius eager to present the board with reasons why it should be adopted.

"...there’s an entirely new slant on what constitutes marginality."

Why would the likes of Gold Fields and AngloGold Ashanti consider such a proposition? Well, in the ever-declining profile of South Africa’s gold industry there’s an entirely new slant on what constitutes marginality. Anyone producing gold at between $800 and $900 per ounce might qualify, says Pretorius.

As for Blyvoor, it needs more than stay-in-business capital to help it flourish. At current investment levels, equal to about 9% of turnover, Blyvoor mines at between 60,000 and 70,000 tonnes of ore per month. However, it could be producing at a far more profitable 90,000 tonnes/month, a quantum that requires development capital it doesn’t currently have.

It’s terribly risky though. Pretorius has done an admirable job paring down DRDGOLD, but you can’t legislate for the reality of an asset like Blyvoor. A seismic event in 2009 removed its high grade panels at a stroke. Unfortunately, that was shortly after DRDGOLD last wooed investors to its investment case.

A month-long strike, a weakening in the dollar gold price, and poor recoveries at Ergo completely took the breath out of DRDGOLD’s sails. The result was a loss of credibility the firm is only now probably regaining in the form of RBC Capital Markets’ glowing report, in which DRDGOLD’s optionality has been remarked upon.

Said Leon Esterhuizen, RBC’s respected gold analyst: "There is potential to add some critical mass to Blyvoor’s underground operations by acquiring high grade resources from a neighbouring mine. This should enhance Blyvoor’s economics, enabling it to operate on a standalone basis". Esterhuizen has the stock on a sector outperform, although bear in mind the report is dated March 24 and followed a 12% sell-down in the first half of the month.

"We want to get serious investors back into the stock. We need a simple message, not the currently ambiguous one of running towards and simultaneously running away from risk," said Pretorius.

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