By: Alec Hogg
Posted: 2003/03/24 Mon 21:17 ZE2 | © Mineweb 1997-2003
MINEWEB: Our other top story we’ve been looking at over the last little while is Durban Deep and we’ll touch on that in a moment, but today the share price of Durban Deep dropped by 16%. Chairman Mark Wellesley-Wood is with us. Mark, we were talking a little earlier with our market commentator, David Shapiro. He’s concerned about the Money Bill, the royalties government is proposing on mines. Your mine, Durban Deep is a high cost producer so I guess you add another 3% onto your cost basically, you could be in quite a lot of financial difficulties. The share price today, the drop of 16%, is that related to the Money Bill?
MARK WELLESLEY-WOOD: Yes, I think it is directly related. We were all expecting this Money Bill to come out but we didn’t know when. Clearly, as you’ve seen, the figures quoted for the royalties have come out at the higher end of people’s expectations.
MINEWEB: Well much higher. We had Bernard Swanepoel here who was complaining about 1% and saying well ….
MARK WELLESLEY-WOOD: Well perhaps Bernard had 1%, we had a number in between in mind, I’m sure there was a range, but yes, I think you’re perhaps right, the industry and the markets expectations had eased or were falling and it comes at a particularly bad time. The strength of the rand, volatility in the dollar gold price, facing wage negotiations now at 12%, it’s all come together, the timing really couldn’t have been worse, let alone for the position as you say of some of the marginal producers or indeed the area where I’m concerned, some of the new black economic empowerment structures which obviously also operate some of the leaner ores and some of the more marginal mines. It has been presented as a discussion draft and I don’t mean what the purpose of that really leads to, it’s different to the leaked document we had with the charter. It’s been presented with quite a lot of supporting statistics on international comparisons about these percentages of royalties. I think the problem is all the comparitors don’t have the same economic stake in gold that South Africa does. We have a very high labour force here as a percentage of costs, 50 to 55% typically are labour related. We have the South African golden goose and I think therefore the international justifications for it may not be the right model for a country that actually does have quite a large stake in jobs going forward.
MINEWEB: Are we out of line though? Is what’s been proposed out of line with other countries in the world?
MARK WELLESLEY-WOOD: The justification is that it isn’t, but they’ve quoted countries like Poland and what little I know about the Polish gold industry it probably employs 500 people. We employ 500,000 so that doesn’t, it might be right statistically but I don’t know if it’s right with regard to the economic policy for South Africa.
MINEWEB: Have you had a chance to talk to any of the Treasury officials?
MARK WELLESLEY-WOOD: No, I haven’t, as you say it’s quite a complicated document, there’s quite a few grey areas in it. I mean some of them are quite peculiar, there’s this premium you can pay for stabilisation which seems rather strange because having set the royalty you’re now invited or it’s proposed that if you pay a 50% premium you will get like an insurance policy, you will get that rate fixed for 30 years. All that does is really set up the opposite effect in one’s mind is that perhaps what is proposed is not rigid. And therefore there is some rolling either agenda of increasing these royalties or trying to control the margins of the different segments in the mining industry by direct government intervention and I think those are the sort of weak areas that investors will focus on.
MINEWEB: Well we saw the share price, your share price today dropping 16%. Have you had a chance to field any questions from foreign investors given that most of DRD’s shareholders are outside the country?
MARK WELLESLEY-WOOD: Sure, I think, what I’m saying to them is obviously this impact is delayed. One of the good things of the bill is the earnings impact is not now, it’s when you convert your old order rights to new order rights and we have about five years in which to go through that process, so the immediate impact on DRD’s earnings is nil, but one of the other exemptions that we must have clarity on is this marginal exemption, there is an exemption for marginal mines.
MINEWEB: High cost producers?
MARK WELLESLEY-WOOD: Well they don’t say high cost unfortunately, they say low grade ores. Now I’m not quite sure whether again this is just a bit of wording or statistical error in the wording because low grade ores could mean dump retreatment or it could be and I use the example something like ERPM, you know high cost, deep, pumping, hot, ventilation, those are all the reasons that we’re battling with our black economic empowerment partners to get those sort of assets back into the market and I think we need clarity as to how that marginal offset will work.
MINEWEB: Well you’ve obviously tried your best, but you didn’t convince too many investors because they sold your shares aggressively today.
MARK WELLESLEY-WOOD: I haven’t seen the share price.
MINEWEB: It’s down 16%.
MARK WELLESLEY-WOOD: Oh, that I knew was coming because that was an adjustment to Friday’s close in New York so they’d already had their chance in New York because the market was open on Friday when we were closed.
MINEWEB: Mark, what has been interesting is with all the developments that have been going on around DRD with your battle, if you like, with the Kebbles, a couple of people resigning from your company making all kinds of allegations, the share price hasn’t really moved on that news and yet today it takes an awful knock. A delayed effect maybe?
MARK WELLESLEY-WOOD: Oh it is, but again I have been speaking to investors about those issues and there’s been no negative feedback at all. If there were criticisms we should have acted in certain circumstances a bit more strongly, a bit tougher, taken more immediate action, got all the rotten apples out of the barrel sort of thing. No, in fact our share price was generally rising, relative to the trend. The Money Bill just seems to have been the catalyst. I think, as David’s made the point, the markets are very difficult and irrational at this point in time, yes, DRD is the marginal producer so it’s the logical one to say whoops if I’ve got a concern about the Money Bill I’ll express it in a DRD action. But equally, I think the converse could be true, that once we get clarity that it’s a deferred royalty, we get clarity on the marginal offset provision, DRD could actually be doing a lot better than some of the other gold stocks.
MINEWEB: Indeed. Just to close off with, the story with the Kebbles, when we did speak to Brett Kebble last Thursday, he suggested that he’d be quite willing to talk about a settlement in the whole issue.
MARK WELLESLEY-WOOD: Well, I read the transcript, I didn’t pick that up.
MINEWEB: That’s what I picked up at the end. David you heard the interview, last Thursday you were here. Didn’t you pick it up that way?
DAVID SHAPIRO: I didn’t pick it up that way.
MARK WELLESLEY-WOOD: Thank you David.
MINEWEB: All right.
MARK WELLESLEY-WOOD: But that’s not the point. The point is yes, this is not a vendetta, this is corporate governance. There are claims for amounts of money, it goes back a long time, if those claims can be settled out of court then of course that’s pragmatic, we’re sensible people, we’re not out here to kick the Kebbles to death, we’re just out here to look after our shareholders and have a nice, good, clean company.
MINEWEB: Mark Wellesley-Wood, executive chairman of Durban Deep.