By: Alec Hogg
Posted: 2003/03/28 Fri 21:00 | © Moneyweb 1997-2003
MONEYWEB: Durban Deep is a gold mining share that has brought new meaning to the word “volatility”, or perhaps [the expression] “falling like a stone”. We will find out what gives from DRD investor relations executive, Ilja Graulich. Ilja, it’s been a rough ride over the last little while for DRD. I see today another 4% off the price, down to R17.02. We were discussing it earlier in the week, David Shapiro and I, and one of the issues that did come up – and I would like to explore a few of them with you – was that there is a big short position in your stock. In other words, certain people had sold a lot of shares that they didn’t own, and they will profit greatly should the share price fall as it has been doing. In other words, you are almost pushing the share down. Is there any credence in that argument?
ILJA GRAULICH: Alec, I think you have to look at two situations. We get a lot of information around the short positions that are in our market. From our market, where we are listed on Nasdaq, which is regulated by the SEC.
MONEYWEB: And that’s in the United States?
ILJA GRAULICH: Correct.
MONEYWEB: Why is that relevant to you, Nasdaq rather than South Africa?
ILJA GRAULICH: What happens is, we have some 80% of our shareholders offshore and the majority of our trade, most of our trade, happens on Nasdaq. Just to give you an idea, the volume that we trade on the JSE in a month is equivalent to two days’ worth of trade in the United States.
MONEYWEB: The price is set in America?
ILJA GRAULICH: The price is set and it’s not just DRD as a gold stock. I think if you look at the other gold stocks, it’s a similar scenario, if you look at the ownership and where the volume is traded. So what we look at is we look at the short positions that are given to us by the SEC, by Nasdaq.
MONEYWEB: Just again, do they have to disclose it in the United States?
ILJA GRAULICH: Yes. What happens is, on a monthly basis you have to disclose, it’s an SEC ruling. I checked it with Nasdaq today again. The hedge funds and a variety of other funds have to actually give that information, so that you can have a regulated market. So the information does come through on a monthly basis.
MONEYWEB: So you know exactly where you are as far as the people who are trying to sell your share down, and of course obviously the long positions, day to day?
ILJA GRAULICH: Correct.
MONEYWEB: All right. Now what is the short position in Durban Deep on Nasdaq?
ILJA GRAULICH: On Nasdaq at the present moment, this is at the end of February – and for March obviously I am still waiting for the data – we are sitting at a short position of 6,5m shares out of a total issued share capital of 183m. So, if you look at it in terms of day to cover, that means how many days trade would I need to cover the short position in the market, we are looking at around about 2.5 days to cover that, and if you look at the group average in terms of our peers, it is about 2.1 days.
MONEYWEB: All right. So you are not out of line. It sounds like a lot of money, though, six multiplied out over a hundred million rands worth of short positions.
ILJA GRAULICH: Yes, I think what you have to look at is also in terms of where did the short position come from. If you look at before November, we were sitting at less than one day day to cover. As you know, in November we raised some capital, close to $60m, through a convertible bond, which is a derivative instrument. So you saw a lot of hedge fund players coming in, taking up that bond and, through the various structures that are available to them, starting to short the share, because they know that if the share converts in a certain time, and the share price goes up, they have the scrip available to deliver to the market. And if the share price does go down, they can buy back the share at a lower level and then cover themselves in that way.
MONEYWEB: Sounds quite complicated the way you’ve put it now, but, in essence, there are two investment instruments, you can buy the one and you an sell the other one and make a profit in the arbitrage between the two of them?
ILJA GRAULICH: That’s correct, and that’s what hedge funds do in the market.
MONEYWEB: And that’s the reason why your short position went up?
ILJA GRAULICH: The short position went up, yes.
MONEYWEB: I ask this, because there is a conspiracy theory – and we’ve seen DRD In the news a lot recently, we’ve seen a couple of your executives resigning and putting out pretty spicy letters that have been published all over our Web site. We’ve also heard Brett Kebble on this programme, having a full go at DRD, and the theorists would say, if there are people who want to see the share price of DRD falling, there are few better ways than having a whole bunch of ammunition and trying to hurt the reputation of the firm?
ILJA GRAULICH: I think that’s correct. I have this information available in terms of the way they look at it, and one way is try and short the share. Obviously, we will have to see if that has increased in the March month. If there is a short position on the JSE, for which I don’t have the information available, I don’t think it will affect the share at all in terms of short position, given the way the share is traded on Nasdaq and the way it is traded on the JSE.
MONEYWEB: So the important thing here is that the price is made in the United States, and the conspiracy, if there were one, might have other intentions. You are not going to make a whole lot of money out of it, because if the gold price were to go up, you could find yourself losing a lot of money.
ILJA GRAULICH: That’s correct. What you have to look at is, in terms of the DRD share, it trades around 500% a year – that means five times the entire issued share capital trades. So in order for somebody to try and build up a massive short position in terms of trying to hurt the share, I think it would be very, very difficult. And placing it into context in terms of volatility of the gold price and the volatility of the rand, and our correlation to both of them, I think it is quite a risky instrument that you are looking at in trying to short the share and trying to hurt the company through that way.
MONEYWEB: Is there any ratio that you can give us for DRD on, let’s just say, if the gold price goes up $10, what would the share price go up by?
ILJA GRAULICH: Historically, the company, if you look at the depreciation of the rand over the last five years – we did the calculation, that’s taking out the appreciation of the rand over the last three months – DRD has been looking at a correlation of one to six. That means a 1% move in the dollar gold price is a 6% move in the share price. So it’s the highest correlation that you have.
MONEYWEB: Dollar gold price, not the rand gold price?
ILJA GRAULICH: Yes, in the dollar gold price, given the depreciation of the rand that we’ve seen over the last five years. So you have to take that into account. That’s why I said that over the last three months it has changed, because the rand has moved very differently from the way it has moved previously. So that means a 1% drop in the dollar gold price, 6% drop in the share, and that’s what we saw last week when the Royalty Bill came out. A 3% revenue royalty is equivalent to around about 16, 17% of our share price. So it was exactly in line with what we expected it to be.
MONEYWEB: So, from your perspective, no conspiracy theory, no huge short position. It’s just a function of the fall in gold price.
ILJA GRAULICH: I think that’s how we view it at the moment.
MONEYWEB: Ilja Graulich is the investor relations executive at Durban Roodepoort deep