In the media

DRDGOLD retains costs

[moneywebonline] -– It–s Thursday October 27 2011 and in the studio with me is Neil Pretorius, he’s the CEO at DRDGOLD and they’ve just put out their income statement for the quarter ended September 30 2011

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GEOFF CANDY: It’s Thursday October 27 2011 and in the studio with me is Neil Pretorius, he’s the CEO at DRDGOLD and they’ve just put out their income statement for the quarter ended September 30 2011. Neil, it’s your first quarter 2012 fiscal year numbers and the numbers look good. Your operating profit up 192%, compared to the quarter last year. Take us through a few of the highlights quickly.

NEIL PRETORIUS: I think the most important two drivers of this quarter’s performance were the fact that costs remained manageable, we managed to keep our costs relatively under control and, of course, the gold price. The gold price shot up and we didn’t see a decline in gold production. Gold production, in fact, went up by 1%. So, the combination of cost control, steady production and a very robust gold price I think all contributed to the numbers.

GEOFF CANDY: Now, this is a very different company to the one you took over in 2009, you’re about to sell Blyvoor, the expectation is that the announcement will come by the end of this year, at least of who the bidders are, and you said in the press conference you’ve had four offers so far. I know you can’t say that much about them but you do still or you would like still to have some kind of a hand in Blyvoor after the sale.

NEIL PRETORIUS: Yes, I think the sale of Blyvoor is because obviously the two asset types that we have are so different and you can’t really market a company where in the same sentence you say to your potential investor, we represent both the lowest and the highest risk in the South African gold space. So, you’ve got to be something and we decided that we’re going to be the recycling company because that’s where I think most of the future potential for our company lies. But then on the other hand, also our shareholders have invested the better part of half a billion rand into Blyvoor over the last ten years or so. To sell it now and not see any potential upside, if the gold price were to continue to rally, I think that would also be unfair to shareholders. So, the way that we’re trying to position this transaction and negotiate this transaction is one in terms of which clearly we want to make it affordable to the right purchaser, somebody with a balance sheet and the ability to capitalise the business adequately. But then in the medium to long-term, if there’s upside, a least get some or all of the investments that our shareholders have made over the years back into the company.

GEOFF CANDY: Let’s talk about the low risk side of your business, the Crown/Ergo complex, the mining of tailing dams effectively. Where’s the growth going to come from in this business?

NEIL PRETORIUS: There are two things basically, I think we’ve established ourselves in the central and East Rand as the company with the competitive advantage in the sense that we have the footprint, we can link up all of these tailings dams and so forth, and treat them. So, I think growth in so far as the recycling business is concerned will come from three different directions. In the first instance it’s by simply optimising the extraction efficiency of the reduction works of the metallurgical plant. The material already arrives in the right sort of quantities and we’re increasing the capacity of our Ergo plant now in the next few months by about 50% and phasing out some other plants. So, the volume delivery is there. If you could improve or increase the percentage of actual gold that you recover from the same amount of material that flows through it, then of course the economies of scale start looking really attractive in this business. The technology is there, we think we’ve identified the technology to at least give us an improvement of around 20% to 25% on existing extraction efficiencies. The second avenue of growth or growth opportunity is offered by a byproduct potential. All of these tailings dams contain various other minerals as well, amongst others, uranium and sulphuric acid. Now, the same technology that enables us to improve the extraction efficiency of the gold circuit potentially could concentrate down the runner mine [UNCLEAR], the material to an adequately high cut off for the extraction of uranium, so that would be a second potential growth area. Slightly more modest I think than the upside offered by technology improvement on the gold side but nonetheless something that could dilute your costs and add some additional revenues. Then the third avenue is simply by expanding the footprint, extending the footprint either towards the east or the west or both. We only control about 30% of all the tailings in and around Johannesburg.

GEOFF CANDY: How many tailings are there in Johannesburg?

NEIL PRETORIUS: There are plenty. We have accessible tailings that we can treat over the next few decades, it’s anything up to 800 million tons. Practically treatable is probably about 600 million tons at this stage and we do it at a rate of, let’s say 25 million to 28 million tons per year. So, there’s plenty, which we already have under our control.

GEOFF CANDY: What kind of grades are you looking at these kinds of dams?

NEIL PRETORIUS: Well, it’s anything between 0.28 to about 0.4 grams per ton. So, it’s very much the ultra volume environment but then again, I don’t think we really resemble a mining operation anymore. I think we’ve become more of a gold factory. Increasingly we’re starting to wonder whether we’re a technology company or whether we’re a mining company.

GEOFF CANDY: Well, it’s a very good point that you make there because at one level and something that struck me as interesting, during the presentation, was the comments around ERPM extensions that you also have the licences for and your plan was to unlock value there. So, what you said is you’re going to take it up the value curve and then try to unlock it in some form or another.

NEIL PRETORIUS: Absolutely, yes, I think its assets at this stage because of the operation and strategic focus that we’ve had over the last few years, they are assets that have been completely under-emphasised, nobody really knows about them but if you look at the underground gold mining space and what future development potential there is in South Africa, then these could present an interesting asset in the right portfolio, with the right investors and with the right sort of management. So, basically what we want to do is just tell the market more about it and at the same time create the structure for somebody with the appetite and the capital capacity to take exposure to the asset and unlock some value for our existing shareholders.

GEOFF CANDY: Now, is that kind of where you’re looking to go longer term? So, you’ll have the nice base of the tailings dams, the gold factory as you put it, and potentially there’s a plateau to the capacity that you can put through that on any given year and then perhaps go and look at other exploration activities. I know you’ve got some ops in Zim as well, looking at Mozambique, perhaps it’s almost a way of unlocking value in various other portfolios as well.

NEIL PRETORIUS: Absolutely, I think we could leverage off the existing cash flows because the amount of capital that we need to spend in addition to what we already have at the recycling business is fairly limited. So, I think what we would probably want to do going forward is continue...there’s one thing that you don’t want is to become an annuity because then because then you might as well just put you money into a bank account. It might be a fairly robust annuity but it’s an annuity nonetheless.

GEOFF CANDY: Especially [UNCLEAR]

NEIL PRETORIUS: Exactly, yes. So, you do want to offer some sort of growth but you also want to do it in the right space and in the right way. Now, the growth steps that we’re taking over and above the technology improvements that we’re envisaging over the next few months, those involve really becoming the primary concession holders in jurisdictions that have up until now may have been overlooked by many of the other players but which offer good value in the long-term. Basically go to governments, go to provincial governments and so forth and obtain new exploration licences and see if we can build up a portfolio of assets that could offer some value and be attractive to the right sort of investor. That’s the one side and I think we’re pretty much down that track but then again, I made the comment earlier about are we a gold mining company or a technology company and I think our board, over the next few reporting periods, will increasingly start deliberating over this particular point. Do we take our technology and the expertise that we have internally, amongst our management personnel, to move vast quantities of relatively low value material and concentrate it to a point where it offers significant and attractive margin? Is that the sort of thing, which we should expand over other types of minerals and other types of resources as well? So, I think those are the things that we will start looking at going forward. It’s nice to be in that position, its nice for the fist time, in as long as I can remember, to be a little bit on the front foot, where you can start talking about the future and not just defending the business.

GEOFF CANDY: Talking about the future, you did mention that your dividend is sustainable and also, perhaps, that we may see a special dividend when the Blyvoor sale goes through.

NEIL PRETORIUS: Yes, look, it’s a question that, I think it was a bit of a naughty question that was posed by Mr. Shepherd but then again, he’s been diligently following our stock for so many years, so he’s probably entitled to ask these sorts of questions. But yes, I think we won’t hold on or hang on to cash, which we don’t need immediately. We run the business for the shareholders and for the other interested parties but in accordance with predetermined criteria and if we don’t need the money we’re not going to hold on to something that diminishes in value when our shareholders can maybe do something else with it. So, yes, I think the whole issue of a special dividend or as an agenda item, looking at the cash balance and deciding whether or not there’s something available for distribution, that’s something that will occur. It’s unlikely to occur in the immediate future, I think the next dividend would probably be the year-end dividend because that has become our policy. Obviously if circumstances continue to be favourable but I think once we’ve spent the capital and once we’ve secured our obligations with regards rehabilitation cover and so forth, we might be with a bit of surplus cash from time to time and we will want to give that to shareholders. That’s certainly, I think, the sentiment in our board.

GEOFF CANDY: And, of course, it’s something clearly that investors wanting as well, especially as gold companies begin to become treated as just general equities, as well.

NEIL PRETORIUS: Absolutely, you have to give shareholders a reason to buy your share and not just buy the ETF. That reason is that you pay them for holding your stock and you want to pay them 2%, 3%, 5%.

GEOFF CANDY: Neil, just to close off with then, if we look briefly at two final questions. Firstly, how much is all of this going to cost to get to where you want to be in terms of the tailings side of the business?

NEIL PRETORIUS: Well, I think that the next step for us to optimise the extraction efficiency, there are two components that we need to bring in, a floatation plant and an ultra fine grind circuit. We will consider the final feasibility study by the end of the year, by December but the indicative numbers suggest something in the region of about R250m.

GEOFF CANDY: And finally, where do you see the gold price going?

NEIL PRETORIUS: Well, I posed that question to a, whom I believe to be a very astute analyst and investment manager, I’m not an economist myself. So, I asked the question of people in the know and he said, you know what, it’s as simple as this, as long as new debt is created to pay old debt, you are probably going to want to be in the gold space.

GEOFF CANDY: Neil Pretorius is the CEO at DRDGOLD.