DRDGOLD Ltd (DRD) 2006 Q2 法說會逐字稿

Good afternoon and welcome to the DRDGOLD Fourth Quarter Earnings Conference.

[OPERATOR INSTRUCTIONS].

I would now like to turn the conference over to John Sayers. Please go ahead, sir.

Thank you. Hello everybody and welcome to our conference call. I trust you all read our site details for the quarter. As you can see that fundamentally our S.A. cash costs remain flat. S.A. has got a second consecutive quarterly profit and apart from ERPM Extension 1 we've now got the prospecting rights for the ERPM Extension 2 granted in South Africa.

We are in the process of restructuring our Australian operations. I'm sure there will be questions on that to follow. You would have seen that our operating costs and production ounces are detailed in a separate schedule. Blyvoor running at 519, Crown at 399 and ERPM at 644. And Niel Pretorius will talk to the South African numbers and particularly the ERPM.

You will see [that are slow here] at the moment. You've got Porgera at 396, but that follows a lightning strike, Tolukuma 827 following a mill breakdown. That is looking a lot better now, but we can cover that later on and Vatukoula has been put on care maintenance.

If you look at margin management you can see how that has come around but apart from the Australian impact which gives you sort of a turnaround of S.A. I think a lot of the issue with the margin management will be managing the existing South African reserves and resources and getting a fix on the Australian costs.

Niel, I'm going to hand over to you to talk through the South African operations and then I'll handle the Group and the Australasian issues.

Thanks John. Anyhow can we are live? All right I'll talk to you the numbers at Blyvoor first and foremost. At Blyvoor the strategy still is to move away from our former profile of low-volume, high-value producer to higher volume, over-value or lower grade producer. During October and November of last year we were getting pretty close to hitting some of the strategic markers that we had set for ourselves toward achieving this profile. It's still underway.

We've had a number of incidents which has impacted on progress in this regard. And I refer to these as incidents or events, most of them being events that have been part of our -- part of our control or external events as opposed to some of the events that you might aim on so I'll elaborate a little bit later on.

Both in October and November Blyvoor came within one or two shots from achieving what we consider to be a very important strategic marker and we achieved 70 [technical difficulty] at the stated value of [technical difficulty].

November, we had a fire, which restricted access into the area for a period of about two weeks. We've had slightly lower surface production during the [SAC] period mainly because of rain. As a precautionary measure against lightning we banned any dumping of surface materials.

I think the effect also of the [technical difficulty] towards the end of the quarter also had a slight impact in the December numbers. So as you can see the profit before Blyvoor was really encouraging. It's not quite where we want it, but as I said earlier the markers against which we are measuring our focus towards achieving the higher margin profile are very much within reach.

At Crown the robust CapEx or reinvestment program which we followed at the beginning of last year, January through towards June in refurbishing our pipeline [columns] and also refurbishing the multi [fit lines]. This has paid off and it's created significant margin or improvements in margin at Crown as the numbers suggest. Crown is still very much the operation, which at this stage is giving our South African operations the degree of flexibility that we require whilst we're still very much in a process towards bringing the underground operations towards stability.

We had hoped to -- brought the Top Star part into our circuit by now. Once we submitted in March the Top Star application the Departments of Minerals and Energy there is a group of concerned citizens, who have approached the Departments of Arts and Culture. They've managed to achieve a declaration in terms of which Top Star has been declared an interim heritage site. We've embarked on an administrative process to have this set aside and we'll also be approaching government to assist in this. I originally said that these issues-- the Minister of Minerals and Energy is currently the Deputy President of South Africa and approved a smaller application, an earlier application to bring or to submit an application for a Top Star mining right. So we're hoping to overcome that and still bring the Top Star circuit on line while we have deposition capacity for our slopes on our deposition facilities.

As an interim measure we've brought an application for the 3L2 dump. This efficient initiative is ongoing at somewhat reduced margins but at better than breakeven until such time as we do have Top Star on line. That application is in its final stages. We've dealt -- we've jumped through all the administrative hoops in order to get that approval and the CapEx to establish the sites has also been approved. The site establishment is ongoing as we speak.

ERPM, at ERPM we have two focal points where we spend our capital. The one was preserving the ore body and that involves the plugging and pumping upgrade in order to make sure that both ERPM and the Sallies 1 area, which is adjacent to current production areas, that those are preserved going forward. We have to seal off the cavity or this basin from the remainder central ridge basin in order to protect it against flooding. That project is on schedule.

The second area in which we spend capital is doing [hand] efficiencies because while Blyvoor is a high volume, lower grade producer, ERPM is very much dependent on lower volumes and higher grade. Now in February of last year we believe that had we addressed the main issue which inhibited ERPM's production. That was the decline conveyor. We managed to fix it, but at the time there were concerns there -- the production capacity or the rate at which production occurred at the ERPM had inadvertently adjusted to the capacity of the conveyor belt which regularly failed.

As a result we then commissioned or in order to address these concerns we commissioned a risk analysis in-house through the assistance of [New Entity XR]. The purpose of this risk analysis was to obviously identify areas where we were exposed or areas where we were vulnerable and which [would implicate] ERPM's production capacity.

Neither of these two results had highlighted efforts which towards the end of the quarter of last year impacted on ERPM's production profile. And those being predominantly lack of adequate ventilation into the East Long Wall where the bulk of our production is currently happening, and our inability to deliver compressed air at a sufficient rate is obviously our insular method within our control and we would have wanted to address them earlier on, identify them first and foremost earlier on and address them in time with our philosophy and applied capital to sequence it in such a way that we minimize loss and enhance efficiencies at the appropriate time, and at the appropriate place. We didn't manage to do that and as a result the 1st of November, or rather December and January were pretty disappointing months at ERPM.

We had since relooked at the rate at which we address these issues, the ventilation in particular, and also compressed air. And I believe that towards the middle of March we would have, to a large extent, have addressed the internal issues which inhibited the rate at which we produce at ERPM.

Now what's aggravated the problem at ERPM as well as our ability to mine efficiently have been inhibited by these two issues that I highlighted, ventilation and compressed air were at the same time also in [technical difficulty] in the Eastern Long Wall. Perhaps I should elaborate on this point. ERPM had moved away from a scattered mine layout to a more consistent long wall layout towards the Eastern Long Wall. And that is primarily where our focus currently is, which means that you take the good with the bad. If the bulk of your volume is from one particular source then it means that whatever inhibitors you encounter in that source take you there straight to the bottom line and impact on your production capacity.

Now further up towards the 66, 67 level, we've encountered this particular fault. The long wall configuration is such that it will sequentially now encounter this fault as we move further east -- we'd hit the fault in the lower levels at 72, 73. We've extended our -- first lengthening that area and we're in the process of further extending it so that we can or that we do produce sufficient gold bearing ore while we sequentially mine through this spot, particularly enhance the flexibility.

And with better ventilation and with the delivery of compressed air issues having been addressed or in the process of being addressed, we have to be able to continue to mine gold at the [inaudible] mine or at the required rate to achieve the forecast that ERPM has to meet and will continue to contribute towards the breakthrough.

The patterns that we see coming out of ERPM are improved. We believe that they bottomed out in January. They definitely are improved now it would seem, and with the improvement in infrastructure we have to sustain that improving pattern. Hopefully get you into the sort of profiles that we would notice between March and May of 2005. Thanks, John, back to you.

Thanks, Niel.

Thank you.

If you turn to Australasia, Vatukoula and I would expect questions on this. And I'm quite welcome to take questions on this -- Vatukoula is a little more than placed on care maintenance. We've been occupied by the military. We've had negotiations with the P.M. We believe we've found the resolution and we believe we've found a solution for Vatukoula which will fundamentally deal with the issues of rehabilitation and environment.

We are restructuring at Philip is common knowledge. We have raised working capital from ANZ and in fact I was with ANZ on Monday. We have a further 20 million to come through. We are doing that fundamentally to preserve the asset value whilst we look at the alternatives. And we have appointed Rothschild to advise us for the strategic plan going forward.

I think -- sorry to preempt any questions we do have a number of alternatives and I'm quite happy to talk to the strategy here, and the strategy in the greater group. We are bound by our cautionaries because we are looking at a number of material aspects but nonetheless I'll answer what I can. Any questions?

Thank you very much, sir.

[OPERATOR INSTRUCTIONS].

Our first question comes from Steve Shepherd of JPMorgan. Please go ahead.

Good afternoon, John. Well let me ask you the question what options do you see for you going forward with Emperor? It's clear that you don't consider it to be a core asset any more judging by the wording that you've put in your quarterly numbers. So if you would just talk through what you can in terms of the options?

And then specifically I'm having a great deal of difficulty personally understanding why you would want to get rid of Porgera if that is one of the options because in our numbers it is a core driver of your share valuation. And while it is having problems at the moment because of the West Wall pit failure and the other one-off issues which you talked about we are having a great deal of difficulty understanding why a company like yours would want not to own 20% of Porgera. Could you please try and help us understand that if that was one of the options?

Well I'll do my best Steve.

Thank you.

Firstly, the cheapest reserves and resources, you've got other ones you have 100% under your control. And to a very large extent your strategy should be to move your resources to reserves which you have already purchased of round about 280. Secondly, new and very good exploration opportunities have opened up in South Africa in the ERPM 1, ERPM 2 and Argonaut. And thirdly we don't control the cash flows at Porgera and whilst potentially it's a very good asset the CapEx program going forward is quite heavy and we question whether we were are going to get an appropriate return from the CapEx going forward.

So we do have an asset that has a value in Porgera and we do have a purchaser that sees the value of Porgera. That still leaves us with Tolukuma and the exploration or [PUD] potential and we have to really make a call in terms of our cash flows for both South Africa and overseas. And I understand, Steve, your concern with the value for Porgera. And we share that but at the same time, we are for the first time for a long time considering the alternative to investment against the very different exploration base than we had about a year ago and those are the issues we're looking at.

Could I just follow that one up, please John?

Sure.

Could you perhaps just clarify for me what you're going to do with Vatukoula then and are there kind of any financial liabilities associated with its closure if that's what you intend to do?

Steve at the moment we have a buyer for Vatukoula and it will retransform the liabilities. I can't tell you who. I can't tell you when.

That's fine you've gotten to the question then. I'll let somebody else have a turn.

Yes, thank you.

Our next question comes from Victor Flores of the HSBC. Please go ahead.

Yes thanks good afternoon. I was just hoping that you could clarify for us what covenants if any or financial I guess following up on Steve's question guarantees DRD if any has provided to Emperor?

Emperor has, DRDGOLD has $23 million of loans to Emperor which with interest accumulates to US$25 million. We have not made any guarantees at this point in time to ANZ but we are in discussion and we will make a guarantee for the excess over the current level, but that is well within our funding ability because people tend to look at only the repayment of the convertible not what it's done to our balance sheet which has freed up some US$70 million of funding.

So in the meantime we are negotiating as I have said to restructure the Australian operations, and we expect to have an answer to that and I expect we'll be able to talk fairly concretely to an option by the end of March.

Good thanks, and then a follow-up question with respect to the balance sheet, could you explain how the impairment value was calculated and what valuation you're using for the remaining carrying value for Emperor on your balance sheet?

Yes off the record you're going to put my hackles up because I might be an accountant, but I hate the accountant profession at the moment. The simple issue is that an imputed value for Vatukoula was US$117 million at the time we did the deal where we put the other two operations TGM and DRP into the operation. That was based on expected reserves and resources. A new mining plan changed that and to be prudent we effectually took the entire value of Vatukoula off the balance sheet.

Okay.

Unfortunately under IFRS we have to recognize the impairment and unfortunately under U.S. GAAP we cannot re-write that impairment back. So unfortunately with Vatukoula the exploration potential could not be recognized, so we decided prudently to take the entire markup.

Okay and the remaining carrying value that you've reclassified on the balance sheet is based on the value of the shares that you own in Emperor, or is it based on some valuation of the remaining assets?

No it's based fundamentally -- the (indiscernible) was helping it, but I think it's based fundamentally on the share price and LOL.

Now basically the asset value of property, plant and equipment is the current book value on our books. It's not the fair value of those assets but the current book value.

Okay so we haven't written it on.

Okay, great and then sorry I'd just like to ask one more question which I think is important. As the new Chief Executive of the company could you briefly explain to us what you see as the company strategy?

Yes, I can. If I'm not too lucid you've got to accept I'm sitting in Brisbane at 12 o'clock and it's after midnight. I believe the strategy is twofold. We have new exploration opportunities that are very good quality in South Africa, and we have an Australasian asset that we must stabilize. We must be able to stabilize both operations and we need to put in place on the balance sheet the capacity to invest in CapEx. That is why I'm not fussed about the quality of the balance sheet at the moment because that's fundamentally accounting driven, and we have the capacity having repaid the US$66 million to look at other sources. We have very good opportunities in South Africa.

And we have a very good young team in South Africa, and I think that we have an opportunity to look broadly at both Africa and what we do with Australasia. I think the key strategy has got to be -- which is happening by the way because our South African operations are now cash positive after CapEx and will get better. We need to look at our exploration opportunities to see what we can do and how quickly we can do it both in Africa and South Africa. And we need to look at our opportunities with our playing cards at Australasia, which aren't bad playing cards by the way, and we have a lot of opportunities there.

Great, thank you. I actually suspect that giving me the answer from Brisbane at midnight made it in fact more lucid answer. Thanks.

Okay, thank you.

Thank you very much, sir. Our next question comes from Peter Townsend of BJM. Please go ahead.

Hello there gentlemen. John, just to get back to Porgera I couldn't quite understand the strategy. I understand that there's financial pressure within Emperor that has to be addressed. But giving up production that contributes the major part of your cash operating profit or will in the course of the year ahead fall--to go and look further at Emperor--I mean I beg your pardon at year-after-year where cash costs are in the 150,000 Rand kilogram range or way above R$600. It just doesn't make sense to me that you say you've got big CapEx falls yet Porgera is going to be the biggest cash provider within the group. So I understand the financial constraints that you're in, in Emperor but giving up Porgera really I don't see helps you.

Peter, that's a difficult question to answer because I could be giving a forecast. I guess a simple way of putting it is our expectations for South Africa is that we generate as much cash as Porgera, and the chances of Porgera generating this is it could be higher than South Africa.

Right, thanks.

Porgera has got to go to level six from level five to extend its mine life and that is going to cost a considerable amount of CapEx. And our view is that CapEx could be quite highly understated.

Okay, thank you.

[OPERATOR INSTRUCTIONS] Our next question comes from Allan Cooke of JPMorgan. Please go ahead.

Hi John, good evening.

Hi Allan.

Just two quick questions you've spoken lots about Porgera and perhaps having a potential purchaser for Porgera and also for Vatukoula, but you've not said too much about Tolukuma. Could you briefly just talk to the operations and some of the issues that you've had there, and then also mention, if you can, or to what extent you can how Tolukuma fits in with the plans that you're assessing for the Emperor suite of assets?

And then in South Africa if you could just give us some color on the exploration, the new exploration opportunity that you're talking about within your strategy? You made mention of Argonaut also some color on that if you can?

Allan, yes thanks. Again, I'll fundamentally talk to what I can. As far as Tolukuma is concerned it is being constrained by our cash position. It's generally acknowledged to be a bonanza site, but we haven't been able to access at that bonanza position partly due to exploration. We have six drill rigs on site which are very valuable assets and we simply got to kick those into gear. And quite frankly Tolukuma is a playing card in our pack.

The question, we have expressions of interest at very reasonable value, and we need to decide how we are going to handle it. So Tolukuma, yes, has a value. It's been recognized by independent offers. We are looking at those at the moment. Where it fits in the pack depends on how we end up playing the unknown. We're not constrained. We have flexibility on our balance sheet, but we are taking our time. We don't -- how can I put it. We do not wish to -- we want to make a good long-term decision for DRDGOLD not a sharp, short-term decision and Tolukuma is very much a playing factor in our cards. Now in terms of the exploration potential I think they're very good but Niel I'd like you to pick that up if you could because you know those.

Certainly John. We have three distinct exploration assets now all of which have been drafted under the new minerals dispensation in South Africa. Two of those are genuine exploration assets which would be toward the duration of the -- particularly [technical difficulty] to five years. We analyze. We'll do the necessary geological interpretation as we go ahead and we may look at some value uplift whilst we're still well within the category of exploration assets.

The third exploration asset is the ERPM Extension 1 or the Sallies 1 area. Now is that right next to our Eastern Long Wall which is where the main focus of our production currently is in the ERPM. It had high a level, 66. We are right on the boundary. We've drilled into the ore body and we're about to over step the prospecting drive into the Sallies 1 area. So those reserves we believe, or those resources rather will come onto our reserve statement sooner rather than later by the virtue of [inaudible] now contiguous to the existing ERPM operations.

The total number of ounces that have been added to our portfolio, the general resource ounces are in the region of about 15 million, 13 of which are at this stage very much incurred ounces whereas the 2 million which we estimate we'll encounter in the ERPM 1, Sallies 1, those are going to be accessed within the foreseeable future well within the five-year prospecting permit time horizon that we have.

Allan does that answer your question?

Thanks, Niel. If I may just one more briefly because we don't have the Emperor accounts, and I understand there have been some issues in the balance sheet again, could you just quickly say or give us the total cash on the DRDGOLD S.A. balance sheet the total gross cash on the Emperor balance sheet and also what the gross debt numbers are on those two balance sheets please?

Allan can I ask Kobus to answer that?

Thanks very much, Kobus.

I don't have my accounts here.

Thanks, John.

Kobus?

Yes in terms of at Emperor I've got cash in the bank ZAR$67.4 million. Obviously the total ANZ can't be disclosed as a net current liability and that's sitting around about ZAR$400 million. And with obviously the hedge book also around about the ZAR$200 million as we show on the balance sheet the financial instrument, under the current liability is basically the market-to-market of the Emperor hedge book. The balance of cash in terms of the $168.7 million there is a difference between 168 and the--ZAR$67 million is the cash that we have in South Africa. The only debt in South Africa is still currently the IEC loan that is sitting with Blyvoor at this point in time and it's sitting at ZAR$10.4 million.

Thanks. Thank you very much.

Sorry, Allan just to Kobus that will be tied off quite soon, yes?

That will be repaid by the end of June.

And what did you say the mark-to-market on the hedge book was or was that included in the ZAR$400 million net current liability on the Emperor?

Under the current liability there's a line called financial liability for ZAR$207.5 million. That is the Emperor hedge book market-to-market.

Okay thank you.

But Allan we'll be taking that out on the restructure.

Okay.

Gentlemen we have no further questions. Would you like to make some closing comments?

All I can say is, thank you very much for your time, and we'll be available as we can any time you like.

Thank you very much. On behalf of DRDGOLD that concludes this afternoon's conference. Thank you for joining us. You may now disconnect your lines.