DRDGOLD Ltd (DRD) 2006 Q3 法說會逐字稿

Good afternoon, and welcome to the DRDGOLD conference. All participants are now in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions.) Please note that this call is being recorded. I would now like to turn the conference over to the speakers. Please go ahead.

Hello, everybody. This is John Sayers here. I think before we get to the South African operations with Niel, I'd just like to cover some of the key features for the Group. As you would have seen, we've sold our stake in the Porgera Joint Venture for $250 million US. It is subject to shareholder and regulatory approvals, but we don't anticipate any particular problems there. The discontinued Vatukoula operations have been sold with all the associated liabilities. The Blyvoor strike did impact negatively on the DRDGOLD SA results, as did the slow startup after Christmas. We have definite exploration progress. At ERPM Extension 1, ore body definition continues. And at Blyvoor, we're drilling to define slime stands and rock dump uranium resource, and we intend to exploit that uranium resource. Blyvoor is still mining uranium-rich areas, and we think there's a future there.

We've signed a JV agreement with Mintails to explore and mine the Western Rand Goldfield. That's three mines, one of which could be accessed very quickly, and the infrastructure's generally not too bad at all. That's West Rand, Luipaardsvleim, and East Champ D'Or.

On the operaional review, Blyvoor came in at cash operating costs of $566, Crown $499, and ERPM $686. Blyvoor was hit by labor issues upset, Crown has pressure to bring new reserves online but is working on that as a project, and ERPM has slow eastern longwall development, which has reduced volumes, but we have put in the infrastructure to correct that issue--better ventilation, better compressed air.

Australasia, at Porgera, (inaudible) suffered from power disruptions and lower Stage 5 bench productivity. Tolukuma at $992, cash operating cost continues to be a problem, and a lot of management focus will--fundamentally all of management focus in Australasia--is going to Tolukuma at the moment.

The average cost per ounce was $707, and Vatukoula produced only 429 ounces from its care and maintenance phase. As I said, we have solved that now.

We have worked at maintaining our margin, and we worked on that by virtue of cost control. And you can see that the SA turnaround kicks in round about March to June '06, and the gold price is supporting us. However, it's our medium- to long-term strategy to maintain cost controls to improve the margin and sustain it given where the gold might be. Niel, would you like to cover DRDGOLD SA?

Thank you, John. As John had set it out, production was down at Blyvoor. We calculated that we lost approximately 18,000 man shifts. We're contacting to about 160 kilos of coal. This was a combination of a very slow rate of return of employees after the Christmas break, and then also we had a five-day illegal strike in February which negatively impacted on Blyvoor in the underground production. Surface production improved, though, and we obviously accelerated the surface production during this period to take place, (inaudible) reduction of underground production. By and large, the efficiency drivers was at Blyvoor are encouraging. We have been aggressively spending capital base to improve those towards the higher volume, lower grade. (Inaudible - technical difficulty).

Areas that were isolated or into which access was restricted as a result of the November fire, those areas have come online again, and we did see a nice kick in trace earlier this month. Hopefully, without any further interruptions at Blyvoor, and if we don't have any mechanical breakdowns or any other calamity, Blyvoor should go into a slightly more stable period, at least until we start wage negotiations, and those at this point in time are still slightly unsteady.

Crown production profile for the period was more or less consistent with what we had expected would start to happen if we don't bring Top Star into the Crown circuit. The one that's still responsible for most of the profits that the company's generating. There is a decline, and the rate that we witnessed this quarter will probably be what we'll expect to see coming out of Crown until such time as 3/L/2 and ultimately Top Star does come into circuit. The Top Star delay is unfortunate. It is costing the Company money, and the sooner we get this online, the better. It's a very expensive monument to be looking at, the Top Star (inaudible).

The ERPM production profile, what we rate to be seen here is a continuation of the train bed we saw late November to early December, when it became apparent that we, we did not, at the layout of the insulation and the delivery capacity of compressed air into the eastern longwall, we had progressively started mining the eastern longwall. That's where the center of gravity of operations in ERPM has moved toward. And the opening up in development rate was lagging and caused the reduction in volume. We saw that trend continue in January and February. I think we've stabilized the volume side of affairs in March and in April. However, the (inaudible), some of what we started to see from August and September onwards, and this is to logic then leads to the fact that the whole of the east longwall has a fault from north to south, and this fault has to be intersected at various points in the future. Every panel moves towards the top and has to go through it. We believe that we would have, will not go entirely through it before the end of at least another 12 months. So we are conservatively, are conservative about the rate going forward, but then, as I say, volume will hopefully pick up in the, will pick up in accordance with recent change.

Surface production has been improved quite nicely at ERPM. We saw a 34% improvement there, and that's obviously helping us with the volatility in recoveries coming out of underground. And there are still more reports for the (inaudible) underground operation and mix between surface and underground. Surface gives you the consistency of delivery, and underground largely at the ore bodies. We do have a degree of volatility in delivery, and that needs to be supplemented by surface operations. Thank you, John.

Pleasure, Niel. If I could set you on the Australasia operations, I'd just like to point we have sold Vatukoula, and all the associated assets and liabilities have gone, and that includes the rehab liabilities. The sale of Porgera for $250 million US has been agreed. It's subject to shareholder and regulatory approvals, but the repayment of Emperor debt is possible in full, and it will leave Emperor with between $100 million and $130 million US in cash. Australian operations after the sale will own the Tolukuma Mine. A lot of focus is going into improving the efficiency in Tolukuma, and 5,000 square kilometers of copper and gold exploration portfolio in PNG. That drops from the 9,000 given in the previous statements because of the sale of the exploration assets at Vatukoula. As I said, we'll have significant cash on the balance sheet and take considerable funding strain off the total Group. That also will translate to cash in the Group balance sheet.

We're now open to questions.

Thank you very much, sir. (Operator Instructions.) Our first question comes from Victor Flores of the HSBC. Please go ahead, sir.

Yes, thanks. Good morning. Could you just repeat again that figure for the net cash that will remain on the Emperor balance sheet once all the debts are paid off to the various parties?

Yes, it depends on the timing of the payments from Merrick, but it will be between $100 million and $130 million net.

U.S.? Sorry. But is it U.S.?

Yes, U.S. dollars.

U.S. dollars. Thank you. Now, let me just ask you a question about the future of Emperor. I mean, it seems rather expensive, if you will, to maintain a publicly listed company in Australia merely to house an asset that produces at best 10,000 ounces a quarter and which, with the current cost structure, isn't generating any income at all. What are the plans for this asset going forward?

We're still debating the plans, but we believe, provided the opportunities are there, that it will, Tolukuma will underpin as a producing mine EML, and then the focus will be into exploration and into minority shares in producing mines. But we need to explore that and look at the opportunities.

But, I mean, is this, once again, how can Tolukuma, which right now doesn't generate any cash, underpin this company?

Well, we believe at the moment the mine plan shows a significant upside. Tolukuma's running at round about 2,500 ounces per month because of problems with flooding, fire, and mechanical issues, 4,500 ounces a month is breakeven, and 7,000 ounces a month is what Tolukuma has historically produced on a consistent basis.

If this is true, so what will it take to get it back to that level, or, and is that possible?

We will know within three months. That's the time level we've put on the project. Clearly, now that Porgera and Vatukoula have been sold, all management focus is going into Tolukuma, and we will make a call.

Now, just to follow up on your comment. You said breaks even at 4,000 a month.

4,500 ounces.

All right, 4,500 ounces, but that's at the mine level. That wouldn't create a company Emperor Gold Mine that is profitable.

We are very well aware of that. It is of course interest on the cash, which will in essence cover the head office cost. And in the meantime, as we said in the announcement, an interest payment from Barrick, which will cover the head office cost. So our focus is into getting Tolukuma profitable, and then from there we look at the future of the Group.

Okay, fair enough. I realize it's been a challenging go at Emperor. Thank you.

Thank you.

(Operator Instructions.) Our next question comes from Steve Shepherd of J.P. Morgan. Please go ahead.

Good afternoon, John. Hi. Can I start off by just asking you about ERPM and Blyvoor? The Blyvoor and ERPM operations have obviously been through a very rough patch, but nonetheless, I see the cost there well over 160,000 round the key level at both of them. You mentioned in your release that we should be aware of the wage negotiations, and you also mentioned in the context of ERPM that you were moving from scattered mining to longwall mining, and this has an impact on the grade, because clearly you can't mine as selectively as you can with scattered mining. I'm just wondering where we should be looking for you to get the costs in a, if I can call it a normal quarter, when you don't have fires and strikes and faults and things like that?

Steve, I'm not too sure there's a normal quarter in this business.

I was kind of hinting at that, wasn't I?

And I'll get Niel to back up as well. But I think that what we're looking for at ERPM is consistency, both in volume and growth, and in Blyvoor, we're looking at a good mine plan which is coming together. We've got, as we explained in our release, we've got good prospects for Crown, and Crown underpins the cash position once we solve Crown and once we solve ERPM and Blyvoor. And Niel, maybe you'd like to comment as well?

Yes, I certainly would. The plan at Blyvoor, which is one that we put together at the beginning of last year, is really to start pushing towards volume, recognizing the fact that grade has dropped to an extent. And we started getting some very good patents coming out of Blyvoor in October and November of last year, after we had taken care of some of the mechanical issues and before we had the fire. Now, the fire obviously interrupted some of that, and that was followed up by the Christmas break, the slow return to work, and then the illegal strike. But if you look at the, at all of the efficiency drivers at Blyvoor, effectively the people of Blyvoor are active in the ore body as when they do mine. Then in those patents that are emerging are actually quite encouraging. And as I stated earlier, when the workers do go to work, and they've been going to work now for the last month and a half, we do, we do hit (inaudible) volume-wise.

And we're also seeing a nice kick in grade now that we're back in the area that was hit by the fire. If you had to take the lost shifts and the gold which we did not recover as a result of that, and that means to account that the fixed costs really are the fixed costs, and you don't see much of a variation in that, even you have a fewer number of shifts the way that we'd experienced, then in Blyvoor, if you were to factor that into your calculation, and Blyvoor came close to about the 120 cash operating costs underground for the quarter, and then these are the sort of paces I think that (inaudible) carries forward. So at Blyvoor we've seen some encouraging factors and, as I say, unless we have something unexpected happen to that mine, we're hoping that we will see these continue. We're expecting the view that for 70,010 marker, this may be, at this point in time, not one that we will consistently achieve because we had these interruptions. And we're looking at the volume profile, and while it would be less than absolutely optimal, we might have to drop the volume profile slightly and have a tweak in the labor force that would give us the terms that we require. So even we might drop it back to say, 5,000 7,500 pounds for the period going forward as an objective, but as I say, the efficiency markers are fairly encouraging.

ERPM, a slightly different story there. We really, I think, realized in December that there were certain things that had to be done there that wasn't done. And when we get the interruptions of December and the slow return to work, these are obviously accelerated, and those were simply the fact that we did not have a layout around the installation that made the working environment in the east longwall conducive to high levels of productivity. And coupled with that, as you correctly pointed out, was the fact that good longwall mining, you take the good with the bad until you see a slight drop in (inaudible). Today we're really working towards stabilizing the volumes and then trying to mine through the spot as effectively so as not to dilute the grade unnecessarily. So there really the focus is going to be to have more consistent volume, more consistent unit costs, and to mix very carefully to the extent that we can.

Thanks, Niel.

So what do you think the costs will be like in terms of fact, Niel, at ERPM? Where would you feel comfortable with a sort of average cost per kilo there, do you think?

Underground, Steve, or--?

Yes, underground.

If we can manage a cash cost of, say, 135,000 rand a kilo as an initial stabilizing point, and assuming we're mining in the region of, say, 6.5 grams a ton, and we can consistently mine the tons that we take out at a fairly flat and predictable rate, I mean, that would be a patent from which we could then work. Because obviously, you do get pockets of high grade. And once you've successfully negotiated with the fault and provided that there's not something else that's lying for us in wait from the other side, and the grades do kick. As we know, we've seen that ERPM in the past, and we've been mining 8.5 less than a year ago, then I think we would have a nice offering.

But having said that, Steve, then ultimately the ideal model for ERPM would have, would be to have a similar mix between underground and surface, as we have at Blyvoor. Because while these are good ore bodies, they're not consistent producers. So over a year you might get a nice return, but there are going to be areas of, say, three or four months every now and then where you don't get the sort of return you need--you need somewhere just to plug into for some additional cash to take it through that. So, (inaudible) maybe summarizes it, at this stage it's more a matter of ore body sustenance and putting in the sort of infrastructure and development that will give us better efficiencies around volume, and then moving in the (inaudible) the cash (inaudible) we need to take it into the future, and retain that optionality as you chase shorts and profit. It's easy to chase shorts and profit if you start mining (inaudible) again, but that's more of a distraction than anything else. And in the long term, hopefully seeing some internal optionality in the underground workings. But it's a long process. It's not going to be in the next two or thee months. I mean, you'll probably hear a similar story coming out of your (inaudible) three months down that, maybe six months down. And then, hopefully, we'll start to see a little bit of a tick in the grade, say, in nine months' time and further on.

I understand, but thank you, Niel. These leads onto, if I may, John, to my next question to you. You've outlined that you obviously have your sort of extension area into Sallies at ERPM, and you've got projects on the go at Blyvoor. You're talking now about getting back into the Monarch shelf at West Rand and Champ D'Or, presumably, if that's what you were talking about.

The Mintails project.

Yes, and I have some knowledge of that line, as you may know, and I'm just wondering where all the money's going to come from here, John. I mean, you're also talking about drilling a hole into (inaudible). I don't quite, I can't quite see where you're going to get all this money from.

But Steve, it's simple. We're going to get $25 million US or more from EML, and we're going to get some other uptake from EML. Probably that bottle will come to round about $18 million US. And then we're looking at other cash sourcing. I mean, my whole focus, Steve, is to put stability into this Group and put cash on the balance sheet.

I understand. I'm just having a little bit of difficulty with the timing, I think, John. That's the thing that--you know, the actual cash flow?

Well, Steve, the timing from EML will be between four and seven months.

Yes.

In the meantime, we will be doing the feasibilities for the other projects.

Yes.

And it's going to take that long to get equipment coming through, because you know what it's like in the world of mining.

So I think, if I've understood you correctly, John, there must be some external funding here. Would that be a correct takeaway from what you said?

There may well be. It just simply depends on how we approach the issues with EML.

Okay. Thank you very much.

Pleasure.

Our next question comes from Muneer Ismail of Deutsche Bank. Please go ahead.

Hi, John. Hi, Niel. How are you guys doing? On the--sorry to bring this up again, but just to follow through from what Steve was talking about with regards to Blyvoor and ERPM, if you could give us on a normalized basis what you think production rates would be, that is, tons moved and--sorry, volumes moved--and rent and ton cash costs, just to get an idea of, through the cycle, what do we think on those two, once you're beyond the problems, of course, with the wage negotiations and the eastern break dislodging this quarter?

Okay. Niel, you want to pick that one up?

Yes, certainly. I think at the, at Blyvoor, if we can maintain between 60,000 tons and 68,000 tons, which we seem to be comfortably achieving, as I say, when people do show up, then that would be a comfortable level. I wouldn't have stated this maybe 12 months ago with the gold price as it was at the time, but the adjustments in the gold prices have given us a little bit of margin within which we can move this around. I hope to achieve, at Blyvoor, a rent for (inaudible) of between, depending on the season, between 575 and 675, and we simply not going there. So, sorry, the season is dependent on the electricity costs (inaudible) here. So realistically, and this is not a forecast, it's, I would probably have to go and run the model around this, but if we can bring rent per ton down to about 700, I mean, that would be a healthy margin and in the current environment at Blyvoor.

ERPM, I still look at the historical (inaudible) to give you an idea as to what I think we can expect at the ERPM going forward, and we're hoping around 900 and 1,100 tons per day on a good day if we don't have interruptions. So if we could turn those into quality tons and have better, and to have better consistency so that we don't just have three or four good days per week, but that we actually five or six good days every week, then it means that we can take those two in the region of initially, say, 23,000 tons a month and hopefully push it up to 28 and ultimately 30,000 tons.

But once again, I would much rather see a slightly more stable and less volatile underground tons profile and then see it gradually go up than having the (inaudible) presence that we sometimes encounter. But that invariably is also when you get the low volumes, the low values coming in, if your focus is solely in tracing tons. And there, unfortunately, the cost profile, cost per ton, are not as soft on the eyes as Blyvoor could potentially be, when they'd be really hobbling around between 800 and 1,000 sometimes, like the (inaudible) rate per ton. And that we need to address. And only address that by efficiency. So we may have to do a little bit of tweaking there as well. Our employee split, the ratio between services and in-stoke workers, there are 60% services and 40% in-stoke, which is not a healthy margin, but which is an indication of the age of the mine and the demand that infrastructural maintenance is putting on the mine. So you're slightly more modest on your (inaudible) outlook, and you perform to the capacity of the Company, you may be able to drop your fixed costs slightly. And we're looking into that. We're trying to see if we can have a combination of the, say, capping fixed costs, a gradual increase in terms, looking at the mix and managing the mix properly, and then hopefully, ultimately you'll also see a slight drop in the unit prices.

Great, great. And also--.

(Inaudible) if I can maybe just add one thing. I'm (inaudible) now where I actually wanted to be in October or September of last year. So we had to do a bit of catch-up from December up until now, which is unfortunate, but it's something that we need to deal with.

Okay. Can I pull off with a second question just on Top Star trying, just trying to understand the value that this potentially could bring into the Group? Can you give me an idea on tons per month, perhaps the ton and CapEx requirements, and then just timing? When do you think, you know, we can initiate on Top Star on mining the dump?

(Inaudible) including the purchase considerations in the region of about $22 million to $25 million, but that would consist of just over 5 million tons. The average grade is 0.7 grams a ton, and we intend to mine it at 230,000 tons a month. And we start mining within weeks after we get the go-ahead from the DME and we get the other administrative issues sorted out.

When do you think that will be? Fourth quarter?

Working with the government, we have to go through an administrative appeal to have the declaration that Top Star was a heritage site set aside. It can be three months, it can be nine months. If it goes beyond 12 months, it might be lost there.

All right. Thank you. Thanks, John. Thanks, Niel.

(Operator Instructions.) Gentlemen, we have no further questions. Would you like to make some closing comment?

No, I just think to say thank you very much to every participant, that's all.

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